An equity strategist expects global stock markets to shake off the attacks between Israel and Iran as they continue for the sixth day.
Jeff Buchbinder, chief equity strategists at LPL Financial, says economic conditions often have greater influence on market performance than geopolitical events.
“When you get right down to it, it’s economic growth and corporate profits that really drive markets higher,” said Buchbinder in an interview with BNN Bloomberg on Wednesday.
He referenced the First Gulf War and 9/11 attacks to illustrate that market reactions are often tied to how the economy fairs rather than the wars themselves.
“In the First Gulf War of 1990, the market sold off little over 10 per cent during that period but that was a challenging economic time,” said Buchbinder. “We would argue that weakness was due more to the economic environment coming off of the savings and loan crisis, rather than fears of a worsening conflict in the Middle East.”
WTI crude oil sat at around US$72 per barrel on Wednesday but that is still not a 52-week high. One year ago, it was close to $84. Buchbinder suggested the attacks will be contained and won’t impact oil prices as much as initially feared.
“The U.S. is energy independent now,” said Buchbinder. “Oil shocks aren’t going to have as big of an impact on the economy or corporate profits, so I think that’s why you’re seeing this market be much more resilient to this episode.”
He did however say it could drag on for months like other geopolitical events in the past.
He said 9/11 happened after the dot-come crash, the beginning of the 2001 recession and the Enron scandal. He attributes those economic events to the downturn of the market rather than the terrorist attacks themselves.
“You can attach those selloffs to that period of time and those economic events,” said Buchbinder.
Buchbinder has studied market reactions back to the Japanese attack on Pearl Harbor in 1941. He says the S&P 500 was up about 11.5 per cent one year after Pearl Harbor and 32 per cent after the Cuban missile crisis in the early 1960s. He said stocks have historically been resilient after traumatic geopolitical events.
He said war in the Middle East may lead to a short-term market downturn but if relatively contained, the market could recover quickly. He said investors should focus on economic growth and corporate profits, while not letting emotions drive investment decisions.
“It’s an emotional time” said Buchbinder. “We don’t want emotions to drive our investment decisions, but if you step back and look at history, as long as you’re not in or about to enter recession, stocks actually manage through these events quite well.”
