Market Strategy 1/06/2020
It Don’t Come Easy
Geopolitical tension and unease greet investors returning from holidays
Key Takeaways
- After posting upside gains earlier in the week, stocks ended the week lower on news of a ramp up in hostilities in the Middle East.
- The prices of oil, gold, and Treasuries advanced as markets moved from a “risk on” to a “risk off” mode by week’s end.
- For all the complexity and discomfort that geopolitical events can produce near term, markets historically focus most on economics, revenues and earnings over time.
- Last week’s ISM manufacturing figures drew considerable attention for their weakness but shouldn’t have been a surprise given the effects of the then-lingering trade war.
A jump in geopolitical tension in the Middle East in the wake of the US killing of a top Iranian military commander in Iraq last week has turned what was a global “risk-on” start to the new year into a “risk off” precautionary interlude as market participants worldwide consider what the rise in geopolitical angst actually means for the markets.
As we prepared to go to press on Sunday evening news services featured stories with political and military consultants and strategists pondering the outcome of last week’s US action against a military foe.
From our perspective on the market radar screen we’d note that thus far the global market reactions as of last Friday had been quite measured. Declines in equities around the world reflected acknowledgement and concern about what might be the geopolitical impact and implications of the military action that had taken place in a part of the world well known to be burdened, troubled, tenuous and unstable.
On Friday, shares of the largest ETF tracking the price of gold rose 1.33% while gold (the metal) rose 1.45%; a leading energy sector ETF (tracking the energy sector of the S&P 500) shed 0.3%; while the Dow Jones Industrial Average, the S&P 500 and the NASDAQ Composite respectively slipped 0.8%, 0.7% and 0.8%.
In Europe, stocks closed mixed last Friday with the FTSE 100 (the UK) up 0.24%, the CAC 40 (France) up 0.04% and Germany off 1.25% with the two former benchmarks likely reflecting those indices’ substantial energy components and the later index reflecting its members’ vulnerability to higher prices of oil—which might or might not be that pronounced considering that the drone attack on Saudi Arabian oil facilities last September was quickly discounted by markets in light of the substantial supply of oil worldwide.
As we prepared to go to press with this edition on Sunday evening markets in Asia appeared to take the increase in geopolitical tension in the Middle East somewhat more to heart as they opened lower pretty much across the board in a range from near flat to off nearly two percent.
Earlier markets in the Middle East showed increased concern as participants in that region reflected on their proximity to the increased geopolitical instability in that region of the world.
War, Huh Yeah, What Is It Good For?
From our experience over more than three decades in the markets a worsening of geopolitical situations including increased hostilities in war zones gains the attention of market participants in their immediacy and from an opportunity standpoint in terms of asset classes. An upward bump in bond prices, a bounce even a surge in the price of a commodity can be short lived beyond the context of market day to day action.
For now we’ll pray for peace (we mean that) and hope that cooler heads will prevail in digesting yet another unsettling situation in a troubled area of the world.
Monitoring developments in the Middle East will be important for traders and investors this week with upside risk for gold and oil likely to remain key throughout most if not all of the week.
Beyond the geopolitical issues in the headlines, traders and investors returning to their desks stateside today after the holidays will be focused on a slew of economic data crossing the proverbial transom leading up to the non-farm payroll, unemployment and average hourly wage numbers on Friday.
We continue to favor cyclical sectors over defensives and suggest investors look for “babies that get thrown out with the bath water” should the equity market experience a pick-up in volatility near term.
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