This month, we take a brief look at what side effects terrorism and the human crisis in the Middle East might have for the U.S. economy.
When a political or geopolitical event occurs that has the potential to jar markets, analysts are forced to review the event through a narrow prism—i.e., how it might affect investors.
Yet, it’s difficult to be clinical and objective following what has happened in the Middle East.
Hamas, a designated terrorist group per the U.S. and European Union, launched an appalling, unwarranted, and gut-wrenching attack on Israeli citizens. Real emotions surface and have their place. But in this forum, we are just analyzing unfolding events through that very narrow prism mentioned above.
Using history as our guide, geopolitical instability has not had much short-term or long-term impact on the overall stock market.
LPL Research reviewed 23 geopolitical events since Pearl Harbor.
The average loss of the S&P 500 Index on the first day was 1.1%, with the worst loss of 5.4% following North Korea’s invasion of South Korea. The average total pullback was 4.7%, with the largest being Pearl Harbor at 19.8%. On average, it took 19 days for the market to hit bottom after an unexpected event and 42 days to recover.
“Equities have historically held up well during geopolitical shocks, including wars and other military conflicts going back decades, with the average recovery taking roughly two months,” according to LPL.
What is the biggest impact 12 months out? A recession.
Reviewing a wider series of potential market shocks, the S&P 500 Index was up an average of 9.2% after one year when a recession did not ensue and down 11.5% when a recession occurred (LPL Research).
For now, investors are betting that the violence will be contained to Israel and Gaza, and the war will have little impact on the U.S. economy.
The Fed and inflation
The core CPI rose 0.3% in August and again in September. The rate of inflation is in a gradual downward trend, but it remains well above the Fed’s 2% goal. The core CPI is up 4.1% versus a year ago in September versus 4.3% in August. While the Fed has stressed that 2% is its inflation goal, it has no date on that goal. Is a goal really a goal if there’s no date?
At best, the Fed is in no hurry to get back to 2% as long as inflation gradually slows.
It doesn’t want to risk a recession to obtain one of its goals—price stability—while sacrificing another goal—full employment.
What may lie ahead?
Profit outlook brightens. It’s early in earnings season, and just 6% of S&P 500 companies have reported as of October 16.
Earnings are forecast to rise 2.2% versus one year ago (LSEG, formerly Refinitiv).
That’s up from 1.6% as of October 1.
The typical pattern of lowballing expectations appears to be playing out again.
Ex-energy, profits are projected to rise a healthy 7.2%.
So far, 88% of companies have topped analysts’ profit forecasts. On average, those that have reported are beating by a wide margin.
Strong Q3 profits and upbeat guidance could support equities. The wildcard is geopolitical turmoil.
Our team and investment strategy is being monitored steadily as we digest the data and remain cautious relative to allocation, but with history as our guide we are now looking for opportunities to move from the fixed income markets to equities.
October 2023
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.
The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful.
