Fuhgettaboutit. Stocks bounced around yesterday on multiple conflicting news reports, ultimately closing in the black as investors moved beyond geopolitics. A good rally couldn’t be put down as investors chose bulls over bombs.
N O T E W O R T H Y
“Fill up the tank, please.” I realized after I wrote this tagline, that unless you have filled up in New Jersey or Oregon you have probably not had to utter those words as they are the only states in the Union in which self filling is illegal. No matter how you fill your tank, gasoline is still a major factor in the lives of many consumers. Yesterday, I wrote about the fact that crude oil prices are still relevant. Today, I want to bring that point home once again, given yesterday’s market action. Quick recap: US kills top Iranian general, Iran gets mad and threatens hellfire. Realizing that “hellfire” might mean disruption on crude oil shipments through the Strait of Hormuz, traders push crude oil prices up. Higher prices of crude oil means that energy companies like Chevron and Phillips 66 would be less profitable causing their stock prices to go down. In order to maintain their profitability, fuel prices would have to be raised, which is bad news for the airlines who rely on it to keep their planes in motion. Airline stocks traded off. That was Friday’s practical investment theme. Yesterday, traders reflected on past Middle East strife only to realize that, although stocks initially responded with volatility, long term trends usually persisted. The President promised a swift response to any Iranian aggression, Iraq voted to kick US troops out of the country, a US memo surfaced stating that the US was going to leave Iraq, people around the world were upset that the President suggested that he would destroy cultural sites, the US said that the memo was just a draft and it was not leaving Iraq, the President’s people declared that he can legally do whatever he wanted, and finally the Secretary of Defense said that the President didn’t really mean that he would actually destroy cultural sites. Stocks bounced around throughout the procession of twisted and conflicting reports, but in the end, cool heads prevailed, oil prices came down a bit and paved the way for stocks to trade into the black. Looking a little closer, we see that crude oil closed down slightly yesterday, settling at $62.75 / barrel, still near a 2-year high. If we look at crude oil futures contracts for January 2021 delivery, we see that they are trading at just $57.73 / barrel, indicating that traders expect prices to come back down as the threat dissipates. Before we all settle in with that comforting thought, we should note that if the crisis does not quickly deescalate in the coming months, crude will remain high and that will affect fuel prices in the year ahead. Higher fuel would put upward pressure on inflation making it difficult for the Fed to continue to justify its very dovish and bullish stance. The Fed makes the rules in this market, so traders need to proceed with caution until the affair truly plays out.
Stocks closed higher yesterday as traders reflected on Friday’s geopolitical risk selloff. The S&P500 traded up by +0.35%, the Dow Jones Industrial Average climbed by +0.24%, the Russell 2000 advanced by +0.14%, and the NASDAQ Composite Index jumped by +0.56%. Bonds pulled back slightly and 10-year treasury yields climbed by +2 basis points to 1.80%. Gold settled up at $1565.74, a high not reached since April, 2013. Bitcoin joined in the safe haven rally, climbing by +4.21% for a second day of gains.
– ISM Non-Manufacturing Index is expected to have risen to 54.5 from 53.9.
– Factory Orders may have declined by -0.8% compared to last month’s +00.3% growth.
– Durable Goods Orders are expected to have declined by -2.0%, same as the prior reading.
– The Treasury will sell $38 billion 3-year notes.