Nothing to Fear but the Lack of Fear in Markets

Investors have taken recent geopolitical events in stride, but that won’t last forever

By Steven Russolillo
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Very little seems to spook financial markets these days. That itself is a cause for concern.

Last week alone, a subway blast in Russia killed several people, a truck drove into pedestrians in Stockholm and the U.S. military launched dozens of missiles at a Syrian air base. Those three events normally would at least send some tremors through markets. Instead, stocks barely budged.

Traders for years have been conditioned not to overreact to geopolitical events. Dips following incidents such as the invasion of Crimea in 2014, the Paris terror attacks in 2015 and the Turkish coup attempt last year quickly turned into buying opportunities. The S&P 500 was higher after all three of them within five trading sessions.

But the latest reaction, or lack thereof, was even more pronounced last week. S&P 500 futures fell 16 points late Thursday night immediately after news broke of the U.S. missile attack. A few minutes after trading opened Friday morning, though, stocks were higher.

“Investors have developed a complacency toward these kinds of events,” said Andrew Brenner, head of international fixed income for National Alliance Capital Markets. “When you see these movements, there just isn’t any follow-through.”

Much of that has to do with the current stage of the market cycle. Sam Stovall, chief investment strategist at CFRA Research, found investors are much more likely to shrug off these types of events in good times rather than bad.

In bull markets since World War II, 13 of these so-called market shocks have prompted the S&P 500 to drop about 5% on average, taking nine days to bottom, according to Mr. Stovall. By comparison, when other exogenous shocks have happened during bear markets, the S&P 500 has dropped 17% on average, with these pullbacks lasting about two months before bottoming.

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This isn’t to say that the recent calm will last forever. Students of market history know that periods of low volatility last until they don’t. And markets have been eerily quiet of late, with volatility at historically low levels. The CBOE ’s Volatility Index, the VIX, averaged 11.7 in the first quarter, the lowest start to a year in its history.

How Syria plays out and what role it has on financial markets is obviously unknown at this point. But when geopolitical turmoil arises, “investors shoot first and ask questions later,” Mr. Stovall said. “And the question they often ask is ‘Will this lead to recession?’ If not, that’s more reason to buy the dip.”

In the ninth year of a bull market, there isn’t much that fazes investors, geopolitics included. But it only takes one whopper of an exogenous shock to change that.

This time certainly won’t be different.

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