Where Is All The Market Fear?

The United States dropped a 21,600-pound Massive Ordnance Air Blast bomb on ISIS targets in Afghanistan. The attack is the first time the U.S. has used the so-called “Mother of all Bombs” in combat, and news of the bombing came just days after President Donald Trump authorized bombing targeted Syrian bases in response to the use of chemical weapons on civilians.

Russia's 'FOAB' On Standby

Russia issued its own response to the Syrian bombings. Russia's deputy U.N. envoy Vladimir Safronkov warned the United States of "extremely serious" consequences of its "illegitimate actions" in Syria. Russia then revealed what it calls the "Father of all Bombs," a thermobaric bomb that it claims is four times more powerful than the MOAB.

Immediate Market Reaction: Meh

While the U.S. stock market certainly hasn’t reacted positively to news of escalating international conflicts, its negative reaction has been relatively muted so far. The S&P 500 was up 1.0 percent last week, and the SPDR S&P 500 ETF Trust SPY was down less than 0.1 percent since the U.S. Syrian bombing began.

The lack of market reaction may be troubling to certain traders, especially with the U.S. stock market still within a stone’s throw of all-time highs. Market tops are often associated with a bias known as Pollyannaism, or a tendency for investors to ignore all bad news and focus only on the positive.

This bias is related to the idea of “irrational exuberance,” or the tendency for investors to get so caught up in the euphoria of record-high markets that stock prices become detached from rational valuations.

"If anybody really started to price in a potential conflict, you're talking about a massive correction in the market," Axiom analyst Gordon Johnson told Benzinga.

"Quite frankly, we've been in a secular bull market since 2009, so you have people who are managing money who have never seen a down market, ever. People want to believe. As a result, if you want to believe, you've got to ignore the bad news, and I think that's what people are doing."

Market Sentiments

While the muted market reaction to the military escalation has some investors concerned about Pollyannaism bias, the CNN Money Fear & Greed Index indicated that plenty of investors are feeling uneasy about the stock market.

CNN incorporates seven different measures of investor sentiment into its index, including stock and treasury bond demand and market volatility. The index is a scale of zero to 100, where zero represents extreme fear and 100 represents extreme greed. Last Thursday, the index stands at just 36, in the middle of the "fear" quartile. Surprisingly, investor sentiment has rebounded from just 25 a week ago a week ago and is up from 32 one month ago.

A certain amount of fear and skepticism is a healthy part of any bull market. When negative headlines and geopolitical uncertainties start to have little or no impact on the stock market, it may be a bad sign for the eight-year-old bull market in U.S. stocks.

Related Links:

The 'Irrational Exuberance' Of 1996, And How You'll Know It Has Returned

'Mother Of All Bombs' Made By Government Plant

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Image Credit: By Fl295 at English Wikipedia (This file was derived from:  MOABAFAM.JPG) [Public domain], via Wikimedia Commons