My Comments: Wouldn’t it be nice if the world and our lives were able to move from one month or year to the next with no unnecessary drama. But it doesn’t, perhaps because it can’t. Why the issue of Syria caused the markets to leap about earlier this week was the focus of commentary by Jeffrey Dow Jones, whose weekly blog I follow. He has good explanations. Here’s some takeaways from his comments about Syria and the global markets.
Economically speaking, Syria is largely insignificant. Even though it sounds like some sort of military or tactical strike is imminent, the market doesn’t seem to care. Stocks have been quite stable during the last few days as the story over there develops.
Syria does have some crude oil though, an estimated 2.5 billion barrels of reserves. Production runs around 400,000 barrels per day, which places them pretty far down the list of oil producing nations. Even if their supply was totally disrupted, it wouldn’t have much of an impact on global prices.
Crude broke out to a 2-year high on this news (US, France and Great Britain’s threats to intervene), and though the pain hasn’t really trickled through into gas prices yet, many analysts are re-thinking their price estimates for the year ahead. Most forecasts called for decreasing prices through the second half of the year, but now it sounds like we may stick around at these levels for a while longer.
If the economy is on weak footing, a spike in gas prices can act as the final straw to tip the economy into formal recession. 2013 certainly qualifies as “weak footing” with just 1.1% GDP growth in the first quarter and 2.5% growth in the second.
For the record, I don’t think that’ll happen here with Syria. Unlike Iraq, it’s just too insignificant in the grand scheme of things. The fundamental drivers are too small. But it does bear watching. Situations like this can create ripple effects and have strange and unintended consequences. Iran is a key ally of Syria, and Iran does matter. Iran has major influence on the Strait of Hormuz, which is where most Middle Eastern oil flows through, so one could (and should) argue that this is the real geopolitical risk in the market.
So we’ll see how this all plays out. Investors who are heavily long the market don’t seem to be sweating, nor should they be. The trend is still firmly up.
If anything, this could be setting up for one of those situations where the headlines follow the market. We may indeed see a sharp correction in the next few weeks, and if we do, we’ll all point our fingers at the headlines du jour and assume that the market is dropping because of military intervention in Syria. In reality, the market will go down because the market feels like going down. Keep in mind that the market has still gone straight up all year without any meaningful correction.