Syria is in the midst of civil war. One side, led by elected President Bashar al-Assad, has reportedly unleashed chemical weapons on their rebel opponents. The U.N., and the U.S., rejects the use of such weapons. At this writing, President Obama is lobbying Congress for support on staging a military response to Assad’s actions.
The markets initially reacted to the possibility of strikes against Syria with a large one-day downturn, as the Dow lost 132 points. Then, two positive days followed and the consecutive upticks gained back most of that one-day drop.
This is not an unusual market reaction. One of the tenets of behavioral economics is that markets tend to overreact to bad news and underreact to good news. Frequently, though, the eventual rebound from a negative market response reaches a level higher than the previous mark of the Dow before its one day fall.
Why does the Dow frequently plummet after singular events like these? Iran is a major Syrian ally. While Iran is not likely to seal off the Strait of Hormuz and Syria is not a major oil producer, the possibility that supply could be potentially limited can impact markets. Thankfully, the U.S. is consuming less and producing more oil, so we are not as vulnerable to this threat as in years past.
But industry and businesses throughout the world that depend on oil from the Persian Gulf could suddenly find themselves squeezed by higher oil prices. Industrial production, transportation and manufacturing among energy dependent countries could fall. Temporary layoffs could result. Economics are negatively impacted. Domestically, the Fed’s Quantitative Easing timeline might be adjusted. Interest rates may remain lower for longer than the Fed had anticipated, as bond buying continues. Thus, the values of equities and fixed income instruments are impacted.
Nothing happens in a vacuum, especially in the volatile Middle East, where conflicts often cause neighboring countries to quickly choose sides. Israel worries that if Assad is removed from power, it might face more conflict from an unstable and war-torn neighbor. Shock waves would reverberate throughout the region.
Meanwhile, the debt ceiling debate is about to resume here on the domestic front. Most economists feel that markets will again be negatively impacted by another Congressional stalemate on this issue, though markets are becoming somewhat numb to the apparent inability of our leaders to solve this ongoing financial dilemma.
Overall, this has been a solid year for U.S. equities. Giving back these gains due to unrest in the Middle East and Congressional logjams is frustrating. Employing a defensive, downside strategy might be a good idea for investors heading into this fall season. It is especially important for those folks who are either nearing or in retirement.
Margaret R. McDowell, ChFC, AIF, a syndicated economic columnist, chartered financial consultant and accredited investment fiduciary, is the founder of Arbor Wealth Management, LLC, (850-608-6121~www.arborwealth.net), a “Fee-Only” Registered Investment Advisory Firm located near Sandestin. Arbor Wealth specializes in portfolio management for clients with $250,000 or more of investable assets.