Geopolitical Headline Risk In The Now

August 14, 2014 10:31 AM

Since the S&P 500 reached its record on July 24th, it is down roughly 4.0%, but has recovered 2.0% of that loss since the August 7th recent lows of price level 1909.  To a certain degree, it seems as though Q2 earnings season has been lost to this current of headline risks.  That’s because geopolitical risks continue to take center stage.  There is some commentary suggesting that the overall number of geopolitical events is not any higher today than at any other time.  That may ultimately be proven true, but it can only be measured in cycles rather than in contemporaneous study.  In addition, the velocity at which our present stash of geopolitical events are going from problem-to-conflagration-to-unsolved lingering issue seems quicker than that of previous cycles.

Let’s review.  Some of the immediate geopolitical headline risks to markets are:

  • Ukraine conflict: Russia is possibly interceding in a sneaky way (with the help of the Red Cross…?) and bumbling Ukrainian officials;
  • Iraq conflict: US intelligence doesn’t know if there are 4,000 or 40,000 people stuck on a mountain top.  It looks like the former this morning and looks like the US will not further intervene.  It also looks like the country could implode again at any time as it is a leaderless ship;
  • Syrian civil war: stalemate for now, but ISIS/ISIL has just completed a nasty gerrymandering exercise that will not please Assad;
  • Ebola: not likely to affect global risk markets so long as it is contained to frontier market countries; and,
  • Israel-Gaza conflict: looking increasingly like the brutal methods employed on both sides will end in an outcome favoring Israel for the time being.

There are many other geopolitical hot spots including China vs. Japan, North Korea vs. The Rest of The World, Iranian nuclear ambitions, etc.  As a proxy for measuring knee jerk reactions to these risks, the purest indicator may be the CBOE Volatility Index – the VIX. 

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Since July 24th (the S&P 500 record close) the average daily move in the VIX, in percentage terms, is 4.97%.  That is high and proves that US markets are subject to headline risks. 

Is there more geopolitical risk in the world today than at previous times?  The answer is “most likely, yes.”  When the only hegemony and world power recedes to domestic squabbles all the while encouraging regime change in the least stable region of the world (the Middle East), it tends to lead to increasing world chaos.  The real question to all of this may be how quickly investors get used to a consistently higher quanta of geopolitical risks.  Only time (and the VIX) will tell.

DISCLAIMER: NOTHING HEREIN SHALL BE CONSTRUED AS INVESTMENT ADVICE, A RECOMMENDATION OR SOLICITATION TO BUY OR SELL ANY SECURITY. PAST PERFORMANCE DOES NOT NECESSARILY PREDICT FUTURE RESULTS.  SEEK THE ADVICE OF AN INVESTMENT MANAGER, LAWYER AND ACCOUNTANT BEFORE YOU INVEST. DON’T RELY ON ANYTHING HEREIN.  DO YOUR OWN HOMEWORK.  THIS IS NOT A RESEARCH REPORT. THIS IS FOR ENTERTAINMENT PURPOSES ONLY AND DOES NOT CONSIDER THE SUITABILITY OR INVESTMENT NEEDS OF ANY INDIVIDUAL.

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