Tuesday, September 10, 2013

What Can the Stock Market Tell Us About War With Syria?

One of the books in my every-expanding to-read pile is Barton Biggs' Wealth, War and Wisdom. Biggs was a Morgan Stanley director, Hedge fund honcho (and later day survivalist) and the book (as I understand it) argues that stock markets correctly anticipated the course of WWII.

The basic idea is as follows: the price of a given company's stock is a sort of collective prediction about the future profitability of that company. If the price of that stock responses to some new event by going up, that suggests that the event increases the likely profitability of the company. If it goes down, that suggests that the company is likely to be less profitable (or is less likely to be profitable). Likewise, if a stock index goes up or down, this suggests something about the aggregate profitability of the companies that make up the index, and if the index is sufficiently broad based, we might even be able to infer something about the effect of the event on the overall economy.

This sort of reasoning has it's critics, and it isn't perfect by any means. For one thing, it is possible for the collective judgment of the market to be wrong (even a fierce advocate of the Efficient Market Hypothesis would concede as much). And there is always a risk that one might misinterpret a given market movement. Still, even if the market isn't perfect, it probably has a sounder basis than the source of a lot of punditry, which is just making stuff up.

This week the Congress is debating an Authorization for the Use of Military Source in Syria. As with any great matter of war and peace, there are a lot of unknowns. Will military strikes deter Assad from using chemical weapons again? Could it destabilize the region? Etc. Personally I think military strikes are a bad idea. But that's just my opinion. What, if anything, does the Great and Powerful Stock Market think of it?

Looking at the Dow and S&P 500for the last month, it seems that, at first, the stock market did not treat Assad's chemical weapons attack as a big deal. Shortly after 3:00 pm on August 26th, however, both the Dow and S&P fell sharply, as Secretary of State John Kerry gave an afternoon press conference in which he called the Syrian attacks a "moral obscenity" and intimated that the U.S. would take military action against the regime.

Over the subsequent week both Dow and S&P edged back upward as domestic opposition to military strikes led Obama to seek Congressional authorization (which, it increasingly looks as if he will not get). Then, on Monday, an off the cuff statement by Secretary Kerry that Syria could avoid reprisals if it allowed international control of its chemical weapons appears to be turning into an actual realistic option for avoiding war. Coincidentally or not, the Dow rose around 140 points.

You see the same general trend (albeit inverted), by looking at oil prices. When military strikes appear more likely, the price of oil goes up; when their probability falls, the price falls as well. Syria isn't a big source of oil, of course, but they are backed by Iran, and the price movements suggest that military strikes could have larger consequences. I was a bit of a jerk to Matt Yglesias when he mentioned this last week, but his methodological point is sound. Higher oil prices hurt the U.S. economy, and so to the extent that military action against Syria would lead to higher oil prices, that is at least one reason against military action. 

UPDATE: Asian markets appear to be reacting positively to President Obama's announcement that he is delaying a vote on the Syria AUMF.


  1. If, at anytime throughout the year, taxpayers could choose where their taxes go, what would the DoD's change in revenue tell us about war with Syria?

    "There are multitudes with an interest in peace, but they have no lobby to match those of the 'special interests' that may on occasion have an interest in war." - Mancur Olson

    What would be the legitimacy threshold? Would a war be considered a legitimate public good even if only .1% of taxpayers gave their taxes to the DoD?

  2. Anonymous10:23 AM

    " ... the stock market did not treat Assad's chemical weapons attack as a big deal."

    I wonder how the victim's feel about the attack and how big a deal it is to them?

    1. Anonymous11:23 AM

      As soon as market data from their trades are released we'll know?

  3. Anonymous11:36 AM

    "[...]to the extent that military action against Syria would lead to higher oil prices, that is at least one reason against military action."

    Or the war against Syria could be a great success, pacifying the whole region, jump starting the world economy and thus increasing oil prices. In this case oil markets simply anticipate the military clout of the US...

  4. Anonymous2:17 PM

    You were a bit of a jerk to Yglesias, and your point is wrong. If a carbon tax increases the price of oil(and energy, and everything else), it's not like that increase in cost just disappears off in to the pockets of oil producers, which is what happens when the price of crude goes up. It goes to the US government, which presumably would do something more intelligent with it than just hand it over to Saudi Arabia. They might, for instance, make a broad based income tax cut, or lower corporate tax rates, or even just spend it on paying the unemployed to dig ditches and fill them back in again, all of which would offset to some degree(maybe even entirely!) the economic impact of higher oil/energy/everything else costs.

    Having the price of crude oil go up is unambiguously bad for oil importing nations. Having consumers pay for the negative externalities of their consumption is Econ 101.

  5. Summary of Paragraph I and II: Remember that book, the one by Biggs? Yeah, what about it? Um, I didn't read it, yet, but its on my list.

    Paragraph III: Remember that theory the EMH about current known information being priced into stock prices? Yeah, what about it? Um, even the EMH doesn't think future unknown information is perfectly priced.

    Remaining Paragraphs: Remember that book by Biggs about how the market anticipates information? Yeah, um never mind, I wonder if the market today responds to news, cool you know the market went up and down, it might be reacting to news flow. Its not just the Dow either, the oil market and Asian stock markets might react to news too.

    Interesting, here's another illustration of the wisdom of crowds. If you don't have anything good to say, don't say it. Why just look at what all this blogs commenters have to say to this post.

    1. Dan,

      That's not such a bad summary, actually.

    2. But why would you write such a post?
      Why mention a book you haven't read - make note of the fact that you don't really know what the ideas are, mention dramatically that a theory isn't about what it isn't about, and then veer off in a completely new direction unconnected to either the book you haven't read or the theory that isn't about the idea to make a point that everyone takes for granted. If there was some doubt that markets react to news, the place to start would be to illustrate the doubt, if there was something novel or surprising about markets reacting to news write about that.
      Look, its easy on the internet to just trash something in the comments. - i wish it were easier to just say nothing - I strongly suggest you put a little meat on the bone of your posts, you have a good platform give the reader something to chew on - respect us with a quality post with some care effort time and thought behind the post. In short, try to make Noah look really bad, so far, his replacements are making him look great. it's hard to write, its hard to write a blog.

  6. Anonymous7:43 PM

    What is "the stock market"
    A bunch of programs, programmed by geeks from CMU or Stanford who probably couldn't find syria on a map ?

    A bunch of obnoxious WASP wall street traders living in Greenwhich CT, who , if Obama came out in favor of apple pie, would note that the apple plant originated in the Caucusus, which was (wink wink) part of the USSR ?

    A tiny number of hedge fund dudes, whoose morals are beneath contempt ?

  7. The title of this article is somewhat unappropriate. At least you admit that striking Syria would be a mistake.

  8. Bill Ellis7:26 PM

    The one of the most disturbing developments to come out of the debate about Syria is that the bulk of our political class is now on record that they are behind the neocon policy that we can not tolerate an Iranian A-bomb -- and our press, left and right, has not objected or even questioned it one tiny bit.

    They are acting as if there is nothing to debate--as if we will be compelled to stop it.

    Under Bush North Korea got the bomb and the world complained and fretted. Why was NK getting a bomb tolerable one presidency ago, but Iran getting a bomb means we have start a war in the Persian gulf ? Who is nuttier than the Kim's ? What nation is more totalitarian than NK ?

    The level of fear surrounding an Iranian nuke is completely out of line with the reality of the situation.
    The 1st Use of nukes becomes irrational in situations of mutually assured destruction.(MAD) The leadership of Iran is as rational as any nation's. If history shows us anything about the Persians is that above all they are survivors.
    Few nations have been screwed over by History's great powers as much as Iran has, yet- in the words of Curtis Mayfield-- they keep on keeping on.

    I think the world would be better off if the great powers could not fight over it anymore...The Iranians certainly would be.

  9. By the end of the 1960s, pension funds,
    insurance companies and individuals owned 67% of all the shares on the Share Market.
    But today they are just minnows next to the global hedge funds that really control Britain's companies.