"Kee" Points with Jim Kee, Ph.D.

  • Iran and Markets
  • Trade and Markets 

Iran and Markets

Because of recent intelligence reports of possible Iranian attacks on US targets in the Middle East, the US deployed warships to the area. This was followed by reassuring or conciliatory words from President Trump, i.e., “I’m sure that Iran will want to talk soon,” followed by Sunday’s antagonistic tweet, “If Iran wants to fight, that will be the official end of Iran” (WSJ). Trump has since toned that rhetoric down, but it is reasonable for our clients to ask, “What are the implications of turmoil in the Middle East for the stock market?” This has actually come up quite often over the past ten years, and I have frequently used a chart by data provider Crandall, Pierce, & Co., to answer the question. Titled, “After the Crisis,” the chart looks at various geopolitical shocks over the past 70 years, like the Cuban missile crisis, the Kennedy assassination, and the fall of Saigon. The takeaway is that in bull markets, crises tend to run their course and the market continues to advance. On average, the market declines for 8 days following a big event, loses about 4.3%, and then returns to pre-crisis levels in about a month. Looking just at the current bull market, Bloomberg columnist Barry Ritholtz pointed out in a recent column that we’ve had 24 declines of 5% or more since 2009, and “they all seemed like the end of the world” (Bloomberg). Examples include events like the Greek debt default concerns, the Libyan civil war, the Japanese nuclear disaster, and China’s growth rate falling by half. The average of these twenty-four declines has been 9.7%, and yet like the Crandall-Pierce data, the takeaway is the same: try not to react to market volatility.


Trade and Markets

So I think the market’s main focus and source of angst continues to be trade issues. One of my old Auburn professors, James Barth, pointed out in a recent piece that the sum of all countries’ exports and imports divided by global GDP tends to be a common way to measure the degree of globalization. In 1960 that number was 24 percent, while today it is 56 percent, so the world is over twice as globally integrated as it was 50 years ago. In fact, the consulting firm McKinsey & Co., argues that it is even greater than this because overall trade flows are understated by at least 20 percent. McKinsey states that, “Intangible assets that multinational companies send to their affiliates around the world – including software, banking, design, operational processes, and other intellectual property, represent tremendous value, but they often go unpriced and untracked unless captured as intellectual property charges.” They add that trade statistics fail to track the “soaring cross-board flows of free (but valuable) digital services, including email, real-time mapping, video conferencing, and social media.” And they point out that the composition of trade is changing from goods to more intangible services, which have much higher profit margins and account for a higher percentage of value added for goods traded globally. I think all of these developments help explain why the market is so sensitive to trade issues.