Written by Norman Isaac Mwambazi

What the Taliban takeover of the Afghan government might mean for the U.S. stock market

At this point, it is no longer news that Afghanistan is now in the hands of the Taliban after fighting …

At this point, it is no longer news that Afghanistan is now in the hands of the Taliban after fighting the American-backed government for over 20 years. The Taliban’s efforts have been helped largely by the pulling out of the American forces from the war-torn country, a process that was started by former President of the United States Donald Trump, and concluded by the current President Joe Biden. Before pulling out, the American government had spent billions of dollars in capacity building and training the Afghan national army but with the ease with which the Taliban progressed and eventually took over Kabul, the country’s capital, it is safe to say the training didn’t do much.

The U.S. has been in Afghanistan for over 20 years, having gone there in 2001 after the September 11 attacks on the World Trade Centre in Manhattan, New York and The Pentagon in Virginia. This would turn out to be the longest war for the U.S. in its history spanning the administrations of Presidents George W. Bush, Barack Obama, Donald Trump and Biden, and it has been reported that the government has spent more than $2 trillion over the course of the war.

After entering Kabul, seizing power and President Ashraf Ghani fleeing the country in fear of his life, the Taliban have announced that the war has ended. There was a stampede and chaos at Kabul International Airport this morning as Afghans and diplomats from several countries alike were trying to flee from the country for fear of their life, and it has been since reported that the flights have been suspended from the airport.

Well, the fears have not stopped in Afghanistan. There are fears among a section of investors that the collapse of the Afghan government could affect the U.S. stock market since the U.S. has been heavily and directly involved in the Afghan conflict with the Taliban for over 20 years.

The impact of this collapse on the Dow Jones Industrial Average (DJIA), the benchmark S&P 500 index, and the tech-heavy Nasdaq Composite Index is not yet clear, as all these three have been trading at or near record highs in the previous few months.

By press time, we have confirmed that the U.S. has sent over 6000 troops to Afghanistan to provide security to its nationals and diplomats as they try to evacuate the country that is headed for uncertain times. The Biden Administration had planned to pull out all their troops from Afghanistan by August 31 but that was under different circumstances. Now that circumstances have changed, it is yet to be seen what the next decision about pulling out could be. According to research from the Watson Institute of International Public Affairs at Brown University, an estimated 241,000 people have died as a direct result of the Afghan war.

Joe “J.J.” Kinahan, the Chief Market Strategist at online stock brokerage firm TD Ameritrade commented on the terrible situation that Americans that are still in Afghanistan might be going through, but also said that the long term implications of the collapse on the U.S. financial markets are yet to be seen.

However, in extended trading, Sunday evening and premarket trading this morning, Dow Futures, S&P 500 futures, and Nasdaq Futures were all tilting lower, but this is no indicator that the stock market’s bull run and recovery from the effects of the COVID-19 pandemic are over.

Since the fall of 2001, the DJIA has risen by nearly 270%, the S&P 500 is up more than 300% and the Nasdaq has grown more than 700% and the benchmark 10-year Treasury note was yielding between 4% and 5% around that time.

It is worth noting that historical data shows that military conflict, whether lengthy or short-lived, doesn’t always have an impact on stocks. When the WTC and the Pentagon were hit on 9/11, the U.S. economy was already going through the pain and effects of a recession in 2001 so the sharp dip that happened after the attacks can be hard to fully be blamed on the horrific attacks.

It is common knowledge that the stock market was hardly hit by the coronavirus pandemic specifically the period between March and April 2021, and it is currently recovering from the effects of the pandemic thanks to several factors like the discovery of a vaccine, the stimulus checks that were passed, and the Federal Reserve Bank’s decision to keep interest rates at a near-zero level among other measures put in place. However, the delta variant is posing a new threat to this recovery, with investors becoming wary of its continued spreading. 

Military conflict on stocks

When the world was forced to stay home and shift work online due to the pandemic, companies providing cloud-based services like Microsoft Corporation (ticker: MSFT), Amazon.com (ticker: AMZN), Netflix (ticker: NFLX), and Zoom Video Communications (ticker: ZM) among others hugely benefited from the shift. When the COVID-19 vaccine was discovered towards the end of last year, big pharma stocks Pfizer (ticker: PFE), Moderna Inc. (ticker: MRNA), Johnson & Johnson (ticker: JNJ) all surged, and are still registering glittering earnings reports. That being said, military aggression may benefit companies in the defence sectors as some investors will be betting on defence contractors to gain hugely from the conflict.

Since 2001, Northrop Grumman Corporation (ticker: NOC), an aerospace and defence technology company has seen its stock grow nearly 880% and the same has happened to Lockeed Martin Corporation (ticker: LMT), another aerospace, arms, defence company. LMT’s stock has gained 834% in the same period. Other defence stocks that have also grown in the past 20 years are Boeing (ticker: BA, 439%), and General Dynamics Corporation (ticker: GD, 422%). All these have outperformed the broader market since 2001.

Investors also have the option of investing in Exchange-Traded Funds (ETF) with the iShares U.S. Aerospace & Defense up 13.7% year-to-date. This fund was created in 2006. The SPDR S&P Aerospace & Defense ETF, another fund that provides exposure to defence stocks, has gained 7% this year so far. This was created over a decade ago.

As mentioned earlier, wars and military conflicts have not really impacted the broad stock market historically.

Feature photo by AP News.