Elisabeth Dellinger
Into Perspective

The Long-Term Investor’s Guide to Syria

By, 08/28/2013

The chances of a bear market stemming from Syrian conflict are far, far smaller than these Syrian bear cubs. Photo by Fox Photos/Getty Images.

Syria is in bad, bad shape. Over 100,000 souls reportedly dead during two and a half years of civil war. Countless factories and over half the nation’s hospitals reduced to rubble. Roads are blocked or bombed out and farmers can’t farm, so food is scarce. With a horrendous chemical attack on his own people last week, dictator Bashar al Assad is rapidly joining the giants of genocide. And now, Western powers are threatening to intervene—and with those threats come widespread worries of armed conflict impacting global stocks. What’s a long-term growth investor to do?

In short: Think long term. Stocks may get choppy as leaders weigh intervention and air strikes start looking likelier, but history shows localized armed conflicts—even those involving the US—have a fleeting impact on stocks. Only the escalation of World War II in 1938 has had the power to knock a bull off course, and the likelihood of Syria escalating into a huge war between major world powers appears exceedingly low.

Throw a dart at a timeline of 20th century world history, and chances are you’ll land on some conflict or skirmish—they’re all too common. And more often than not, they happen during fine years for stocks. The Spanish Civil War, Korean War, Egyptian Revolution, French Indochina War, invasion of South Vietnam, Castro’s seizure of Cuba, Bay of Pigs, Prague Spring, Tet Offensive, Lebanon’s Civil War, the Soviet invasion of Afghanistan, the Iran-Iraq War, Grenada, the US bombing of Libya, the first Iraq war, Balkan War, the second Iraq War, North Korean nuclear threats and tests—all happened during double-digit positive years. Together they disrupted countless lives, and some roiled regional economies, but none had the power to derail global markets.

Not that markets were perfectly calm as these events unfolded. The potential for conflict creates uncertainty. As tensions mount, fear sets in—fear over which nations get dragged in, how many resources they’ll commit, how far the conflict could spread, how long it could last, how much it could weigh on domestic growth and so on. This fear often drives volatility in the run-up to a conflict—as bombs and bullets look likelier, fear intensifies, and stocks get choppy. Stocks fell in the run-up to 1967’s Six-Day War among Israel, Egypt, Jordan and Syria and the months preceding 2006’s Israel-Hezbollah conflict. Volatility spiked after NATO authorized Bosnian air strikes in early 1994. And stocks retested bear market lows as the US weighed whether to strike Baghdad in early 2003.

After conflict broke out, however, things changed. Investors gradually realized the conflicts would stay local, world powers wouldn’t get dragged in on opposing sides, life would go on as normal on the home front, commerce would continue, and corporations would remain profitable. And as folks realized things wouldn’t be as bad as feared, markets got some relief, and bulls resumed their upward march. The S&P 500 rose during every trading session after the Six-Day War broke out. Stocks stayed choppy while Israel and Lebanon fought in 2006 but gained plenty of ground before the ceasefire took effect. Markets had a strong six-month run between NATO’s first air strikes on Bosnia and the late 1995 ceasefire. And by late March 2003, with the US firmly entrenched in Iraq, stocks were surging. That’s not to say bullets are bullish! Just that the uncertainty of potential conflict typically fades once conflict becomes reality, allowing investors to rationally measure the real impact. And the impact on the world’s economy and companies is almost always minimal. 

Which brings us back to Syria. Since last week’s horrific chemical attack, US officials have weighed whether to attack with missiles or adverbs, and markets have retreated a bit. On Tuesday, we got a bit more clarity. State Department officials leaked word air strikes could begin Thursday, and UK Prime Minister David Cameron suggested British troops won’t be far behind. France, too, is at the ready, according to President François Hollande.

So military action now seems likely—and as the likelihood has increased, markets have remained volatile. Uncertainty reigns! But for long-term growth oriented investors, what really matters is whether an international conflict in Syria can disrupt economic activity and corporate profitability globally. Evidence strongly suggests it shouldn’t. Syria is about 1% of the world economy, and it’s not exactly a big revenue source for multinationals. It hasn’t exported petroleum since 2011, so firms don’t rely on Syrian production to keep energy costs down. If the US’s recent experiences in Iraq, Afghanistan and Libya are a guide, it should be business as usual on our shores—ditto for the UK, France and other potential allies. Within Syria, it’s another story—the conflict is devastating! But for global investors, staying cool is likely the right move—not being callous to suffering, but staying disciplined in your portfolio.

Now, could this escalate into something more impactful globally? Sure—it’s possible. Not even remotely probable, but possible. Maybe Russia makes good on those threats of “catastrophic consequences” for an “illegal” NATO intervention. Russia tends to get extra belligerent when its economic standing is falling—and with oil prices down and natural gas booming in the US, petroleum-dependent Russia is hurting. Vladimir Putin is already threatening to restart the Crimean War (in trade-war form) if the Ukraine signs an EU trade deal, and a pending EU antitrust complaint against Gazprom won’t make the world’s favorite jungle-cat-wrestling president any more kitten-like. Maybe he decides launching a few missiles on behalf of a murderous thug is a great way to regain some international prowess. And maybe that takes the conflict global. It’s utterly, completely unlikely! But something utterly, completely unlikely is what it would take for Syria to knock the bull off course. In other words: It’s a virtual certainty Syria’s civil war stays localized.  

Yes, anything is possible—especially in the short term. But markets don’t move on possibilities—they move on probabilities. And the probability Syrian conflict escalates into something big enough to disrupt global commerce appears slim to none. So stay cool. Spare a thought for Syrian people and all those caught in the cross fire. But for long-term growth investors, keeping a longer view of all the many other fundamentals driving global stock markets is vital at times like this.

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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

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