Global Static: Geopolitics and U.S. Markets
When a Malaysia Airlines jet crashed over Ukraine on July 17, 2014, due to a suspected missile attack by pro-Russia separatists, the U.S. stock market dropped sharply, with the S&P 500 declining by 1.2%.1 The next day, with no new information regarding the crash, strong corporate earnings caused the market to rebound, regaining most of its losses from the previous day.2 By the following week, the S&P 500 had surpassed its level before the airliner crash.3
On August 14, the market closed strong, due in part to conciliatory remarks regarding the Ukrainian conflict by Russian President Vladimir Putin.4 Yet the following day, when news broke that Ukrainian forces had attacked a Russian convoy that crossed the border from Russia, the S&P 500 dropped more than 1% over an hour-and-a-half period, only to bounce back by the end of the day.5
As these examples illustrate, the U.S. stock market tends to react quickly to geopolitical events, but recently such reactions have been short-lived. Over the longer term, the market generally moves on more fundamental domestic economic issues. With this in mind, it might be helpful to consider some current geopolitical issues and what effect, if any, they could have on the U.S. economy.
Is Russia an Economic Threat?
The ongoing Ukrainian conflict is serious, and it’s natural for Americans to be concerned about a resurgence of Russian militarism. However, direct trade between the United States and Russia is minimal, amounting to about 1% of U.S. foreign trade.6 The larger issue is Europe’s dependence on Russia’s natural gas and the potential consequences if Russia were to cut off the supply. This worst-case scenario could have a major impact on Europe and might reduce U.S.-European trade, but it seems unlikely because
of its potentially destructive impact on Russia’s economy.7
Moreover, it appears that tough economic sanctions imposed on Russia by the United States and the European Union have begun to have an effect, as evidenced by the fact that the largest Russian oil company asked the government to help bail it out of massive debt.8
Reduced trade with Russia in the short term may slow the still-struggling European economy. While U.S. gross domestic product (GDP) rose by 4.0% in the second quarter, eurozone GDP was flat. Germany, which maintains an important trade relationship with Russia, saw GDP drop by 0.2%.9–10 However, Germany’s economic minister predicted that Europe’s largest economy should show growth by the end of the year.11
What About Iraqi Oil?
The escalation of armed insurgence in Iraq has raised concerns about oil supplies and further involvement by U.S. forces. The major Iraqi oil fields are far from the fighting, and world oil supplies are sufficient to withstand a decline in Iraqi production. Oil prices spiked briefly in mid-June when the Iraq insurgency flared, but have declined through July and August.12 Though the situation remains volatile, recent gains on the ground and the transition to a new, more moderate Iraqi prime minister appear to be hopeful signs.13
Should You Cry for Argentina?
On July 31, 2014, after Argentina defaulted on a debt payment to U.S. creditors, the S&P 500 lost 2% of its value and took more than two weeks to regain its losses.14–15 Considering that Argentina accounts for less than 0.4% of U.S. trade, the reaction seems overblown.16 In fact, some investors who thought the U.S. market was due for a correction might have used the Argentina default as an “excuse” to sell stocks.17 If so, this only affirms the principle that investment decisions should be based on long-term fiscal trends rather than on events in a single country or region.
Focus on Your Own Strategy
As this brief overview demonstrates, there are always international flash points, and the market may rise and fall on news from abroad. But geopolitical events tend to create temporary “noise” rather than having a lasting effect.
Over the long term, U.S. stocks are driven primarily by the U.S. economy, and thus far in 2014 the economic news has been mostly positive: Corporate earnings have been strong, and more people are finding jobs.18 It’s generally wise to downplay the global noise and maintain an appropriate investment strategy based on your personal situation, risk tolerance, and long-term goals.
The return and principal value of stocks fluctuate with changes in market conditions. Shares, when sold, may be worth more or less than their original cost.
The S&P 500 is an unmanaged group of securities that is considered to be representative of the U.S. stock market in general. The performance of an unmanaged index is not indicative of the performance of any specific investment. Individuals cannot invest directly in an index. Past performance is no guarantee of future results; actual results will vary.
1) MarketWatch, July 17, 2014
2) Associated Press, July 18, 2014
3, 5, 15) Yahoo! Finance, August 18, 2014
4) Reuters, August 14, 2014
6, 16) U.S. Census Bureau, 2014
7) Business Insider, August 11, 2014
8) Bloomberg, August 14, 2014
9) U.S. Bureau of Economic Analysis, 2014
10–11) Reuters, August 14, 2014
12) Fox Business, August 18, 2014
13) The Washington Post, August 18, 2014
14, 17) USA Today, July 31, 2014
18) CNNMoney, August 19, 2014
The information in this article is not intended as tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent professional advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Emerald. Copyright 2014 Emerald Connect, LLC.