Don't Get Caught Up in the Fray!

As the calendar turns from summer to autumn the dreaded months of September and October, historically the weakest months for the stock market, are facing investors, there is plenty of outside news to make even the most steely market veterans queasy.  On the minds of most citizens in the United States, let alone investors, is the question of whether or not there will be an escalation of U.S. military involvement in the Middle East.  As of this writing, the Obama Administration is heavily lobbying the U.S. Congress to approve a strike against the Assad Government in Syria, apparently as "punishment" for the regime's use of chemical weapons against its own population.  We have no expertise in handicapping what the response of the Congress will be, and even less with respect to what the Obama Administration will ultimately choose to do, irrespective of the vote in Congress.   We will also not opine on the merits of such an "activity".

What we can say is that history is fraught with military endeavors and the market has either initially sold off only to recover shortly (1991 Iraqi invasion of Kuwait, Afghanistan War in 2001, Iraq War 2003), or it has ignored the actions altogether (U.S. and British bombing of Libya in 2011, NATO bombing of Yugoslavia in 1999).  For sure, the more prolonged a military conflict becomes, the more likely the market will react sluggishly, at best, or negatively, at worst.  It seems likely that any action taken by the U.S. against Syria will be short-lived and limited in consequences, at least in the short to intermediate term.  Therefore, we would expect the effect of any action on the market will also be short-lived.

The problem that this current pending military engagement presents is that it comes after a dozen years of prolonged conflict that the U.S. has been involved in both in Afghanistan and Iraq; and the citizenry, including the "investor", is weary of the danger that another prolonged conflict could be in store if action in Syria should go poorly.  It is very important that we make the point here that we believe war is NOT good for the economy, which is contrary to what many often believe.  Besides the obvious human tragedy that war encompasses, it strains the economy in that resources which would normally go towards investment in productive, entrepreneurial activity are instead redirected towards destroying things and killing people.  Sure, the defense industry may benefit, but this is the ultimate "zero-sum game".  We would argue that much of the reason that the market has struggled over the last dozen years is at least partially due to the enormous economic AND emotional cost of the wars in which the U.S. has been embroiled.

This is not an indictment of the defense industry.  Yes, there have been many technologies that have emanated from research and development in defense and have ultimately been commercialized, thereby aiding economic growth.  However, the most valuable of scalable technological advancements have come from private investment in areas such as microprocessors, software, and bio-pharmaceuticals.

What is most important to recognize is that while war may well have served to suppress the economy and market in recent years, the economy has managed to grow in spite and many more advances in technology have occurred in mobile, 3-D printing, biotechnology, etc.  And while the market has made little progress over the past dozen years, it is that very fact that likely means any significant downturn is less likely to happen, or to last long if it were to occur at all.  Therefore, as events unfold in the Middle East in coming weeks, regardless of what transpires, it would be wise not to get caught up the the "fray"!