Investors Need to Not Overreact as Markets Sort Out Latest Geopolitical Crisis
The reaction in bond markets was also pronounced. The yield on the U.S. ten-year note plunged nine basis points on Friday, to 1.79 percent, its lowest yield in the past month. The two-year fell six basis points to 1.52 percent.
Of course, all eyes were on the oil market due to the importance of the Middle East to global production. Brent crude spiked 3.6 percent to $68.70 a barrel, its highest level since last April.
The question now is retaliation. How, when, and where will Iran choose to settle this score? And will it lead to a series of back and forth responses between the U.S. and Iran, and possibly allies and sympathizers of both sides, that could spiral into a broader conflict? Iran presumably has a number of possible targets to consider, ranging from American troops on the ground in the region, commercial and military ships in the Persian Gulf, and cyber-attacks directly on the U.S. –something it has done before – on the banking system and certain infrastructure assets.
The Bottom Line for Investors is to Stay the Course
For investors, it is important not to overreact to Friday’s events. History is full of examples of geopolitical crises that in the moment looked ominous, yet from which markets eventually recovered. That is not to say that one should be complacent, either. The current situation certainly may deteriorate, and markets may remain under pressure as a result, especially with stocks at record highs and valuations well above average. But until we know more, the best response is to stay the course.
U.S. Manufacturing Numbers Decline Yet Again, While the U.S. Consumer Continues to Remain Strong
Somewhat lost in all the attention paid to the Iranian confrontation on Friday was the Institute for Supply Management (ISM) report on U.S. manufacturing in December. Rather than showing some improvement, albeit while still contracting, the index showed further deterioration, to the weakest level since 2009. The juxtaposition of the market optimism of the past few weeks in response to the announcement of a phase one trade deal with China on one hand, and the hard evidence of damage done to manufacturing by the trade war on the other, is a stark reminder that the production component of the U.S. and global economy has endured real hardship. December was the fifth straight month of contracting activity. Headlining the economic calendar this week is the December jobs report. The Bloomberg consensus anticipates the addition of a healthy 162,000 new non-farm jobs, and an unemployment rate unchanged at 3.5 percent. Such a strong report would reinforce the view that the consumer sector remains healthy enough to offset the weakness in manufacturing and keep the economy rolling.
Fourth Quarter Earnings Season is Up Next in the Economic Calendar
Also somewhat overlooked is the fast approaching fourth quarter corporate earnings reporting season. According to FactSet, earnings are expected to decline 1.5 percent.1 If they do, it will be the fourth straight quarter of year-over-year decline. However, actual results can be anticipated to exceed expectations, so this could turn out to be the first quarter of earnings growth in the last four. Revenue growth is estimated at 2.6 percent, which would be the weakest in almost four years. For the 2020 calendar year, analysts expect earnings growth to rebound by 9.6 percent.2 Our own forecast assumes roughly half that rate.
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The Standard & Poor’s 500 Index (S&P 500® Index), an unmanaged index of common stocks, is frequently used as a general measure of market performance. The index reflects reinvestment of all distributions and changes in market prices but excludes brokerage commissions or other fees.
Brent Crude is a major trading classification of sweet light crude oil that serves as one of the two main benchmark prices for purchases of oil worldwide.
The Institute for Supply Management (ISM) manufacturing index is a national manufacturing index based on a survey of purchasing executives at roughly 300 industrial companies.
1 S&P 500 Now Projected to Report a Year-Over-Year Decline in Earnings in Q4 2019. FactSet, November 4, 2019.
2 CY 2020 Earnings Growth: 9.6%. FactSet, December 20, 2019.
It is not possible to invest directly in an index.
Past performance is not a guarantee of future results.
Ameriprise Financial Services, Inc. Member FINRA and SIPC.
- Chief Market Strategist, Ameriprise Financial
- More than 30 years of experience in the investment management industry
- Frequent guest on CNBC, Bloomberg TV and Fox Business Network.