Above the floor of the New York Stock Exchange on Jan. 28, a TV screen showed unrest in Egypt. The Dow fell 166 points that day.
IN 1972, Edward N. Lorenz gave a talk that turned out to be a landmark in the development of chaos theory. Its title was “Predictability: Does the Flap of a Butterfly’s Wings in Brazil Set Off a Tornado in Texas?”
Dr. Lorenz said that even a tiny action — the flapping of a gossamer wing — could set off a train of events leading to a violent storm in another hemisphere. This is “deterministic chaos,” the recognition that the world is so complex that certain outcomes cannot be accurately predicted.
Dr. Lorenz was a meteorologist, but his insights are applicable in many fields — notably including finance, where obscure local events have periodically been transformed into major storms in distant markets. Last week on Wall Street, there was, at least, the question of whether such a phenomenon was already under way: Is it possible that protests on the streets of Egypt will derail the bull market in the United States?
It isn’t very likely that they will. But the risks are being widely assessed.
Bob Doll, chief equity strategist at BlackRock, the asset management firm, says disturbances in Egypt could conceivably prompt a market correction in New York. “Since Aug. 26, the stock market has gone up in what was almost a straight line,” Mr. Doll said. “As you know, the market never moves in a straight line for very long.”
Concern about Egypt has already caused some hiccups, he said. While he is bullish about the market’s long-term prospects, he said, “sooner or later, we are going to have a real correction. Could this be it? I don’t know. It could be.”
He says Egypt is not the most likely source of problems for global markets. Although its geopolitical importance is indisputable — it has about 80 million people, and the Suez Canal is an indispensable link in trade routes between Europe and Asia — its weight in the world economy is negligible.
Audrey Kaplan, co-head of international equity at Federated Investors and manager of the Federated InterContinental fund, says her fund owns no Egyptian shares. “We’ve considered it too risky to hold,” she said. “We’ve viewed it that way for quite a while.”
And Kevin Gardiner, the head of global investment strategy for Barclays Wealth, said that while “the human implications of what is going on in Egypt are very important,” so far, at least, the financial implications are not.
In a survey of the world economy, Mr. Gardiner said the overall outlook was positive, but he started his discussion with a description of the disturbing ripples emanating from Egypt. “Last month, I’m sure I wouldn’t even have mentioned Egypt,” he said.
Are investors merely reacting prudently to the latest news headlines? Quite possibly. But it isn’t hard to envision Egypt’s unrest morphing into a global nightmare.
The most unsettling scenarios include a major war and terrorism spreading from the Middle East and South Asia, accompanied by an oil shock and a depression. Even if such developments are extremely unlikely, investors may worry about them if demonstrations intensify and governments topple.
Because financial markets are barometers of investors’ moods, worries can be pernicious. On Jan. 28, for example, riot police in Cairo fired tear gas and rubber bullets on crowds challenging President Hosni Mubarak. Global stock markets fell sharply — the Standard & Poor’s 500-stock index dropped 1.8 percent — while the dollar, Treasuries and gold rose. The markets have been intermittently jumpy since then.
Short of violence, rising oil prices may be the most obvious way to transmit contagion from Egypt, even though it isn’t an important oil producer. But about 4.5 percent of global oil supplies flow through the Suez Canal and the Sumed pipeline connecting the Red Sea with the Mediterranean, and 14 percent of global liquefied natural gas moves through the canal. No serious disruptions have occurred, but the markets have reacted anyway, perhaps factoring in the possible risk of blockages or, far worse, of turmoil spreading to a crucial producer like Saudi Arabia.
In the United States, there could be serious repercussions. If oil prices rise, every 25-cent-a-gallon increase in the price of gasoline — which is equivalent to a $10.70-a-barrel increase in crude oil — would result in a decline of 0.25 percent in annual gross domestic product and in the loss of 270,00 jobs, according to a study by IHS Global Insight. Nariman Behravesh, the research firm’s chief economist, says that he does not expect current unrest to cause a sustained spike. “That would be a low-probability event,” he said.
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