Iraq appears headed for a tough summer of turmoil, adding to U.S. security concerns about tensions with Russia and Ukraine, but analysts predict investors likely can expect continued stock growth as long as America does not commit ground troops to those combat areas.
Oil prices rose as Iraqi cities fell to the Sunni Islam insurgent group the Islamic State of Iraq and Syria, and stocks dropped after the fall of Mosul – Iraq’s second-largest city – to jihadists on June 10. Russia also increased fuel tensions when natural gas giant Gazprom reduced supplies to Ukraine, which funnels that resource to the European Union. Kiev now will only receive supplies paid for in advance, Reuters reports.
The Standard & Poor's 500 index traded around 1,937 Monday, dropping from 1,950 on June 10. The Dow Jones industrial average traded around 16,780 Monday, dropping from 16,945 on June 10. The Nasdaq composite index fluctuated Monday, trading around 4,318 and dropping from 4,338 on June 10.
But in the long term, tensions in Ukraine and Iraq won’t frighten Wall Street enough to stop the bull market, says James Paulsen, chief investment strategist at Wells Capital Management. Unrest could only cause a short-term dip in stock values if the U.S. made a significant ground troop commitment in those areas, which would lead to serious social turmoil after a decade of war in the Middle East, Paulsen says.
The White House has said it would not commit ground troops to Iraq, and Paulsen predicts there will not be ground troops committed to Ukraine either, even though “Russia is howling at the moon a little bit.”
“There are too many players on the global stage with skin in the economic game,” Paulsen says of the politics likely to preserve relative market stability. “The U.S. is verging on energy independence like it never has. The market can withstand the shock.”
The stock market has boomed to record highs in recent months, and growth likely will continue as Wall Street is not clouded by overconfidence that led previous growth bubbles to burst, Paulsen says.
Oil prices also have spiked as the August contract for Brent crude rose 0.17 percent Monday to $112.63 a barrel, after rising approximately 4 percent last week. Iraq’s oil supplies in the south of that nation are so far untouched by the jihadist offensive, but there is a low risk that those forces may seize control of pipelines or infrastructure that could disrupt the flow of oil, according to a report from IHS Energy.
“New supply outages in Iraq would likely push global oil prices higher still – possibly toward $120, a level that could trigger discussions among consuming countries of tapping strategic stocks,” the report says.
Investors will be fine this summer as long as they own a diverse range of stocks, Paulsen predicts, adding that there is not enough economic risk to change equities into bonds.
“Sell industrials and transports [stocks], buy utilities, for example,” Paulsen says. “Don’t lose track of the fact that we may not even be halfway through the recovery, and the stock market has higher to go.”
Conversations about whether, and how fast, the Federal Reserve will raise interest rates will play a much larger role in the duration of the current bull market, says James Stack, president of InvesTech Research, a financial advisory firm.
“Geopolitical events can have an impact on consumer confidence, or on business confidence,” Stack says. “Gas prices by themselves can create a headwind for the economic growth that will take a fraction off the GDP, but it is not enough of an economic drag.”
Historically, crisis events do not determine the course of the stock market, according to a report from InvestTech detailing Wall Street’s responses to national security crises dating back to World War II.
“In over 50 percent of past wars and political crises, the market ended the first month following the event with a decline,” the report says. “However in eight of 11 cases the S&P 500 more than recovered any losses by the six month mark.”