7:35 a.m. ET, December 13, 2023
Wall Street is more worried about the Fed than the war abroad
Financial giants have been warning for months that looming geopolitical dangers pose the biggest threat to the broader U.S. economy. But even as wars rage in the Middle East and Eastern Europe, markets enjoyed a year-end rally.
The S&P 500 hit its highest level since January 2022 on Tuesday after new data showed inflation cooling. The increase came even as the war between Israel and Gaza intensified and the war between Russia and Ukraine neared the end of its second year.
It appears that Wall Street is skeptical of the war's impact on the U.S. economy for now, instead focusing more on the Federal Reserve and inflation rates than on conflicts abroad.
JPMorgan Chase CEO Jamie Dimon has repeatedly said that geopolitical uncertainty is the biggest risk in the world right now.
At the New York Times DealBook Summit last month, he stressed that this may be the most dangerous time the world has seen in decades, and that the wars in Ukraine, Israel and Gaza could have far-reaching effects on global energy and food supplies . Trade and geopolitics. He said it could even lead to nuclear blackmail (where the threat of nuclear war is used as leverage to force another country to comply with certain demands). He is not alone. EY's latest CEO Outlook Pulse survey found that 99% of CEOs said they are shifting investments in response to geopolitical challenges.
Violent conflict abroad poses the biggest threat to markets next year, according to a Natixis survey of 500 institutional investors from around the world.
“The biggest macroeconomic risk for 2024 is geopolitical bad actors who, with one action, can disrupt economic and market assumptions worldwide,” the group wrote. This risk ranked ahead of central bank policy mistakes, a slowing Chinese economy and falling consumer spending.
But the S&P 500 is up 9% since Hamas' attack on Oct. 7 and 10% since Russia's full-scale invasion of Ukraine in February 2022.
“Many forecasters are stoking hysteria about the ongoing war in Ukraine and the Oct. 7 terrorist attack in Israel,” Clocktower Group chief strategist Marko Papic wrote in a note this week. “Ultimately, none of the events had any impact on the markets.”
Instead, investors appear to be fixated on the Fed — and investors won't let geopolitics dampen their holiday spirit.
“Given the increasing geopolitical tensions in the world, I think it is very important that we do not confuse the very muted reaction that we have seen in the last four to five weeks, for example, with the very optimistic mood of the markets, because that is not the case,” Sinead Colton Grant, new chief investment officer at BNY Mellon, said at the Portal NEXT conference in New York last month.
“They are monitoring developments very, very closely and are assuming that all of these events remain somewhat under control. If that turns out not to be the case, the markets will react quite strongly and that would have implications beyond the stock markets,” she said.