How scary is Syria?

The Obama administration has been busy preparing the world for a likely and imminent attack (most likely via drones and/or cruise missiles) against Syria in retaliation for Assad's use of chemical weapons on his people. Markets are nervous.

Things could certainly get worse, if, for example, Iran carries out its threat to attack Israel in retaliation for a U.S. attack against Syria. But for now, let's let key market-based indicators tell us how scary the current situation is:

The Vix index of implied equity volatility has jumped to almost 17, its fourth-highest level this year. Earlier this month it sat at a relatively tranquil 12.

But from a multi-year perspective, today's jump barely registers.

Comparing the Vix Index to the 10-yr Treasury yield shows the current threat to be more substantial than just looking at the Vix in isolation. That's because 10-yr Treasury yields are still quite low from an historical perspective—which is symptomatic of a pretty weak economic outlook. Markets are nervous and the economy is weak, so that is more threatening than if the market were equally nervous but the economy were stronger. Still, the current Vix/10-yr ratio pales in comparison to the level registered during other major events in the past two decades.

The chart above shows Bloomberg's calculation of the PE ratio of the S&P 500. It's down today because everyone is nervous, but it's only a bit less than its long-term average of 16.6. That's neither over- nor significantly under-valued.

On balance, it would appear that the market today is saying that while the Syria issue is certainly something to worry about, it is not likely to have much of an impact on the economy.

We'll soon know if the market has correctly estimated the gravity of the Syria situation.