The relentless beat of global turmoil sounds like a war drum, with Israel’s recent attacks and whispers of potential global conflicts on the rise.
Yet, strangely enough, financial markets appear to be dancing to a different tune, showing impressive resilience. Let’s dive into this intriguing contrast and understand why markets seem to march on unfazed amidst escalating international tensions.
The Historical Buffer
When you glance at the markets in the aftermath of the October 7 Hamas attack on Israel, there’s barely a blink. Notably, the S&P 500, the US’s benchmark index, showed little reaction.
Even those financial arenas in proximity to the fiery epicenter, such as stock markets in Egypt, Saudi Arabia, and the Gulf nations, have only registered mild retreats. Bonds haven’t experienced a mad dash for safety, and oil prices maintain a steady rhythm.
History provides a clue to this phenomenon. Recall the aftermath of 9/11, a horrific day which rocked the core of the US and drew parallels with the recent situation in Israel.
Following the terror attacks, the S&P 500 plummeted by 12%. However, this descent was short-lived, with the index recovering its losses within a month.
Furthermore, tracing back through several decades reveals a similar trend. From the Korean conflict in 1950 to the first World Trade Center bombing in 1993, the average decline of the S&P 500 during major geopolitical crises is around 4%.
And within a month, recovery is usually in full swing. More than half of these upheavals have roots in the Middle East. And in every instance, after the initial reactionary sell-off, markets bounce back with alacrity.
Market Psychology: Collective vs. Individual
Humans have a penchant for amplifying the gravity of a present crisis. To many, the here and now always seems more dangerous, more intense, and more unpredictable than the past. However, this doesn’t necessarily translate to collective market behavior.
Markets have memory. A vast and extensive one. They have witnessed wars, recessions, and political upheavals. And time and again, they have learned that these geopolitical skirmishes, though crucial, are often not as cataclysmic in their long-term impact as initially perceived.
Does the Middle East today genuinely present more risk than during any of its previous major flare-ups? Is Russia, despite its stumbles in Ukraine, genuinely more menacing?
And is China’s weakening economy truly a sign of its amplified threat? These are massive, complex questions. But the collective wisdom of millions of market players seems to be more restrained and less reactionary than the individual psyche.
Lessons from Legends
Julian Robertson, the esteemed investor, once highlighted the ever-present nature of dire threats. He recounted discussions with the former UK Prime Minister, Margaret Thatcher, about the possibility of the Soviet Union deploying its nuclear weapons.
The gist? Perceived existential threats often loom large but seldom come to full fruition. Leaders, more often than not, are compelled to act judiciously to prevent spirals of escalation.
Financial markets are far from emotionless entities. However, their collective memory and wisdom, honed over decades, offer a relatively balanced perspective, especially during tumultuous times.
Their calm demeanor amidst global chaos isn’t a sign of ignorance or indifference. Rather, it’s an implicit message that the worst of our collective fears, though valid, might not necessarily materialize.
The beat goes on, and for now, markets seem to believe that the world will keep turning, no matter how turbulent the current.