War, Trump & Investing

The S&P Index broke through a key technical support level on Thursday this week, dipping below the 200 day moving average, and down about 5% from the peak. That break was confirmed by an ugly Friday, as traders clearly did not want to go home long over the weekend.

At the week’s end, the S&P 500 index closed 6.8% lower than its all-time closing high established on January 28th. By any historical measure, this is a very small and common pullback for the stock market. While I didn’t verify the raw data myself, Google AI indicates that since 1928, 5% dips have occurred over 300 times; this implies that a 5% pullback happens three to four times per year on average.

From a stock market perspective, recent volatility is not out of the ordinary; however, the world today is anything but ordinary. In light of the continuing deterioration and the lengthy challenges of the Iran war, the market’s response has been resilient, to say the least. The reason may be that Wall Street continues to anticipate another “TACO” trade (Trump Always Chickens Out), and the market fluctuates wildly with every announcement that the war is “almost over.” The difference today is that, in the past, the TACO trade relied solely on Trump. Today, he has less control, as the trade now requires cooperation from both Israel and Iran. It could be a long wait, and the market finally appears to be realizing that.

Go Big or Go Home

The stock market has always assumed that Trump would eventually succumb to the demands of the midterm elections. His approval ratings are abysmal, and GOP prospects for November look bleak. Opportunity knocked when internal strife hit Iran. With seemingly little to lose, Trump attacked in hopes that a quick victory could turn the tide—leading to an Iranian revolt and regime change, presumably to a more secular government. This is increasingly looking like a miscalculation. What happens next?

• “Go big…” With the midterms quickly slipping through his fingers, Trump is willing to take more chances. With tacit support from other Arab states, he appears willing to take on more risk by attempting regime change with ground troops to settle the Middle East problem “once and for all.” The goal is to be the conquering hero as the GOP wins in November. While this appears to be the current path, it is a low-probability one. The U.S. could be falling into an escalation trap—another endless war with an outcome that could not be less clear.
• “…Or go home.” The resiliency of the Iranian resistance is shocking and frustrating to the point where Trump may have to pull the plug and declare “Mission Accomplished.”

Regardless of the pathway taken, the Strait of Hormuz must be reopened. There is no other way; the world will not allow itself to self-destruct by letting the closure continue. When Hormuz does reopen, energy markets will begin to normalize. The speed of that recovery will depend on the damage sustained up to that point. The longer energy supply is constrained, the worse the growth/inflation tradeoff gets. However, it is important to distinguish that this is not a supply problem, but a delivery problem. Anything that ends hostilities and allows operations to normalize will be considered a significant positive for the stock market.

What to do, What to do?

Raising cash is a form of market timing. If you sell assets now to reduce risk, you must get back into the market at current levels or lower for the strategy to work. That isn’t easy, and if Trump pulls another TACO trade, it will be impossible to react quickly enough.

Hedging is an option, but markets are nervous and the cost of hedging is high. How much are you willing to spend on “insurance”? Historically, markets recover, but you will still have lost the cost of that insurance.

Because markets tend to eventually recover, riding it out is typiocally the best option. It is easy to get caught up in the emotions of the day, but we must work hard to avoid emotional decisions. This situation could get uglier and take longer to resolve, or it could resolve quickly. The point is that it will be resolved eventually, and when it is, markets will recover.

Have a great week!

What We’re Reading

• Iran war oil shock stokes fears of 1970s-style stagflation — why this time could be different

• Fourth-quarter GDP revised down to just 0.7% growth; January core inflation was 3.1%

• Trump is poised to take Iran’s Kharg Island. Here’s what could unfold next.

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All information has been obtained from sources believed to be dependable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy, reliability, or completeness of, nor liability for, decisions based on such information, and it should not be relied on as such.

The views expressed in this commentary are subject to change based on the market and other conditions. These documents may contain certain statements that may be deemed forward‐looking statements. Please note that no such statements are guarantees of any future performance, and actual results or developments may differ materially from those projected. Any projections, market outlooks, or estimates are based upon certain assumptions and should not be construed as indicative of actual events that will occur.

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General News

By: Adam