War Is Hell—but Not for The Stock Market
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War Is Hell—but Not for The Stock Market? What this all about..... See below.
Sentiment Trader saw something interesting in that The stock market tends to rally whenever the U.S. begins military operations overseas.
Does that mean that investors prefer war? Not exactly. But they positively abhor uncertainty, and that’s what typically characterizes the market environment in the weeks prior to the U.S. military becoming involved in a foreign military operation.
Much of that uncertainty gets resolved soon after U.S.-led hostilities begin, and that’s why the stock market typically soars in response.
This interaction between the stock market and uncertainty is key to understanding what’s going on now, with the markets struggling over the past couple of weeks in reaction to U.S. saber-rattling directed at North Korea and Syria. The Dow Industrials are 2.6% below where they stood on March 6, which is when North Korea launched four missiles into the Sea of Japan.
That uncertainty appeared to lessen this past weekend with the failed North Korean missile launch, though it quickly returned: Vice President Mike Pence said in a speech in South Korea that the era of “strategic patience” with North Korea was over, and a White House official was quoted to the effect that Trump was considering a “kinetic” action—including a sudden strike—against that country.
On average over the month prior to the beginning of these seven events, the Dow fell 0.6%, or 1.4 percentage points lower than the average of all months since 1983 (see chart). But this underperformance was quickly reversed: In the month after the U.S. military entered a conflict, the Dow soared an average 4.0%—3.2 percentage points greater than the average of all months since 1983.. This is quite interesting.
This appears to have been a factor during the 2001 war in Afghanistan, which began less than a month after the Sept. 11 attacks. Even though the Dow had fallen more than 8% over the month before that war began, and even though that war took place during the 2000-2002 bear market and the associated deflation of the dot-com bubble, the Dow still gained 11.9% over the six months following the beginning of that war.
We aren’t aware of any particular sector bets that might make sense as a way of exploiting the market’s tendency to perform well when the U.S. military becomes engaged in foreign operations. Insofar as lower volatility is the underlying cause, then we should expect to see that improved performance throughout the market’s various sectors and investing styles. This would be why, for example, both large- and small-cap stocks experienced improved performance.
An important qualification is in order. Notice, for example, that each of the past military operations on which we base our analysis were discrete events with well-defined beginning dates. My findings would not apply to more diffuse military operations that are long, drawn-out, and often conducted in secret—such as the so-called War on Terror.
If the U.S. response to North Korea follows such a pattern, then investors shouldn’t bet on any particular stock market reaction one way or another.
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