Afghan Chaos Mere Blip for Markets Now: Wall Street Reacts

(Bloomberg) -- Wall Street strategists and investors watching the chaotic scenes in Afghanistan said they don’t see an immediate threat to asset prices, though warned that this could change.

Fiona Cincotta, senior financial markets analyst at City Index, said that the geopolitical turmoil over the weekend might have added to the negative tone in Monday’s trading session. Yet despite the increased geopolitical risks and long-term concerns about terrorism, she was looking at how it would harm President Joe Biden’s ability to press for passage of the infrastructure and budget bills in the House of Representatives.

“It could put some speed bumps and some delays perhaps in the progress of the infrastructure bill and stimulus. That could slow down the U.S. economic recovery as well,” she said. “But I do think that’s probably still a bit more extreme from where we are now.”

The U.S.’s biggest infrastructure plan since 1956 is something investors have been anticipating as part of the Blue Wave trade that began last year in anticipation of a Biden presidential win.

Yet the chaotic withdrawal of U.S. troops and supporters from Afghanistan could possibly endanger the two bills, market watchers said. If Biden is seen as politically weakened through having mishandled the crisis, both Republicans and Democrats would distance themselves from him.

In addition, some on Wall Street said that new demands for greater military spending to deal with Taliban-inspired terrorism threats could mean less spending for social programs and some of the nontraditional infrastructure proposals, like the expansion of high-speed internet.

The analysts’ seemingly callous views on Afghanistan’s impact played out in markets on Monday. The S&P 500 Index reversed early losses for a 0.3% gain to 4,480 -- double the level from its pandemic low in March 2020.

Here’s what strategists and investors are saying:

Henrietta Treyz, Managing Partner at Veda Partners LLC

“I think the market is overly optimistic that the Democrats will get what they want right now. Spending will likely be much smaller. The upside is muted, and downside is muted,” she said. “So much of it is social spending on individuals. If you’re an investor and trying to find the read-through like a stimulus effect, it’s not like a hard infrastructure bill.”

Dave Lutz, Managing Director at Jonestrading

“Most seasoned Washington watchers know this is far from a done deal. Democrats have a pile of people to satisfy. Ultimately it will get done, but not at $3.5 trillion. That number would be a short-term positive for the markets, but a longer-term negative as it would be sure to cause a huge uptick in inflationary pressure. The Afghanistan news will certainly make it more challenging for Speaker Pelosi to cobble together a winning vote.”

Ian Bremmer, President of Eurasia Group

“The assessment was that the Taliban was going to take over. Not in a day, but by the end of the Biden administration, but let’s keep in mind they thought the outcome (not as messy) on the ground for the average Afghan was they expected and prepared for this -- part of the reason that there aren’t any market implications,” he said. “It’s a risk for China, India and Europe, but the direct and indirect market implications will take longer to pull out.”

Terry Haines, Pangaea Policy Founder

“The size and speed of Afghan disintegration, largely unanticipated by U.S. policymakers, is the clearest evidence yet of rising geopolitical strains that will affect markets and likely creates larger aftershocks than most anticipated. In the short term, the defense sector likely is market positive and ‘Green New Deal’ sectors and industries likely are market negative, as the already 30% likely ‘human infrastructure’ initiative becomes even less likely to become law thanks to new focus on defense readiness.”

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