A Shot Across the Bow?

President Obama says that we need "a shot across the bow" to convince Syrian President Assad and other rogue leaders that the use of poison gas and other weapons of mass destruction (WMD) will not be tolerated. From naval warfare, “a shot across the bow” is meant to convince the captain of the targeted ship that the next shot will sink his vessel, potentially killing him and his crew. By stating that an American strike will be limited and not aimed at regime change, one might wonder what is the point? We are not targeting Assad the captain personally nor are we likely to sink his ship, and he knows that.

 August was not kind to the bond and stock markets. Already worried about the  "tapering" of central bank stimulus and a political showdown over the federal budget and debt ceiling this fall, fears of military action in the Middle East jolted markets. Mr. Market does not like big events that are hard to assess. As the dog days of August droned on, fast money traders focused on a long weekend and one last summer beach blast, found it easier to dump bond and stock positions and go to cash. The Dow Jones Industrial Average ended August down 4.4%, the largest monthly decline this year. The 10-year Treasury note rate, under 2% as recently as mid-May, is climbing toward 3%, finishing August at 2.747%. While a bargain compared to the historical average of roughly 5%, the upward slope of the yield curve worries some as the "cost of money" rises.

The Dow and the S&P 500 Index have moved below their 65-day moving average. While indexes could sink further, movements below moving averages usually signal rational and longer term investors to stand pat and to consider adding to positions.

We have been here before. With Operation Desert Storm in 1991, the bombing of Kosovo in 1999, the invasion of Iraq in 2003, and the 2011 U.S. airstrikes in Libya, markets were rattled, investors flocked to safe havens in U.S. Treasury paper and gold and oil prices rose. We are seeing a repeat of those patterns. As past events unfolded and the sky did not fall as Chicken Little prattled, investors settled down and the stock market recovered from fear-driven dips.

Our crystal ball is no better than anyone else's but we do seek rational assessments. We find the thoughts of the Washington editors of The Kiplinger Letter to be reasonably prescient. In a August 30 report they acknowledge the threat of a wider conflict but they "don't see the worst case playing out."

 Hezbollah could retaliate by striking Israel from Lebanon and the Israelis will hit back. Further atrocities by Bashar Assad's forces could spur an expansion of U.S. attacks. Iran will make noise but it is thought that they really do not want to risk anyone targeting their nuclear facilities.

 On June 4, 2009, President Obama delivered a speech in Cairo, Egypt. Dubbed "A New Beginning," the address aimed to repair U.S. relations with the Muslim world. Sadly, for Muslims in the Middle East and for America at large, it has been downhill ever since. Egypt is a chaotic mess. The civil war in Syria shows no signs of a quick resolution. A potential post-Assad regime offers no guarantee of American friendship. Unrest in the Middle East has been a fact for the last several thousand years.

 Muslim factions have been fighting each other ever since the Prophet Muhammad died in 632 A.D. Muslims were battling Christians even before the Crusades were launched in 1095. We can pray for peace, but the best defense is a strong U.S. economy and the world's finest, best equipped, and well-paid military that responds forcefully when U.S. interests are attacked directly. We do not seem to be doing well in the "making of friends" department. We do not see that changing anytime soon and the possibility of terror attacks on U.S. assets abroad and at home remains high.

 Syria is not a big oil exporter but oil prices have been rising based on fears that unrest will spread to other producers and impact shipping lanes. Oil could jump to $120 a barrel if hostilities spread, increasing gasoline costs, shipping costs, and airline fares. But ultimately, barring a wider Middle Eastern war, oil could settle back into the $90 to $95 a barrel range.

 One bright spot overlooked midst the worry was an upward revision of 2nd quarter GDP growth to 2.5%. We aren't growing our economy fast enough to produce a jobs boom but we are growing. We don't see anything on the horizon that could tip us back into recession.

There are things to worry about but we have much to be thankful for. The editor of one financial services magazine said that when she frets, she utters six words to make her feel better: At least I'm not in Afghanistan. If you are in Afghanistan, you are not worried about the stock or bond market, for sure!

 

Lewis Walker is President of Walker Capital Management LLC. and Walker Capital Advisory Services, Inc., a Registered Investment Advisor (R.I.A.) Securities and certain advisory services offered through The Strategic Financial Alliance, Inc. (SFA).  Lewis Walker is a registered representative of SFA which is otherwise unaffiliated with the Walker Capital Companies. ▪  3930 East Jones Bridge Road ▪ Suite 150 ▪ Peachtree Corners, GA 30092 ▪ 770-441-2603 ▪ lewisw@theinvestmentcoach.com