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Iran conflict vs US stocks: Black Swan event, or selling excuse?

Written By | Jan 5, 2020
Black Swan, Iran conflict, US stocks

Qasen Soleimani and Abu Mahdi al-Muhandis at the November 2017 funeral of Qasem Soleimani’s father.  By Hossein Velayati for farsnews.com, CC license 4.0.

WASHINGTON – Monday, we should get some idea as to how much influence the budding Iran conflict might have on US stocks. Late last week in a breathtaking act of military virtuosity, Iran’s reputed No. 1 terrorist and No. 2 center of influence, Major General Qasem Soleimani, was whacked and physically obliterated by a missile launched from an unmanned US drone. He was terminated as his entourage exited Iraq’s main airport in Baghdad. So was this a true Black Swan event for stocks or just a temporary selling excuse for a top-heavy market?

A two-day January neck breaker for Mr Market

Investing Year 2020 started out with a one-two punch that nearly broke Mr Market’s neck before anyone knew what had happened. Stocks opened with a big, optimistic run on January 2, the first trading day of the New Year. But after news of the Baghdad airport decapitation of Soleimani, stocks violently reversed course Friday.

As I write this (hopefully) short piece Sunday afternoon, it’s too soon to get a read on UN Monday stock futures. But likely, as things get complicated again in the Middle East – and when aren’t they? – we’ll see a continuing pattern of serious stock weakness, stronger oil prices and perhaps stronger safe-haven prices (gold, high-quality bonds, utilities, consumer staples), even as almost everything else tanks. But whenever the never-ending Iran conflict shows up on the radar, things get very unpredictable.

Oil prices, gold, treasurys higher?

Here’s CNBC’s most recent take.




“Oil prices tend to see sustained gains following Middle East crisis events, while stocks eventually churn higher as safe haven assets gold and Treasurys fade from their initial pops, according to historical analysis.

“Crude prices jumped roughly 3% on Friday after a U.S. airstrike in Baghdad killed Maj. Gen. Qasem Soleimani, Iran’s top military commander. Safe haven assets rose as well, with bonds and the U.S. dollar moving higher. U.S. equities slipped, with the S&P 500 down about 0.7% and the Dow Jones Industrial Average losing more than 230 points, or 0.8% as investors took some risk off.

“If financial markets follow historical precedent, many of those changes will reverse in the coming months.”

In other words, given last week’s potential Black Swan event, things will be the same, only different. Now that we have that settled….

Some oil stocks likely to get a bounce

Oil stocks rose sharply Friday only to tank in the second half of that trading day. This occurred even though oil prices themselves made impressive gains. Not sure what this means. I suspect that companies heavily involved in Middle Eastern oil extraction will get wobbly, while oil and perhaps gas companies still more or less exclusively involved in US markets will be strong. That’s because they’re theoretically less exposed to Iran’s legion of Middle East-based terrorists. Any escalating Iran conflict does strange things to the price of crude oil

Problem is that given the Obama Administration’s asinine open borders policies, particularly in the final two years of his presidency, we almost certainly have a few crack cells’ worth of Iranian terroristas right here, statewide, and ready to blow up some serious stuff and lots of people at the Ayatollahs’ will. Which could wreak havoc, at least in part, with that safe US domestic oil production theory.

Even so, I like (and currently invest in) ConocoPhillips (trading symbol: COP). I also find myself strangely attracted to Canada’s Suncor Energy (SU). Maybe, back in the US, Occidental Petroleum (OXY), too. We’ll see how things look after the smoke clears from Monday’s opening trades. If things ease off a bit, Europe’s Royal Dutch Shell (RDS/A or RDS/B – your trading symbols may vary a bit) pay a swell, well-protected dividend.

And Norway’s Equinor (EQNR), while trading a bit flabbily, has just cranked up the first major new North Sea oil find in recent memory, and is ready to produce after drilling for the new deposits quickly, efficiently and cheaply. This could add considerably to the company’s slightly less-than-impressive projected bottom line. This holding has the added value of living far, far away from the current Middle Eastern brouhaha.

Defense stocks and gold, too

Defense companies should find the current saber-rattling exercises to be bracing for their share prices. These include Lockheed-Martin (LMT), Northrop Grumman (NOC), and, perhaps, the lesser known, newly merged L3Harris (LHX) formerly Land Harris Technology, respectively.

Or so says technical analyst Mary Ellen McGonagle, in a free article posted on StockCharts.com.



Elsewhere, gold and its precious friends have recently gotten away, price-wise. They and their ETFs are still a classic hedge during scary international times, but I’m not going to chase gold here, which is back at its longtime peaks.

Looks like a wobbly, Black Swan fearing week ahead on Wall Street

Everything else is iffy right now. Which means, at least in my portfolios, that I’ll soon have to decide if Friday’s craziness will dominate Mr Market for a while, or if it’s back to the Santa Claus Rally (Extended Edition). Monday and Tuesday trading  AND political action will be key. Iran, of course, has cranked up its threat dial to about 11, ensuring we’ll get equal and opposing views from President Trump. Trump hints that we already have 52 select Iranian sites targeted and ready for obliteration should anything untoward come our way from Iran.

I expect some real unpleasantry here. Perhaps the big stuff won’t come right away as really impressive slaughter takes time to plan and execute. But we’re not done with Iran’s bloodthirsty mullahs just yet. When it happens, it will cause incalculable, Black Swan like, but hopefully temporary impact on markets.

Utilities and the power grid

I’m also mostly steering clear of utilities for now. They remain a good investment. But the utility infrastructure remains astonishingly vulnerable to sabotage. And we know the Iranians have screwed with our electric grid before.

We’ll know better what moves to make probably a half hour after Monday’s opening bell. Temporary bottom line: We should also ready some ammo to pick up shares of the double-short S&P 500 ETA (SDS) in case we want to hold most of our stocks and put on a hedge to salvage the positions.

More tomorrow as the current edition of the now 40-year long Iran conflict with the US continues to simmer.

– Headline image:  Qasen Soleimani and Abu Mahdi al-Muhandis at the November 2017 funeral of Qasem Soleimani‘s father.  By Hossein Velayati for farsnews.com, CC license 4.0.

 

Terry Ponick

Biographical Note: Dateline Award-winning music and theater critic for The Connection Newspapers and the Reston-Fairfax Times, Terry was the music critic for the Washington Times print edition (1994-2010) and online Communities (2010-2014). Since 2014, he has been the Senior Business and Entertainment Editor for Communities Digital News (CDN). A former stockbroker and a writer and editor with many interests, he served as editor under contract from the White House Office of Science and Technology Policy (OSTP) and continues to write on science and business topics. He is a graduate of Georgetown University (BA, MA) and the University of South Carolina where he was awarded a Ph.D. in English and American Literature and co-founded one of the earliest Writing Labs in the country. Twitter: @terryp17