Financial market coverage hyperbole vol. #1: Syria edition

As the New Statesman put it: Syria has finally seeped into financial markets. It’s horrific.

The FTSE falls 0.5 percent? And only bounces 0.45 percent the next day? The horror, the horror! If the UN proves that Assad is responsible for using chemical weapons against his own people, and if he is called to testify in the Hague (after however long evading capture), I’m sure his biggest regret, in a heartfelt retrospective confession, will be the damage done through nerve gas to all those innocent companies, the publically traded casualties of war.

Even if stock markets had genuinely tumbled by ten times what they have done, investors could count themselves lucky that they’ve come no closer to feeling the human repercussions of what’s happening in Syria. The need for perspective aside, however, what’s noteworthy from a stock market point of view is actually how muted market reaction has been to the Syria situation.

Yesterday we opened in Europe with stocks suffering broadly over concerns of intervention in Syria, and energy lending support on the higher price of oil, only to have the U.S. come in, and rally, led higher by energy stocks. The high weighting of energy stocks in the US certainly helps markets shrug off what’s been going on, and has done historically, too. Bank of America/Merrill Lynch has done a study into the effect of oil price spikes on asset returns, and the results are a bit surprising.

While equities underperform during oil price spikes, the downside, in absolute terms, is limited. During the Arab Oil embargo in 1973, the price of Brent oil increased by 237 percent. U.S. equities slipped just 2.8 percent. U.S. stocks rose during the Iranian revolution and the Iran Iraq War, and only the Iraqi-Kuwait in 1990 caused a technical correction (a fall in excess of 10 percent). It’s also been pointed out by Thierry Laduguie at e-Yield that with the last Iraq war, “when the war started in March 2003 the stock market rallied strongly, that was the start of the bull market from 2003 to 2007”.

The market is unsurprisingly nervous that a thus far geographically concentrated, dynamic equilibrium of intense suffering for a country could turn into something else, the consequences of which are unknown. Syria to date, while a horrible situation, has posed limited downside to the profit margins of European listed countries, and what downside it posed was felt two years ago. Rising oil prices would be bad for a lot of companies. But, given the limited effect of previous spikes, and the fact it’s taken just the rekindling of Vodafone/Verizon talks for the market to shrug Syria off for the moment, it’s worth bearing in mind who the gas attacks were actually horrific for.

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