World Crises and the News Cycle
Investment Opportunities or Investment Calamities?
You can blame the printing press. Before its invention, all news was local and shared by word of mouth. The introduction of printed news allowed for wider distribution and greater awareness; local news was magnified to world news, and a local crisis became a world crisis. What is a crisis, anyway? According to Webster’s Dictionary, a crisis is defined as “an unstable or crucial time or state of affairs in which a decisive change is impending; especially: one with the distinct possibility of a highly undesirable outcome.” The term is typically applied to all sorts of issues, including economic, financial, political, climate, immigration, military, and natural disasters. The key question is how crises and stock markets connect, if at all? Since history suggests that all bear markets are accompanied by crises, but not all crises lead to bear markets, we must answer two questions: 1) are we on the verge of a crisis today, and, 2) if so, is there a bear market in our near future?
We certainly have not lacked for crises in the 21st century, which has experienced two deep bear markets in the United States, the former of which was ongoing when the century began. The bear market of 2000-2003 was exacerbated by the terrorist attacks of September 11, while the bear market of 2007-2009 followed the burst of the global housing bubble. Accompanying the worst bear market since the 1929-1932 crash was a society experiencing, among other things, increased income inequality, heightened threats of terrorism, and a surge of mass shootings.
These crises have certainly not been confined to the United States, as we’ve seen a wide range of crises, including political (e.g., China’s occupation of the South China Sea islands), economic (e.g., the European debt crisis), military (e.g., Russia’s invasion of Ukraine), and humanitarian (e.g., migration). On top of that, the battle over climate change continues to rage as society becomes more polarized. Fortunately, capital markets do not care about most crises.
What can we expect in the coming years? A look at the historical record since World War II (Figure 1) may provide a hint to our future: virtually every bear market of the past 75 years involved either a military element or a domestic economic event. A military element occurred in three instances (1961-1962, the Bay of Pigs Invasion and Cuban Missile Crisis; 1968-1970, the Vietnam War; and 1973-1974, Mideast tensions culminating in the Yom Kippur War), whereas the other bear markets involved a combination of economic, financial, and monetary developments.
Figure 1. Major U.S. Bear Markets since 1946
Expanding our scope, a broader list shows that at least 12 major crises occurred outside the U.S. during the same period. These crises included a number of Latin American financial stresses, Japan’s 20-year deflation, and the Emerging Asia debt crisis. A number of other countries, including Dubai, Greece, China, and Russia, had more localized crises. Notably, none of these was instrumental in triggering a U.S. stock market crash. What does that mean? The message appears to be that United States market crashes are caused by either domestic economic events or overseas military actions that impact our economy. Though other types of world crises often reflect tragic events and humanitarian issues, they have not been relevant to the U.S. stock market.
If this is the case, then the future of the stock market will be determined by domestic economic and financial trends, monetary policy, and any military actions that impact the U.S. economy. The International Crisis Group, a news and advocacy organization, compiles an annual list of global conflicts to watch, and the 10 most critical issues identified for 2018 were:
- North Korea
- U.S.-Saudi-Iran rivalry
- The Rohingya Crisis in Myanmar and Bangladesh
- The War in Afghanistan
- Syrian Civil War
- The Sahel
From this group, only the confrontation with North Korea stands out as a significant risk to U.S. markets. All other military actions the U.S. has undertaken in the 21st century (e.g., Iraq, Syria, and Afghanistan) appear to have had no impact on U.S. stock markets, except perhaps in the funding of military expenditures. These are certainly positive for the business of military contractors, and short of a nuclear action with North Korea, any escalation of military activity will likely be a positive for American companies and thus a positive for the U.S. economy and stock market.
It is worth noting that there are significant issues today that are frequently termed crises, but their impact on world economies and stock markets is either gradual or will not culminate until well into the future. The most obvious examples are climate change, aging populations, involuntary migrations, and water shortages. Ultimately, these issues will dramatically affect the U.S. economy and stock market, but within the timeframe of most investors, they are likely to remain news headlines instead of stock market breakers.
While a crisis with the potential to cause a bear market does not seem imminent, there are a number of potential flash points that could ignite into full-blown crises; the notable ones include a financial bust in China, the Iranian nuclear program, or a Brexit meltdown. Interestingly, however, The Economist’s publication, “The World in 2018,” pointed to central bank policy as the most likely risk. Quoting from the report, “…central banks, perhaps grown complacent amid the return of steady growth and the retreat of deflation, tighten policy too much, too quickly.” On the back of a third rate hike in 2018 and with rates rising all across the globe, this remains a possibility. The current Federal Reserve Board of Governors, in place since February, is comprised of members who have intimated very different opinions from those of the Bernanke and Yellen years, showing more hawkish tendencies and less concern about overseas developments.
In summary, the market’s current outlook is sanguine as far as a crisis is concerned. The economy is sound and growing, and the political environment favors corporations. Investors should enjoy these bullish conditions.