What Afghanistan Conflict Might Mean For Stock Market

Asian shares slipped Monday, amid worries about surging coronavirus infections in the region, as well as concerns about the long-term impact from the Afghan government’s collapse.

Analysts said the relatively slow vaccination rollouts in Asia are pushing down investor sentiments. Japan, Thailand and Malaysia are among nations reporting several record daily new cases recently and vaccination rollouts in many countries have been unsteady or outpaced by virus surges.

Analysts said the Taliban sweeping into Afghanistan’s capital may feel like a faraway event, but will undoubtedly affect markets elsewhere, including Asia.

“Yes, markets will try to brush this geopolitical earthquake off: It’s just Afghanistan; It’s a long way away,” said Rabobank in its daily market commentary. “This geopolitical nightmare is almost certainly only just beginning.”

Taliban in control

After 20 years in the shadows, the Taliban have returned to power in Afghanistan, raising questions about stability in the Middle East and stoking some potential unrest in U.S. financial markets, amid a weekend that was rife with political developments.

“It’s a terrible situation for those U.S. folks who are still there,” J.J. Kinahan, chief market strategist at TD Ameritrade, told MarketWatch in emailed comments on Sunday.

“As far as the markets go, we’ll have to wait and see on the longer-term implications,” he said.

The benchmark 10-year Treasury note yield was at 1.27% late Sunday in New York, attracting some haven bids, with prices of government debt rising and yields moving in the opposite direction.

Taliban fighters took over Kabul, the Afghan capital on Sunday, and President Ashraf Ghani fled the country the country, as did American diplomats and those from other nations, fearing retaliation in the new regime.

President Joe Biden has rushed 5,000 troops to Kabul to secure the airport and help evacuate American diplomatic personnel, and the Pentagon authorized an additional 1,000 troops Sunday. The troop movements come as the Taliban’s quick advance has stunned the Biden administration, following April’s announcement that the U.S. would fully pull out of the country by Aug. 31.

The U.S. presence in Afghanistan, spanning the tenures of Presidents George W. Bush, Barack Obama, Donald Trump and Biden, started following the Sept. 11, 2001, attacks on the World Trade Center and the Pentagon, and is now considered the U.S.’s longest military conflict, surpassing World War I, World War II and the Korean War combined.

Biden’s decision to remove troops from Afghanistan came after Trump’s concessions to withdraw U.S. forces as a part of a conditional detente between the U.S. and Taliban leaders. Critics of the withdrawal, including Biden’s top military commanders, had made the case that it would destabilize the tenuous Afghanistan leadership, leaving it vulnerable to insurgent groups.

For the most part, stock-market investors have been mostly sanguine amid the long-running conflict that has cost an estimated $2.261 trillion, according to research from Brown University’s Watson Institute of International Public Affairs, which also estimates that 241,000 people have died as a direct result of the war.

The Dow is up by nearly 270%, the S&P 500 has gained more than 300% and the Nasdaq Composite has climbed more than 700% since the fall of 2001.

Photo: Market Watch

It’s worth noting that the benchmark 10-year was yielding between 4% and 5% around that time.

Historically, military conflict doesn’t always have an impact on stocks, and war’s influence, if any, on investors’ psyches isn’t always clear-cut. The context and economic and market environments are often a bigger driver.

The U.S. was already in the throes of a recession when the attacks of 9/11 hit and the market initially dipped sharply after the attacks.

Markets currently are attempting to claw back from the hit caused by COVID-19 and the spread of the delta variant, with questions about the policy plans by the Federal Reserve, and other central banks, at the front of investors’ minds.

Still, military aggressions may result in some investors turning to bets on defense contractors, which could see a boost if the animosities flare up.

Northrop Grumman Corp.’s stock NOC, -0.21% is up nearly 880% and Lockeed Martin Corp.’s shares are up 834% since 2001, while Boeing is up 439%, and General Dynamics Corp. is up over 422%, all of which outperformed the broader market during that period.

So far this year, Lockheed’s stock is underperforming the broader market, up 0.9%, as is Boeing’s, which has gained 9.5% in the year to date.

Overall, strategists had already been warning about the possibility of a correction as concerns about peak earnings and economic growth grow and many analysts see the Afghan escalation as simply adding to a wall of worry.

TDAmeritrade’s Kinahan said that we “should see a lift in volatility, and perhaps some fixed-income purchasing, as this puts an element of uncertainty into the market.”

But don’t be surprised if the market’s reaction to the possibility of military tensions is counterintuitive, as Ben Carlson, portfolio manager at Ritholtz Wealth Management LLC, has written in the past about the market’s sometimes odd reaction to war, summing it up thusly.

“Markets don’t always respond to geopolitical events the way you think.”