Significant Stock Market Drop
A growing conflict with Iran has begun to rattle global financial markets, and some analysts believe the reaction on Wall Street could eventually influence U.S. policy. One geopolitical strategist says a significant stock-market drop might be the only development powerful enough to push President Donald Trump toward de-escalation.
According to Marko Papic, chief strategist at BCA Research, markets would likely need to fall sharply before the White House reconsidered its approach to the conflict. Papic argues that a correction in U.S. equities—roughly a 10% drop in the S&P 500—could be the threshold that forces policymakers to rethink their strategy.
A Potential Market “Pressure Point”
Papics belief is based on the general notion held by certain investors that the financial market has the ability to affect the political system. In this case, the notion is based on the fact that the sudden fall in stock prices may result in enough pressure being put on the administration to consider diplomatic actions with Iran.
The strategist further indicates that past U.S. presidents have become more sensitive to the actions of the stock market when they begin to feel the effects of the economy. The stock market is a significant indicator of the economy in the United States, as the economy is closely tied with the stock market and the overall feelings of the consumer.
Papic further indicates that when the S&P 500 were to fall by at least 10%, the investors would be able to recognize the fact that the conflict is affecting the economy and would begin to expect the administration to begin the process of de-escalation.
In market terminology, a decline of around 10% is typically referred to as a correction. While corrections are relatively common in equity markets, they often reflect rising concerns about economic risks, geopolitical tensions, or tightening financial conditions.
Courtesy Of Jess Jackson ( Flickr CC0)Markets Already Feeling the Strain
Financial markets are already reflecting anxiety over the rising tensions in the Middle East.
The price of crude oil has increased significantly, crossing the $100-mark. An increase in the price of crude oil could boost inflation and negatively impact the bottom line of companies, thus impacting the stock market.
The uncertainty over the Middle East conflict has also created volatility in the stock markets of the world. Investors are moving their funds into traditional safe-haven assets such as bonds, gold, and the dollar in various stock exchanges.
Even though the stock market in the United States has not yet entered into correction, the environment has become quite fragile. The stock market is often sensitive to geopolitical issues, especially because of the potential disruption that such issues could cause for trade, oil supplies, and economic growth.
Some strategists are saying that if the price of oil continues going higher, the possibility of stagflation could once again become an issue that has not been good for central banks and investors.
The “Trump Put” Debate
Papics comments can also be linked to the larger debate that has been going on in Wall Street regarding what is known as the “Trump put.” This is the idea that the president might respond if the financial stocks were to drop significantly.
It is similar to what is known as the “Fed put,” in which investors believe that the government would respond if the markets were to drop significantly. However, in this case, it would mean that the government would respond by changing policies such as military action.
There is the idea that if the markets were to drop significantly, the government might try to respond by making changes that would help to boost the confidence in the stocks.
However, other strategists caution that relying on such a scenario may be risky. Markets sometimes assume that political leaders will step in to stabilize conditions, but that assumption does not always prove correct.
Investors Remain Divided
Despite the growing discussion about market pressure influencing policy, many analysts say it is still unclear whether the conflict with Iran will escalate further or ease in the coming weeks.
It has also been argued that the economic consequences of the situation may not be severe if the current conflict has little effect on the global supply of oil or shipping routes in the Middle East. If this happens, it may not take long for the stock market to recover from the shock of the situation.
However, some people fear that the situation may cause an increase in the cost of oil, which could have a greater effect on global economic growth. The global stock market has already experienced a downturn, with several markets recording significant losses apart from the United States.
Why Markets Matter Politically
Financial stocks have significant influence over the public’s perception of the economy. A sudden fall in stock prices can impact the economy in many ways, including retirement savings and consumer spending, which in turn can have significant implications for the political system.
Presidents of the United States have always kept a close eye on the stock market’s performance, as a prolonged slump in the stock market can have significant implications for the economy.
Because of that dynamic, Papic argues that a deep enough market falls could alter political calculations. If the economic fallout from the conflict begins to threaten growth or financial stability, policymakers might seek ways to ease tensions.
A Key Test for Markets and Policy
For now, stocks appear to be in a wait-and-see mode. Investors are keeping a close eye on events in the Middle East, as well as changes in oil prices, interest rates, and inflation expectations.
If stocks continue to do well, there may be little pressure on the administration to change course. But if the stocks plummet, as Papic said could be in the cards if they drop by as much as 10%, the political and economic math could change quickly.
Whether that happens remains to be seen. One thing is certain, however: geopolitics is once again playing a prominent role in determining the economic outlook.
By William Hernandez
Journalist for Vlixx Magazine, reporting on news from around the world, ensuring timely, accurate, and detailed information to keep the public informed and educated.
Sources:
Business Insider: Here’s how far a strategist says stocks would have to drop to ‘guarantee’ a Trump pivot on Iran
Featured Image Courtesy of Mike Cohen Flickr Page – Creative Commons License
Inset Image Courtesy of Jess Jackson Flickr Page – Creative Commons License
