The week ahead

We’ll get to the indicators in a moment, but given the horrific events in Paris on Friday, it’s worthwhile to look at the effects of war on the stock market.

keep himShould there be any major strikes on the United States, it’s likely that U.S. involvement in the war against ISIS will deepen — and it’s already in fairly deep, since the U.S. has conducted more than 7,000 air strikes against ISIS so far.

Even though war has a reputation for being good for the economy and stocks, that’s certainly not true in the initial phases. When the stock market re-opened after the Sept. 11 terror attacks, for example, investors looked at the damage and ran the other way, seeking safety instead in Treasury bonds.

And that’s pretty much the way it goes with major wars. The Dow Jones industrial average plunged 24% at the open of World War I, even after the market had been closed for months. The Dow fell 6.2% the two days after the surprise Japanese attacks at Pearl Harbor, and went into a sustained decline until 1942.

In short: Wall Street rarely rallies on war until it’s confident it will be on the winning side.

In the long term, war tends to boost the economy because it’s a massive burst of government spending. It also tends to boost inflation, because war requires the waste of a great deal of raw materials — copper, steel, aluminum — pushing those prices up. It also tends to make importing certain things, such as oil, more difficult, which drives those prices up.

There are many more things more important than your investments, as Friday’s events point out. If things get worse, don’t look to Wall Street for succor.

In more mundane upcoming events:

  • The consumer price index, the government’s main gauge of inflation, comes out Tuesday. Thanks to falling oil prices, the headline number has been lower than the core, which takes out food and energy.
  • Housing starts arrive Wednesday. The housing market has been sputtering a bit lately. The consensus is for a seasonal adjusted rate of 1.162 million, according to Calculated Risk.
  • Leading indicators land Thursday. It’s always worthwhile taking a look at the coincident indicators as well, which give some idea of how we’re doing right now.

Earnings season is winding down, mercifully. S&P 500 earnings are down 1.57% year over year, with 465 companies reporting. On deck: Home Depot and Walmart on Tuesday, Target and salesforce.com on Wednesday, and The Gap and Best Buy on Thursday.

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