As reports of Chinese troops massing near the border with Hong Kong escalate and Chinese state media become increasingly strident in their criticism of protests that have rocked the city for weeks, the Chinese government appears to be threatening a major police action or even an outright invasion of the former British colony.
Such an action, like the People’s Liberation Army’s crushing of the democratic movement in Beijing’s Tiananmen Square 30 years ago, would likely be bloody, exposing yet again the brutality of the Chinese Communist regime. Any military occupation of Hong Kong by China would be a human rights disaster and a great blow to the cause of freedom, which has suffered a series of setbacks over the last decade.
It also would rock global markets already shaky from slowing economies and the trade war between China and the U.S. Chinese and emerging-market stocks—which this column has repeatedly warned you to avoid—would be pummeled and U.S. stocks DJIA, -1.90% would fall. Bonds TMUBMUSD10Y, -6.40% and gold GLD, +0.80% would continue their recent rallies as investors rushed into what they perceived to be safe assets.
But what about a year later? I looked at several geopolitical crises over the past 60 years and found that generally they didn’t make much long-term difference to stock prices. Crises either briefly interrupted current market trends or accelerated them. When the market’s direction changed, it was because of economic factors. Most of the time geopolitical crises just don’t move markets.
The exceptions: the Yom Kippur War and Arab oil embargo, which ushered in the bear market of 1973-74, followed by recession and the Great Inflation of the 1970s, and the Sept. 11, 2001 terrorist attacks, which made that bear market and recession worse.
Those crises directly hurt the U.S. economy. So I selected a few crises analogous to what may happen in Hong Kong in which dictatorial regimes suppressed popular rebellions or conquered territory that didn’t threaten American interests. The only possible exception to this was Saddam Hussein’s invasion of Kuwait, which, less than six months later, resulted in the First Gulf War. (Five years ago, after Russia invaded Crimea, I analyzed the short-term effect of geopolitical crises on U.S. stocks.)
The events I looked at were:
• The Soviet Union’s suppression of the Hungarian revolution in 1956
• The Soviet Union’s invasion of Czechoslovakia in 1968
• The Soviet Union’s invasion of Afghanistan in 1979
• China’s suppression of the Tiananmen Square movement in 1989
• Saddam Hussein’s invasion of Kuwait in 1990
• Russia’s invasion of Crimea in 2014
Result: Two weeks after these events, the S&P 500 index SPX, -1.90% averaged a 1.6% loss and a year later a 4.4% gain.
Moreover, as the table below shows, stock performance in the subsequent year was mostly unrelated to these events, depending more on the state of the market and the economy.
| What happened to stocks after big invasions and crackdowns | ||||
| Change in | Change in | Bull or bear | ||
| S&P 500 | S&P 500 | market, | ||
| Date of | 2 weeks | 1 year | correction | |
| Event | action | later | later | or recession |
| Soviet Union invades Hungary | 11/4/1956 | -3.6% | -14.1% | Correction |
| Soviet Union invades Czechoslovakia | 8/20/1968 | 0.4% | -3.9% | Bull (until late 1968) |
| Soviet Union invades Afghanistan | 12/24/1979 | -0.8% | 26.2% | Bull |
| China crushes Tiananmen Square movement | 6/4/1989 | -1.3% | 12.9% | Bull |
| Saddam Hussein invades Kuwait | 8/2/1990 | -5.4% | 10.2% | Correction, Recession |
| Russia invades Crimea | 8/24/2014 | 1.0% | -4.8% | Bull |
| Average change | -1.6% | 4.4% | ||
| Sources: Yardeni Research, Inc., National Bureau of Economic Research | ||||
I picked these events because there’s no indication President Trump would do much about a Chinese occupation of Hong Kong. The president recently described the Hong Kong protests as “riots” and declared, “Hong Kong is a part of China, and they’ll have to deal with it.” He thereby echoed the decades-long posture of the Chinese government about “non-interference” in China’s internal affairs.
The president also just capitulated yet again in the trade war he launched, postponing many new tariffs on Chinese goods until most of the U.S. holiday shopping season is over. On Tuesday that set off a huge relief rally in the S&P, the Dow Jones Industrial Average, and the Nasdaq Composite Index.
To be fair, Trump isn’t the first U.S. president who did nothing when hostile powers committed acts of aggression. Radio Free Europe encouraged the Hungarian rebels, only to have President Eisenhower abandon them to the Soviet tanks. LBJ was too caught up in Vietnam and riots in America’s streets to respond to Leonid Brezhnev’s Czech putsch.
Ironically, only “weak” Jimmy Carter responded forcefully to the invasion of Afghanistan—recalling the U.S. ambassador to Moscow, slapping on economic sanctions and trade embargoes, boycotting the 1980 Moscow Olympics, and dispatching National Security Advisor Zbigniew Brzezinski and the CIA to arm and finance the mujahedeen to fight the Red Army.
Don’t expect a similar strong response by President Trump, who already has taken such a great-power confrontation over Hong Kong off the table.
That’s why, as I said at the outset, a Chinese occupation of Hong Kong would be a human rights disaster, would pummel Chinese and emerging-market stocks, and would cause gold and bond prices to soar, but would have no lasting impact on U.S. stock markets. As negative interest rates spread like mold, economies slow, yield curves invert and central banks look helpless to do anything about it, investors feel, rightly or wrongly, that they have other things to worry about than valiant little Hong Kong.
Howard R. Gold is a MarketWatch columnist. He owns funds and ETFs holding U.S. stocks, gold, and bonds. Follow him on Twitter @howardrgold.
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