Why the Explosion in Beirut Didn’t Shake Markets
By Matt Salm, Investment Analyst
Several weeks ago, I wrote about how unrest in America didn’t move the markets despite being of societal importance. The reason? “The stock market is a mechanism for valuing what a publicly traded business is worth.” For many businesses, the unrest didn’t affect their valuations.
This week’s column strikes a similar tone. Footage of a massive explosion in Beirut rapidly made its way around the world this week, garnering a huge amount of international attention. The blast in Lebanon’s capital killed over 150 people; injured more than 5,000; and left hundreds of thousands of people homeless.
The stock market’s response? Nonexistent. Why? Catastrophes and tragedies that don’t directly impact the health of the American economy or the earnings of American companies don’t have the power to move the S&P 500 or the Russell 2000 indexes.
These events still have a very real human cost. International support of some form is needed to help the survivors. But the explosion in Beirut isn’t the first catastrophic event to go unnoticed by major markets, and it won’t be the last. Given that only 2.4% of revenues for listed American companies came from all of the Middle East and Africa last year, it makes sense that positive or negative developments in those regions don’t help or hinder American markets.
But here’s what may be surprising: even if the explosion had more directly affected the U.S., it still wouldn’t have hurt long-term stock prices. If the stock market takes a sizeable hit following a catastrophic event or the start of a war, it’s not likely that the dip will last long. “After the September 11, 2001, attacks, Iraq’s invasion of Kuwait in 1990, and the use of American ground troops in Cambodia in 1970… the U.S. equity index returned to its pre-selloff level within less than a month,” notes Mike Bird of the Wall Street Journal.
The takeaway: no matter how important the news is, it’s unlikely to affect U.S. markets unless it clearly alters current or future economic or business conditions.