Fear Has Entered The Room
As a matter of course, markets generally abhor the unknown. Look back at all the great selloffs. The fear was always lose in the room and that fear was of the unknown.
Most recently, February and March of 2020. The Pandemic, and the World was entering the great unknown. The market bottomed out on March 20, 2020 and what may be the greatest buying opportunity ever started. Things started clarifying a bit and markets reacted accordingly. Then the invasion of Ukraine and again a selloff, not as bad as 2020 but a selloff none the less. Clarity started to develop and the market rallied back. Not in a historical way but it steadily regained a lot of ground.
I do not believe we are in that type of investing environment right now. There is fear for sure, most of that is from the Fed’s policies and the eventual results of those policies. The impact they will have on earnings in the fourth quarter and into the first quarter of next year. That is the main culprit of this slow march to Hell markets have been experiencing since the beginning of August.
I don’t believe there is a lot of uncertainty. Fear maybe, but not uncertainty. You have seen a version of this before but the kicker this time is that the jobs market has held up unusually well. The Fed could not forsee that and I think they really do not understand why it is so. It shouldn’t be, but it is.
The uncertainty of what is happening in Israel may be in the back of some investors minds and I get it but I also get that my assertion that geopolitical events have a very short lifespan as far as investing goes.
Some liberal thinkers (Or anticapitalists) would like to accuse the US of warmongering or some such nonsense but the fact is, the United States does not want to get involved in any type of war anywhere. The political side of that is just too much to take. Constituent’s sons dying on foreign soil is not the look most politicians want on their hands. They like the fact that the Pentagon is spending billions dolling out contracts to military suppliers located in their district however.
Right now I do feel like things are different in the Middle East and that is only partially due to Joe Biden. Granted, so far he has been doing pretty much the right thing as far as both wars are concerned. Backing one great ally against a well funded terrorist organization and backing another sort of ally against an unwarranted and illegal invasion. My problem with President Biden is that when he met with Prime Minister Netanyahu. He looked lost and sounded weak and don’t shoot me, insincere. Maybe his insincerity arose from the fact that he may not fully grasp what is happening in Israel, I don’t know, but whatever it is, he looked weak.
What makes this war seem different is that Israel, with US help, has started making inroads in normalizing relationships across the Middle East. Trade was increasing. Cross border exchanges of ideas was happening. Now this. Depending on how Israel responds and concludes this war will have a major impact of it’s relationships across that tinderbox of a region. The stakes I feel, have never been higher.
However, the uncertainty of this war or any war will not be the driving force of the equity markets. The talking heads (those pretty boys on Fox business and CNBC not the band of the same name) will tell the World that the war in Israel is driving the selloff we have seen over the last week or so. Eh, I don’t think so.
They reason that with the spike in oil prices the economies of Western Europe and the United States will be under more inflationary pressure and the Fed will be forced to raise rates at least once more this year and possibly once early in 2024 thus derailing everything. Not so fast skippy. We have seen multiple spikes in oil over the last two years. Oil prices typically return back to the natural supply and demand pricing models. These gyrations have been dealt with before and there is no “shock” anymore as far as gas prices are concerned. People just figure it out.
My assertion is simple, we have dealt with $4 a gallon of gas multiple times and it has never crashed anything. It won’t this time either. Get out of the fear game I say.
The bigger driver right now is the bond market and to be totally honest with you, my experience and knowledge regarding the bond market is very limited so let’s just leave it at that.
However, there is one thing that I do know and know from experience is that when the bond market starts driving stock prices, the effect has a much longer life cycle than any geopolitical event, no matter how severe.
Call me stubborn and call me simple minded but I am still holding fast with my prediction on what the year end may look like. I do not fear geopolitical risk. I do not fear global oil prices. Maybe I should fear the bond market but I don’t. I like equities at this level and even if we sell off to the 4060 level on the S&P I still love them, maybe more so. I am holding firm that by year end we will be near 4390-4400 on the S&P.
Take that you fear mongers!