Monday, August 26, 2013

War on the horizon

After two years of winding down the U.S. military’s presence in Iraq and Afghanistan, the rumblings of war are being felt in Syria.  Calls for American intervention in Syria’s civil war have been increasing lately, especially after reports indicate that Syria’s government used chemical weapons on civilians.   

According to a Reuters /Ipsos poll, 60 percent of Americans surveyed said they don’t favor the U.S. intervening in Syria, even if it’s confirmed that chemical warfare is being used in that country.  Only 9 percent believe President Obama should act now.

Regardless of what Americans want, it may well be war that they get.  A prescient barometer for gauging the likelihood of military conflicts in the near future suggests war is on the horizon.  The Dow Jones U.S. Defense Index (DJUSDN), a composite measure of defense stocks, has been one of the stock market’s top performers this year.  Defense stocks are conspicuously outperforming the S&P 500 (see graph below), just as they did in 2001 in the months leading up to and following the 9/11 terrorist episode.  During this same period the broad market as measured by the S&P 500 was suffering a bear market. 


In 2001 the defense stocks clearly saw war on the horizon and proved to be an accurate barometer for the launching of Operation Enduring Freedom in Afghanistan in late 2001.  This time around it’s Syria that is the potential catalyst to another military escapade.  Americans have clearly become weary of war, yet with the Federal Reserve’s proposed strictures on monetary policy another war would act as a surrogate financial market and economic stimulus.  This could provide the excuse needed to launch a military initiative in the near future, especially if the bond market continues to sag.

Also worth mentioning is that the 24-year cycle of war, a component of the 120-year Kress cycle series, is due to bottom late next year.  Historically wars have been fought around this critical cycle bottom.