Broker Check

Middle East Tension Leads to a Stock Market Pause

January 06, 2020
Share |

Monday Morning QB - Market Observations:

  • Middle East Tensions Pressured Stock Markets around the Globe
  • Iranian Backed Militias Harass U.S. Forces in Iraq
  • In Response, U.S. Targets and Kills Iranian General "Visiting" Iraq
  • Iran Threatens Revenge for the Death of Commander
  • S&P 500 Breaks a Five-Week Winning Streak
  • U.S./China trade relations remained a key focus

Monday Morning QB - Market Performance:

U.S. stocks ended the holiday-shortened week mixed after global markets pulled back on the news of the U.S. attack on Iranian military leaders in Iraq the previous evening.

The technology-heavy NASDAQ Composite fared the best, while the smaller-cap indexes underperformed.

The Dow Jones Industrial Average ended the week down just 10 points, finishing the week at 28,634. The NASDAQ was the only major index to finish in the green, adding 0.2%. The large-cap S&P 500 gave up -0.2%, while the mid-cap S&P 400 and small-cap Russell 2000 declined -0.4% and -0.5%.

Middle East Tension Appears to be Noise, but War Will Be News

Middle East tensions are nothing new. Iranian-backed militias have attacked U.S. troops and our allies in the Middle East ever since the Afghan War began almost two decades ago.

Tension between the U.S. and Iran escalating into violence seemed inevitable since the U.S. pulled out of the Nuclear Agreement in May of 2018 and crippled the Iranian economy with sanctions. 

So, what is different, if anything, about the latest acts of violence between the two countries and what does this mean for us as investors?

Our 24-hour news channels must fill the time with noise because there simply is not enough “news”!

The first responsibility of the networks is to the advertising money, so it's their job to keep you interested. So, what are we to make of the non-stop discussions related to the events in the Middle East culminating in a U.S .drone strike killing the Iranian general while in Iraq?

Nassim Taleb, a Lebanese-American scholar who is world-renowned for his understanding of randomness and probability once said, “Anyone who listens to news, except when very, very significant events take place, is one step below a sucker.”

He is also a former option trader and has been a practitioner of mathematical finance, a hedge fund manager, and a derivatives trader, and is currently listed as a scientific adviser at Universa Investments, so he speaks with "real-world" knowledge.

Unfortunately, for those seeking specific answers, I think we are in a "wait and see" mode.

The Red Line Was Crossed

The U.S. response made up of airstrikes and the killing of Iranian Major General Qassem Soleimani were in response to the death of a U.S. contractor in Iraq.

The Iranians knew that American casualties were a red line. Secretary of State Mike Pompeo warned in mid-December that should harm come to any American, the U.S. would respond decisively.

On December 27th, the red line was crossed when a militia group with direct ties to Iran carried out a rocket attack on a military base north of Baghdad, the capital of Iraq, killing a U.S. contractor.

“We took action last night to stop a war. We did not take action to start a war.” – President Trump

Secretary Mike Pompeo said the attack aimed to show resolve to deter Iran against further aggression and that the U.S. remains committed to de-escalation. Iran’s response? “Hard Revenge”- whatever that means.

"Whatever that means" is where we currently wait. Are we in the midst of a flashpoint with more rhetoric than action, or does Iran intend on acting out something more ominous?

We don’t know.

The stock market losing a few hundred points on a Friday is nothing to take note of. However, should Iran escalate the tensions to another level, protecting your portfolio for a larger drop will be prudent.

We constantly take the temperature of the current market through the lens of three distinct time frame measures (long-, intermediate- and short-term) and take appropriate action as things change.

Currently, nothing has changed.

The Chinese take Steps to Reinvigorate the World’s Second Largest Economy

Lost in the news about the rising Middle East tensions was a major announcement from the Peoples Bank of China (PBOC).

The negative effect of tariffs on the Chinese is not a secret. The Chinese have suffered from a slowing economy from the double digit growth they have enjoyed for decades to single digit growth of around 6%.

The PBOC announced it will further loosen their monetary policy by reducing their banks' capital requirements.

The less money banks need to keep on hand, the more money that the banks can lend. Holding money constricts the economy by taking money out of the economy where loosening the money banks need to keep on hand pushes more money into the economy that hopefully leads to expansionary activity.

Combine this stimulus with the optimism around the U.S. and China making their Phase One deal official at a signing ceremony on January 15th, and it gives hope to both economies. President Trump also claimed he will travel to Beijing to negotiate the second phase of the trade deal.

Positive news all around.

In Conclusion ...

The stock market started the year off positively on the China news and the markets maintained rally mode as a result. Unfortunately, rally mode gave way to a shallow sell-off due to the rising tensions in the Middle East.

News or Noise? Only time will tell.

Time to be patient but with a plan!

(sources: all index return data from Yahoo Finance; Reuters, Barron’s, Wall St Journal, Bloomberg.com, ft.com, guggenheimpartners.com, zerohedge.com, ritholtz.com, markit.com, financialpost.com, Eurostat, Statistics Canada, Yahoo! Finance, www.stocksandnews.com, www.chaikinanalytics.com Chaikin Analytics, www.marketwatch.com, www.BBC.com, www.361capital.com, www.pensionpartners.com, www.cnbc.com, www.FactSet.com, W E Sherman & Co, LLC)
Hayden Royal is an investment adviser registered under the Investment Advisers Act of 1940. Registration as an investment adviser does not imply any level of skill or training. The information presented in the material is general in nature and is not designed to address your investment objectives, financial situation or particular needs. Prior to making any investment decision, you should assess, or seek advice from a professional regarding whether any particular transaction is relevant or appropriate to your individual circumstances. This material is not intended to replace the advice of a qualified tax advisor, attorney, or accountant. Consultation with the appropriate professional should be done before any financial commitments regarding the issues related to the situation are made.
The opinions expressed herein are those of Hayden Royal and may not actually come to pass. This information is current as of the date of this material and is subject to change at any time, based on market and other conditions. Although taken from reliable sources, Hayden Royal cannot guarantee the accuracy of the information received from third parties.
An index is a portfolio of specific securities, the performance of which is often used as a benchmark in judging the relative performance to certain asset classes. Index performance used throughout is intended to illustrate historical market trends and performance. Indexes are managed and do not incur investment management fees. An investor is unable to invest in an index. Their performance does not reflect the expenses associated with the management of an actual portfolio. No strategy assures success or protects against loss. There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk. All investing involves risk including loss of principal. Investing in stock includes numerous specific risks including: the fluctuation of dividend, loss of principal, and potential liquidity of the investment in a falling market. Past performance is no guarantee of future results.