John Manley

A quick history of the market’s reactions to international incidents and U.S. responses

AdvantageVoice® Blog—9-3-13
John Manley, CFA, Chief Equity Strategist

I believe that, much of the time, you do not have to accurately predict the future to do well in the equity market. Many times the market does not get it. The full significance or importance of events that already have occurred or trends that are well underway is simply not grasped by the majority of investors in these cases. Those with a proper perspective can step in, anticipate the eventual enlightening of others, and potentially profit from the experience. I think this was true in the fourth quarter of last year when the chairman of the Federal Reserve (Fed) baldly announced that he would do whatever was needed to boost the American economy. The Street took its time in remembering the positive effect that a strongly accommodative Fed can have on stock prices. Yet, in my opinion, it was there on the wall all the time.

Today, we are not so lucky. While I believe that neither positive monetary pressure nor its impact on the equity market is about to go away, the recent events in Syria have complicated issues. Now it is important to accurately predict the future, and that is not an easy thing to do. For more than 99 years, the memory of Sarajevo and a dead Austro-Hungarian archduke have haunted investors. “What if this seemingly minor event spins out of control and all the pins fall the wrong way?” “What if it grows into something truly monstrous and destructive?” It seems unlikely, but so did World War I at the time.

I don’t think such a chain reaction will occur, but the possibility has been raised by provocation, and it cannot be disproved until something happens or some time passes.

For what it is worth, I believe that I have discerned an equity pattern in past international provocations and responses by the United States. I looked at four such incidents in the past 75 years: Pearl Harbor in December 1941, the invasion of South Korea in June 1950, the invasion of Kuwait in August 1990, and the attack on the World Trade Center and the Pentagon in September 2001.

Each was more of a surprise than today. Each affected us or our vital interests much more directly than recent events. Each was followed by an equity market decline that exceeded what we will probably see in the next few months. However, all effectively bottomed at the same time: when the U.S. military launched its first major response to the provocation.

In 1942, the market bottomed in April, when Jimmy Doolittle led the first air raid on Tokyo. In 1950, the market bottomed when the first contingent of U.S. troops was deployed in the Pusan Perimeter. In January 1991 (when Operation Desert Storm was launched) and March of 2003 (when U.S. forces entered Iraq), the market situation was slightly different. In those months, equities had bottomed a few months before, bounced briefly, fell back, and then set higher lows. In all four instances, stocks moved meaningfully higher in the months that followed the response low.

So, for what it is worth, there it is. We don’t know the exact course that we will take, but history argues that a bottom may not be all that far away.

The views expressed are as of 9-3-13 and are those of Chief Equity Strategist John Manley, CFA, and Wells Fargo Funds Management, LLC. The information and statistics in this report have been obtained from sources we believe to be reliable but are not guaranteed by us to be accurate or complete. Any and all earnings, projections, and estimates assume certain conditions and industry developments, which are subject to change. The opinions stated are those of the author and are not intended to be used as investment advice. The views and any forward-looking statements are subject to change at any time in response to changing circumstances in the market and are not intended to predict or guarantee the future performance of any individual security, market sector or the markets generally, or any mutual fund. Wells Fargo Funds Management, LLC, disclaims any obligation to publicly update or revise any views expressed or forward-looking statements.


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