The opinions expressed below are my own and do not necessarily represent those of Visdom Investment Group, LLC.
Middle East.
Markets sold off when reports of the Israel attacks on Iran broke. S&P futures lost over 100 points in the wake of the news. Asian and European markets sold off, though not too greatly. As the shock of the news wore off, futures recovered slowly and the S&P 500 opened down about 50 points. The index went back and forth over the session but news over the day didn’t change things much and investors attempted to settle down in light of the significant violence in the Middle East. Oddly, yields climbed across the curve today, the opposite of the flight-to-safety trade. And lastly, but also oddly, capital flow was only up small, 106%.
The question markets face is whether the events in the Middle East are going to spiral downward and change the prevailing investing conditions. For US equities, most bulls are chalking this up to the usual mid-east violence and today’s dip is therefore a no-brainer buying opportunity. What they fail to recognize, and what the bears are championing, is the potential for the situation to *change* the market sentiment.
Both sides understand how a disruption of the oil market or a protracted and large-scale military engagement will have *direct* negative consequences on global economic conditions. You can imagine all kinds of scenarios, I’m sure.
What the bulls can’t, or don’t want to, imagine is how the situation can affect the markets through sentiment instead of direct supply/demand. I don’t know exactly what it would take for the pendulum of sentiment to swing towards pessimism, but I recognize that *some* outcomes in the Israel/Iran conflict could do just that.
The bulls assume that the conflict is mostly incapable of changing market sentiment for more than a session or two. I think that’s pollyannish.
I don’t want to claim that the bearish view is correct, nor vice versa. I’m just pointing out that the bulls aren’t using their imaginations enough. Nukes and full-scale war aren’t the only ways that our market could drop significantly. Bulls seem to think that anything other than that is immaterial to the markets. I disagree.
For the coming weeks, the markets will be glued to events in the middle East. We’ll have to see whether the headlines deeply affect the market’s psychology or not.
See you Monday, have a great weekend.
-Mike
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