Overnight Israel mounted an air attack on Iran, targeting military commanders and nuclear research sites where Iran has apparently been trying to perfect a nuclear bomb.
It can be tempting to focus attention on the deep flaws of the leaders, Trump and Netanyahu, who authorized the apparently continuing attack, and what they perceive they will gain personally from it. But that’s hard to know motivations for sure and, as investors, probably not particularly key for figuring out stock market consequences.
What I see:
–Iran produces about 3 million barrels of oil daily, or about 3% of the world’s daily usage. News reports indicate that Iranian oilfields haven’t been targeted by Israel so far, however, and the reality is that the world is likely facing a continuing oversupply of crude, as it turns to other sources of power. Excess supply has been enough to have keep prices in a mild downtrend for the past three years. So today’s large 7% rise in oil, coupled with a similar increase yesterday, have only been enough to bring the quote to 5% below the comparable year-ago level. Still not great for new fracking projects, in my view.
–the $US has been in a nosedive since the inauguration, but is up by about 0.5% so far today against the euro and yen.
Yes, I think the slide that commenced in January has a lot to do with proposed administration tax/spending policies (the big beautiful bill) and it’s potentially severe negative consequences for the Federal deficit. But I think there’s also disappointment that the land of the free and the home of the brave is taking an anti-Robin Hood stance (taking from the poor to give to the rich). The performative cruelty of having armed and masked bands seizing residents and deporting them to foreign prisons without due process doesn’t help, either. The world has lived this rodeo before …and is beginning to fear a repeat performance is in the works.
–I’m interpreting the attack itself as a trigger rather than a cause.
I’ve been scratching my head trying to explain how the US stock market can be holding up as well as it has this year. The following is all I can come up with:
Most of the world’s negativity about the US has been expressed in the dollar’s sharp decline. Measuring performance in dollars makes it harder for Americans to see what’s actually going on. What I mean is:
—the US-centric Russell 2000 of smaller-cap, mostly US, sales is down by about -5% ytd. The S&P 500, a large proportion of whose business results come from international operations, is around +2%. NASDAQ, which also has a large international component, is a bit more than +1%. In sum, not great, but not a tragedy, either.
Look at EAFE, though. It’s +18% in $US. Put another way, the R2000 has lost a quarter of its relative value vs. foreign firms, in less than six months. An investor who thinks in terms of euro-denominated results, he’s something like +8%, ytd from holding EAFE –vs. a loss of 15% from holding the R2000. So for him, what we think of as “meh” turns into “oh, no!.”