War is hell.
War is brutal. It is devastating. It is bloody. War can be described by any number of negative adjectives. But, the one thing war is most assuredly not is bearish.
War is bullish for stock prices.
Oh sure, stocks typically decline in anticipation of military conflict. But, as soon as the bombs start dropping, stocks start rising. And, the duration of that rise tends to correlate to the length of the anticipatory decline that preceded it.
For example, back in 1990, stocks fell hard following Iraq’s invasion of Kuwait. Investors anticipated the United States entering the conflict. And, the S&P 500 fell from 360 in August 1990, to 310 five months later.
Once Operation Desert Storm started on January 17, 1991, stocks rocketed higher. The S&P 500 was trading at 390 five months later. The index recovered everything it lost during the five months investors were anticipating war, plus an additional 8%.
Here’s a chart of how things played out back then…
The current situation is a bit different…
Investors had just one day to anticipate Iran’s attack on Israel. We started hearing rumors of an attack on Thursday afternoon. In response, stocks gapped lower on Friday. And, the intensity of the selling pressure increased throughout the day as those rumors persisted. The S&P 500 tested its 50-day moving average line as support for the first time in five months, and the index finished the day down 75 points.
The financial markets were closed when the missile attack started over the weekend. Many investors were surprised when the stock market gapped higher on Monday morning.
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But, to the extent that Friday’s decline was in anticipation of military conflict, yesterday morning’s bounce was to be expected.
Since it was just a one-day, 75-point decline in the S&P 500 heading into the conflict, bullish investors shouldn’t expect much more than a one- or two-day, 75-point bounce. That will bring the index back up to the 5200 level that had been support for much of the past month. It is now resistance.
And, for many of the bearish reasons we’ve talked about in previous essays, that resistance is likely to hold and stocks will head lower again. That is, unless missiles start flying. In that case, stocks could be headed to all-time highs.
After all, war is bullish.
Best regards and good trading,
Jeff Clark
Editor, Market Minute