De-escalation in the Middle East

After the US killed Soleimani, there was a fear that it could lead to a start of a war between Iran and the US. That fear seemed very overblown when Iran came with their revenge action. The revenge was nothing more than shooting some missiles towards at least two Iraqi bases where US military was based. They did not kill any US soldiers, neither did they damage much. It was a very weak revenge for the killing of Soleimani. It is very clear that Iran does not want a war.

War is in nobody’s interest

Obviously, Trump was happy with this weak revenge. Trump also has no interest in a huge escalation with Iran. He needs to get reelected, and these kind of Middle East wars have not brought much positive in the last twenty years. Trump killed an important terrorist and shows the American people that he is the boss and Iran cannot do much against him.

Commercial airplane shot down

Iran shot down a commercial air plane. It was very shortly after the revenge attack. Iran said they thought they were under attack by the US. They thought the US fired a rocket towards the regime. This was not the case. It was not a rocket, but a commercial airplane.

A disaster. 176 people died, of which many were Iranians living in Canada. A disgrace. Before the US found out that Iran shot down a commercial plane, Iran said it was impossible that one of their missiles hit the plane. Very stupid, everyone knows that this is easily checked with the satellites that the US has.

Did Iran really shoot down the plane unintentionally?

It is not unlikely that Iran shot the plane down on purpose. To get the people’s attention to a different topic. Away from the very weak revenge strikes after Soleimani was killed, towards the tragedy of an airplane that crashed near Teheran. Maybe the Iranian regime wanted to shift this war focus to a mourning focus and in that way easily get away with their military weakness. The regime is worse than worse and willing to do whatever they need to save their face.
It is not that unlikely, but obviously a stupid move. Would anyone believe that the airplane was not shot down after investigations would have been done? Currently, the Iranian regime has to deal with a new wave of protests. Previous protests regarding increasing fuel prices, they could blame on the US sanctions. For current protests there is no one else to blame than the Iranian regime. How are they going to deal with that? Are they again going to shoot down protesters? Maybe they need to shift the attention again to a different topic?

Stock markets relieved

The financial markets have been relieved by the de-escalation of Middle East tensions. Meanwhile the oil price showed a large decline during the second half of last week. Oil had spiked before as the Middle East is a very oil producing heavy region and a chance for a war could put a lot of pressure on the oil production and transportation.
For the moment I expect the financial markets to watch the Middle East situation closely, but to not worry too much. Unless an attack happens where the US suffers. I do not think the markets will be too upset by threatening words between the US and Iran. That is expected to keep on happening now and then. Last couple of days has made clear there is a huge difference between threatening language and an actual act of war.

Middle East tensions

Trump needs to keep his popularity among Americans at a high level, at least till November this year when he has a good chance to be reelected as president. The trade war is, just for a couple of months, a bit to the background. Trump has been looking for a next topic to gain popularity on and has found it: revenge for American victims in the Middle East.

Top Iranian general killed

In the night of Thursday to Friday, the US killed a top Iranian general, Soleimani, in a Baghdad air strike. According to Trump, Soleimani is directly and indirectly responsible for millions of deaths and killing an American on the 27th of December. Soleimani was a powerful man within the Iranian regime. Killing him is a strong symbolic statement to Iran and the world: the US is taking the Midde East situation very seriously and does not hesitate to escalate the situation if needed.

Oil price

The oil price moved up over 3% on Friday on the increased tensions in the Middle East. With the US shale boom, the Middle East is getting less and less powerful within the oil landscape. But still, the Middle-East produces around 35-40% of the total oil production. The oil price will increase much further in case a war with Iran will be started. Iran itself does not produce much oil anymore due to sanctions, but Saudi-Arabia and Iraq do. An increase in oil price is not per se bad for the US. The US is the top oil producer world wide and will probably increase production much more when Crude Oil peaks above $70.

Trump threatens Iran

Trump threatened Iran with targeting 52 Iranian sites in case Iran hits any Americans or American assets. Iran took 52 American hostages many years ago and the 52 targets have in that way a symbolic meaning. Trump says to hit Iran very hard in case Iran further escalates the tensions. This way of speaking we know from Trump and often not much happens. Maybe it is different this time, who knows. Iran is expected to somehow retaliate at some point. They will not hit the USA directly but probably indirectly by attacks in Iraq, Israel or Saudi Arabia. They might finance terrorist groups with extra weapons or money to target US assets.

What would extra attacks mean for the stock market?

Stocks normally initially get into negative territory when people fear a war and when the war starts. Though, during the wars, stock markets have performed well. A significant dip of over 10% on some kind of Middle-East war, could most likely be seen as a buying point. In the last gulf war, the S&P initially lost over 14% and recovered very strongly after. If the US and Iran get into a full-blown war, which is still unlikely, there is no need to worry about the stock market. Initiatlly there will be a shock, but over the span of 1-3 years there is no reason to expect an underperformance. In the past, the S&P has even outperformed in periods of war! Even during World War II, the S&P posted gains!

Looking back and forward

The year 2019 was dominated by

  • US – China trade war
  • Weak manufacturing data and the fear for a recession
  • Dovisch central banks
  • Brexit negotiations
  • Towards the end of the year: diminishing uncertainty around some of the above main topics.

2019 was a good year for stocks. When we look at the S&P, we see that the return in 2019 is around 28%. The end of 2018 was really bad for the markets and just before Christmas 2018, the market did crash heavily. These losses came back quickly in January 2019. We should not forget that 2018 was a bad year for stocks. Though, 2018 & 2019 together posted above average returns. An investor in the S&P starting at the 1st of January 2018, would have made 9.5% annual returns till today. That is a bit above the long term average and also quite a bit higher than the returns we have seen in Europe. The S&P outperformed.

S
S&P 500

Predicting a recession would have been expensive

Maybe for every investor, but definitely for the average investor: trying to predict a stock market crash is very difficult. On average, the stock markets gives you a 8% return for being long. When you try to predict a market crash, your timing is essential. If you think it will happen next year and it only happens in 2024, you already miss 4 years of on average 8% returns. Then the market has to crash very hard to make up for that.
Peter Lynch, one of the most well-known investors of all times quoted it nicely:
” Far more money has been lost by investors trying to anticipate corrections, than lost in the corrections themselves.”
When you take a bit of time to think about this, I think you would agree.
At the end of 2018 and in the beginning of 2019, quite some investors were talking about a recession and the high likelyhood it would happen. They based their opinion on the geopolitical tensions and the inverted yield curve. But then the market overcame these tensions and the central banks became very dovish again. The FED does not want stock market turbulence and the ECB still needs to get the inflation back in the economy. Moreover Trump closed a first deal with China. The market is dynamic and somehow it always finds a way back up. Crises like the one in 2008 are rare but still in the memory of people. But if you would have bought before the crisis in 2008 and kept your stocks during the crisis and still owe them today, you would have made a satisfying annual return of nearly 9% and your investment nearly trippled in value!

2020 to be dominated by US elections

Currently the stock market sentiment is very good and is expected to stay good for a while. Trump cannot risk significant market turbulence and wants to boost the economy once more: to get reelected. Moreover, profit margins for companies are high, unemployment is low and there are no significant structural/system risks in the money system at the moment.
The market can react heavily in the short term on a Democratic presidency. Democrats are being seen as negative for stocks while Trump is being seen as relatively good for stocks. Especially if Bernie Sanders or Elisabeth Warren would become president, the stock market might sell off heavily just after the elections.
Though, on the longer term it has been found that it does not matter much for the stock market if a Democrat or a Republican is in power. Depending on their policy it can matter for certain stock sectors, but for the stock market (S&P) as a whole it does not matter much on the medium/longer term.

Long term message

The long-term message is: do not try to outsmart the stock market and stay invested with the money you do not need on the short term. It is as easy as that. Make sure you diversify the portfolio and understand the risks.

Green light for stocks

Last week has been an important week for the stock market. Two main topics have been adressed in a positive way: the UK elections and the trade war between the US and China.

UK elections & Brexit

Boris Johnson won the UK general elections by a landslide on Thursday. He gained a massive majority in the UK parliament. He should easily be able to get the Brexit deal, that he made with the EU, through parliament. The stock market was happy with his victory and so was the Pound.
The chance of a hard Brexit has really diminished now and companies that deal with the UK will feel a relief and can actually focus again on the long term business activities.
Going forward, in the upcoming months/years there will be a transition period in which will be negotiated how the Brexit will be dealt with. For example, there have to be trade agreements between the UK and the EU. Next to that, the UK gets all the freedom to make own trade deals with other countries like the US. On the longer term this Brexit might well work out very nicely for the UK.

Trade war Phase 1 deal

The US and China have agreed on a so called Phase 1 trade deal. New tariffs that would start on the 15th of Dec are being halted but the previous 25% tariffs remain. In return China has agreed to some structural changes and large purchases of mainly agricultural goods. This de-escalation of the trade war helped the financial markets move up. Trump and China also agreed to start the negotiations on a Phase 2 deal very soon.

Lots of market uncertainty gone

With Boris Johnsons victory and the trade war Phase 1 deal, quite a lot of concerns on the world wide economy have disappeared. With money being very cheap and geopolitical risk diminishing, stocks do have more upside potential.
Trump will probably not take much risk going forward and needs the economy and stock market to do well running into the US elections in November 2020. The upcoming 6-9 months are expected to be months with lower volatility and interesting returns.

New highs & US elections 2020

The US stock market volatility is coming down and new highs have been reached this week. There is continued optimism that the US and China are getting closer to signing off the ‘Phase 1’ deal. Moreover, economic data remains solid.
The week was very queit with on Thursday Thanksgiving. Every Thanksgiving 46 million turkeys get finished by the Americans. Enough reason to close the stock market that day.

US elections November 2020

The upcoming year has one big central topic: the US elections. The main question is, can Trump get his second term as president? Quite a bit depends on how the economy and the stock market will perform in 2020. So far, Trump chances look good.

40%

Based on the polls, Trump has a over 40% chance to get reelected. The democrats have not yet one candidate of which you would think, wow that person is going to give Trump a hard time. Who are the main contenders on the Democrat side? In order of likelyhood of becoming president (on betfair):

  • Joe Biden (12%)
  • Pete Buttegieg (10%)
  • Elizabeth Warren (7%)
  • Bernie Sanders (7%)
  • Michael Bloomberg (5%)

Joe Biden (77 years) currently has the highest chance, but the whole story with Ukraine and his son has not really helped Biden. Biden is a reasonable guy who has reasonable economic ideas and is not a danger to the stock markets. He is there for the middle class which he likes to ‘save’. He is not that much of an activist that wants to destroy the wealthy and save the environment at all cost. Joe is the most market friendly Democrat.

Pete Buttegieg (37 years) is the newcomer and his main advantage is that he is only 37. And probably the only Democrat candidate that would survive two presedential terms :). The others are all 70 years or older. Pete is openly gay, a millenial and a war veteran. Quite a nice profile for a president. He is quite an environmentalist and wants to tax the rich most. But he is not that extreme in these views. Pete is pragmatic and the financial markets would not dislike that.

Elizabeth Warren (70 years) is the Robin Hood of these days. She is very extreme in her thoughts and a real environmental activist. The financial market and the US economy would not like her to become president. She wants to ban all fracking which would kill the US oil business and heavily harm the US economy. She also wants to let the rich pay for all the medical care in the country. Her extreme ideas are currently backfiring her in the polls. She will probably lose more ground and have not that much of a chance to become president.

Bernie Sanders (78 years) is old and he recently had a heart attack. His health situation is probably not gonna help. Moreover he is bad for the financial markets and a bit in line with Elizabeth Warren. Bernie should retire and enjoy his last days, but not focus on a presidency.

Michael Bloomberg (77 years) is a business man and one of the wealthies guys in the world. Bloomberg was a Republican in the past and now is a Democrat. He was the major of NYC and will know how to run a country like the US. He would be a very interesting choice for the economy. He has a tremendous amount of money, so I expect him to use that to climb in the polls.

In February there are many Democratic primaries where we get more insight on who will become the Democratic nominee for the US elections in November 2020.

Slow silent trade war

Trump and Xi are openly not well communicating about the trade war. Xi is mentioning that China and the US should strengthen communication on strategic issues to avoid misjudgement. Trump on the other hand keeps on claiming that China really wants to make a deal and that the US does not need to, only if it is a great deal for the US. Trump is also not clear what will happen to the possible new tariffs that start on the 15th of Dec.

There is uncertainty around the trade war but the markets do know this. It would limit a bit the potential for much further upticks. On the other hand, strong downticks can definitely happen. But the low interest rates and the active central banks will probably keep the stock market going fine. There is just not an interesting alternative for investing your money in stocks.

Next to that, Trump is also getting pushed around a bit by CEOs of the big US companies. Tim Cook from Apple has had many discussions with Trump. Trump understands his tariff actions might hurt the US economy and their big companies quite hard. Trump currently thinks about a possible tariff exemption for Apple. Where Trump was very impulsive in the beginning of the trade war, it seems he is using a bit more rationale last weeks. He probably finally experiences that his implusive actions do not always help the calmness and the quality of the stock market and the US economy.

Tesla’s Cybertruck

Silent markets, but something more interesting was the presentation of Tesla’s electrical truck. Elon Musk presented this Cybertruck that should get on the market in 2022 or so. If Tesla is still solvable at that time… The truck gets to 97km/h within 2.9 seconds, should be more or less impossible to destruct and should be able to tow up to 6350 kilos. Moreover one should be able to drive 400kms on a full charge. Watch the video below and enjoy. Some people believe it is a joke. You never know with Mr Musk.

And if you have some more time and money left, why not check out the latest opportunities in the stock market?

Bye bye, Draghi

Last Thursday, it was the last ECB meeting under president Draghi. Draghi is well remembered for his phrase: ‘whatever it takes’ back in 2012. At that time he wanted to turnaround the euro crisis. Draghi is the first ECB president that never raised rates. With massive Quantitative Easing (QE)programs and uncountable amounts of rate cuts, Draghi has been trying to keep and bring back the inflation in the eurozone at satisfying levels. He has not succeeded in that goal. Some people say the rate cuts and the QE programs did not work at all. I think they probably did work. Without them we might have been in deflation and thanks to Draghi we still have some inflation and an economy that is still quite strong.
Trump is a massive fan of Mario Draghi. Trump wants lower rates and has the opinion that the competition with Europe is not fair, as in Europe governments can borrow money for negative interest rates. Trump probably dreams of firing Powell and hiring Draghi, but Trump will probably not do ‘whatever it takes’ to get negative/very low interest rates

Stocks have been on the way up

Stocks have been rising for three weeks in a row now. Before this week, there had been positivity on the Brexit developments and in the last week the markets seem to have started an end of year rally already, There has been some rumors and reports that the US and China are actually getting closer to sign the partial trade deal that they had mostly agreed on earlier. The S&P 500 is nearing a new high and the NASDAQ has actually reached a new record.
As some earnings, like those from Amazon, have been worse than expected, investors do think that there is no decline yet in the technology growth and are getting more optimistic about the stock landscape again.

Fed can make or break the upcoming weeks

Within days of each of the previous five Fed meetings, stocks have had serious declines.

There was some fear in the markets after the last Fed meetings that the Fed was not doing enough or might be too late in reacting to the trade war escalations. As the trade war escalation has stopped for now, the Fed is still generally expected to cut the rates next week. In case the message they give with cutting the rates is dovish, a nice end of year rally might follow and can bring stocks finally to significant higher levels than we have seen in the last two years. The S&P might be close to a high, since Jan 2018 the Index has been struggling to choose a direction.
Stocks might struggle after the Fed meeting in case Powel signals that the Fed will go on hold for a while. If so, it could mean no more rate cuts are likely for the upcoming time. Rate cuts are generally good for stocks as the yields in bonds and interest rates on banks decline. To fight for yield, stocks get more attractive. Companies can borrow money cheaper and accelerate profitable growth.

Oh yes, Brexit

In the mean time the markets are also waiting for the EU to give the UK an extension on Monday for their exit time. The extension is very likely, the question is how long will the extension be? Most likely it will be an extension of a couple of months. In that case, Boris Johnson will probably call elections that will be held before the end of the year.

Brexit, an ongoing story coming to an end?

The Brexit saga has been going on since June 2016, when the people of the UK decided in favor of a Brexit. Since then there has been a long negotiation process with the EU. The UK wants a great deal, wants to make it difficult for the UK, and as good as possible for themselves. The EU does not like Brexit to become a success story. This could lead to more countries following the same path in the future. The EU also does not want a chaotic Brexit as this will harm the European economy.

Boris Johnson agreed a deal with the EU

On Thursday, Boris Johnson agreed a deal with the EU and now needs to get it through parliament. Tricky, but possible. If he gets it through parliament, then the Brexit saga might finally come to an end and the UK can leave the EU with a deal. Markets will be relieved and the European economy will be posively affected by an orderly Brexit.

Boris Johnson was forced to request an extension

The Brexit is anything but done yet as the UK parliament probably first need to vote on the deal. In the mean time, Boris Johnson was forced, in line with the so-called Benn Act, to send a letter to the EU reqyesting a three-month extension to Brexit. Johnson did not sign the letter and he then sent an extra letter in which he said that he does not think there should be an extension. Boris Johnson has always said the UK would leave the EU on the 31st of October, with or without a deal. It is quite likely he is not going to deliver on that promise.

What’s next?

The government of the UK plans to hold a meaningful vote on Monday where the parliament has to say yes or no to the deal. The vote might pass, but it is definitely not a high certainty. More like a 50/50. Above all, it is not clear yet whether the Speaker will allow that vote to take place. The government could also try to press ahead with legislation to implement the deal next week. A meaningful vote is in that case not needed.

Most likely case

The most likely outcome is that the UK will not be leaving the EU on the 31st of October and that another extension is needed. All 27 EU leaders have to agree on such an extension. The extension will probably happen. The expectation is that new general elections will be called in the UK. This election can help forming a strong government that can actually get a deal through the parliament.

Market uncertainty?

The chance of a no-deal Brexit has gone down significantly in the last weeks. Boris Johnson has shown he can actually agree on a deal with the EU. This brought optimism to the financial markets. The deal might not pass parliament, but still there is a deal and Johnson has been forced to ask for an extension. It is very unlikely the UK will exit the EU on the 31st of October. The story is going to continue. It is likely the UK will eventually leave the EU with a deal. The question is: when?

13-10: Partial deal, why?

Markets have been very optimistic in the last days. The S&P went up over 1% on Thursday and also on Friday. Trump was giving the market hopes on a partial deal with China. Next to that there has been a bit of optimism on the Brexit saga.

Trump and China finally agree on something

As during every negotioation so far, Trump often tweeted that trade talks are going well and that he has warm feelings about China. Quite often a day later he would wake up angry and come with new sanctions or show his annoyance with China.

But this time the market got more optimistic in the last days and finally Trump and China made a partial deal, called Phase 1 deal. Main outcome was that the October tariff hike will not happen, that China will buy more US agricultural goods and that China opens their market for US financial institutions. There has not been a decision made yet about the new tarifss that kick in in December. The current deal might mean a longer de-escalation of the trade conflict.

Why does Trump make a deal now?

In the end it all comes down to game theory. It is not just about the details of the deal. It is more about the fact that Trump wanted people to see that he fights for the US economy and that he wants the Americans to think that he gets a great deal with China. If he would sign a deal on day 1, even if it would be a good deal, it would look as a quick deal that would not be in the benefits of the US. So he had to wait a bit, put some tariffs on China and let people think China is becoming his child and needs to sign a deal to make sure the Chinese economy holds up. Trump is very good at these kind of games and it is wise he signed a partial deal.

Why not a complete deal?

A complete deal could be a sign of weakness from Trump. First Trump and China were complete enemies and now they would make a complete deal? That would sound strange. Currently Trump can say that the Chinese gave in a bit and a partial deal was possible. To get to a full deal the Chinese have to do more concessions. Trump keeps the possibilities for further measures open. Next to that, Trump wants the Fed to lower interest rates in order to boost the economy. If Trump would sign a complete deal now, quite a bit of geopolitical worries would be gone. The Fed might decide to not further lower the interest rates.

Financial markets are quite relieved and no further escalations and a Brexit solution can bring a heavy end of year rally in stocks. Stocks have been suffering for nearly two years and there can be some optimism now for the next months.

06-10: Economic data pressure

For a very long time the stock bull market has been strong based on the fact that economic data was solid and interest rates were low. There was no reason for investors to avoid stocks. Stocks, especially US stocks, have been doing very well in the last 10 years. The US economy has been strong and unemployment is currently with 3.5% at the lowest since a very, very long time.

Panic on bad economic data

On Tuesday a bit of panic in the stock markets started. So far we had mainly been experiencing bad data coming from Europe, where the huge German economy is falling into a recession. A US recession is still quite far away, but a bad ISM Manufacturing PMI caused the US stocks to start a two day sell off. The figure is a barometer of US manufacturing conditions and showed that conditions fell to the lowest since the great crisis in 2009.

On Thursday there was more bad data coming in from the ISM services PMI. Stocks ticked down over 1% immediately and quickly after rebounded to end the day in the plus. On Friday the S&P rebounded another 1.5% after the monthly jobs report that was not bad at all..

Quite some bad news came in, but why did stocks recover that much?

The markets are a little bit in the stage again of bad news is good news. In the sense that the markets do expect the Fed to cut rates more or come with extra stimulus in case the economy shows signs of weakness. With the expectations that the rates go lower on bad data, the enthusiasm comes back as there is no great alternative to stocks at very low interest rates.
Since the beginning of 2018, stock markets have been struggling. Volatility has picked up and stocks have had strong declines on issues like the trade war and bad economic data. Every time the central banks have been able to bring back rebounds in the stock market.
Company earnings season is kicking off soon. It is going to be very interesting to see if the companies can still report satsifying profits. If they disappoint and guide to more weakness to come, the stocks could get into a more serious longer down turn. Some stocks have already experienced these kind of downturns and are ready to be picked up.