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US Stock Market Stays Calm through a Week of Surprising Headlines

April 12, 2017 Written by Tyler Mull

There were multiple headlines last week that could have struck fear into the market but didn’t seem to sway the resolve of investors. On April 6th the US deployed a missile strike on Syria’s Shayrat airbase in response to the use of chemical weapons; it signaled a change in US foreign policy that could have triggered a sell-off in stocks (The S&P is roughly at the same closing price it was at the close on April 5 as of April 11, 2017.). The US had previously negotiated with Syria regarding the use of chemical weapons during the Obama administration and Trump’s stance during the campaign was to focus on the threat of ISIS. Unexpected military actions like this have the potential to destabilize markets and alter the underlying assumptions of investors. They also tend to have a short-term fear shock that may then wear off as the new information is digested. However, the day of the attacks, the market ended slightly higher than it opened.

There are a few factors that may have soothed the market’s fear and averted a short-term sell-off. Although the strike was unexpected, it seemed well calculated and communicated. The US warned the Syrians and Russians about the strike to try to limit casualties and maintain diplomacy. The event was quickly labeled as a “one-off” strike to signal the US’ disproval of the chemical weapon use, rather than a full commitment to military action in the region. To some, the action may signal the US’ willingness to maintain a role as “world policeman,” which was a job that Trump previously denounced during his campaign.

Unsurprisingly, the strongest negative response to the strike was from Russia. The Russians have an active naval base in Tartus, Syria, and have publicly backed the Assad regime.  Globally, however, reaction to the US’ unilateral decision was mixed, and may not have supplanted the prior equilibrium among international relationships. Below are some of the responses from global leaders as of April 10.

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Notably missing from the table is China. The Chinese President Xi Jinping was stateside visiting with Donald Trump while the attack took place. Reports out of China following the attack did not center on the US action in Syria. Rather, China’s state-run media outlet Xinhua quoted that Xi Jinping feels, “He is ready to work with his U.S. counterpart, Donald Trump, to push forward China-U.S. relations from a new starting point.”

Mohamed El-Erian spoke of what he called “Impressive Market Resilience” in a column for Bloomberg on April 10, 2017. Not only did the market withstand unexpected news on Syria, the number of jobs created in March was 82,000 jobs shy of the 180,000 expectation. The market does not seem eager to test support levels on ‘fear based’ headline trades. El-Erian opined that there is an ingrained “buy-on-dips” mentality in the market that has made it more resilient in the face of new information. This resilience may also show that there is also a lot of optimism about the economy that overwhelms the negative headlines.

Overreacting to negative headlines often provides errant price movements, but the same can be said for underreacting. As we move into a market where investors have more “good news” to point to, active managers may look for opportunities to find risk that is mispriced due to the markets’ expectations for positive outcomes. The willingness of the market to brush off opportunities to check support levels could be a sign that many are seeking out reasons to buy stocks rather than weighing both positive and negative risks. It is easy to mitigate the importance of last week’s headlines; however, the lack of market response may be a notable shift in the behavior of today’s market participants.

What may have been missing from the week of unexpected headlines was any unexpected news from major central banks throughout the world. Fed Chairwoman Janet Yellen spoke on Monday to students at the University of Michigan’s Ford School of Public Policy. She was asked, “How healthy is the US economy?” To which she replied, “Pretty healthy.” Unemployment is at 4.5% and forward-looking inflation is at 1.3% by her estimation. She said that the economy to this point has been greatly supported by consumer spending but they are beginning to see more strength in real estate and the global economy seems to be operating in a more robust way. The Fed has moved closer to their target and is moving from an accommodative stance to a more neutral monetary policy. However, Ms. Yellen stated that their view of a ‘neutral’ short term interest rate is not that high.

This week has raised new uncertainty about geopolitical relationships and the recovering US labor market. Is Syria going to destabilize global politics and potentially lead to new armed conflicts? Is one weak jobs number a sign of a slowing labor market? The market seems to have priced this new information as relatively quickly as unsubstantial, for better or for worse. In the months to come, market players may be looking to the development of these stories, but may also be holding onto their hands until they receive updated news from central banking authorities. The Fed’s intention to unwind its balance sheet could provide the type of headline to which investors are looking to react. At the current stage it feels as though the market is confident in current valuation levels or waiting on the Fed to reveal new insight regarding its policy going forward. Active managers will be performing their own due diligence to determine if they need to adjust their portfolio due to the new information from last week.

Please Note: Content Limitations: The above content is a general discussion only, and should not be construed as a substitute for the receipt of specific advice or counsel from Folio Dynamics (dba FolioDynamix) or the professional advisors of the reader’s choosing relative to a reader’s specific situation or circumstances. To the extent that the above references any general investment-related issues, please remember that different types of investments and/or investment strategies involve varying levels of risk, and there can never be any assurance that any specific investment or investment strategy will be either suitable or profitable. 

This blog post was written by Tyler Mull, Investment Research Analyst and Overlay Manager, and Brian Clark, Investment Research Analyst.