Geopolitics Stymies Investors

Market Recoils From All-Time Highs

Just when you though it was safe to go back in the water… a brewing geopolitical storm has investors on edge. The S&P 500 has pulled back by -1.25% in the last week and more than -3% in the last 6 as it has continued to correct following the recently set all-time high. Mounting tensions in global hot-spots has offset long-term outlook and the prospect of an expansionary Trump Economy. Flare-ups in Syria and Korea have become proxies for a much larger battle, a battle between the super powers, and if left unchecked could very well lead to World War III. Will it come to that? Most likely not but that is not the point, until those fears are alleviated the market will remain under pressure.

The Syrian issue seems to have the US and Russia on the verge of warfare although both countries seem intent to strengthen ties in other areas. On the flip-side, rhetoric between China and the US has cooled, or thawed depending on your perspective, from the hot-headed pre-election claims and accusations of soon-to-be President Trump to a more level headed relationship that promises to bring renewed ties between the two countries.

What traders need to remember is that geopolitical turmoil is always short lived, and more often than not leads to longer term entry points for bullish trading. The underlying fundamentals remain the same; the global economy is on track for growth, as are corporate earnings. This quarter’s US earnings season promises to be the best in nearly 8 years, with the expectation of expanding growth into the end of the year. Considering the fact that earnings are what drive market values it seems likely that the long term bull market will remain intact.

In the meantime we can expect to see volatility persist. Geopolitical headlines will dominate the day to day action with economic data coming in a close second. The latest read on NFP was well below expectations and led to knee-jerk selling but the data within the data remains quite positive. The unemployment rate fell to a new long term low, the participation rate held steady at a recently set long term high and wages continue to grow at a pace greater than 2% YOY; all indications of people going back to work and a tightening labor market, regardless the level of net jobs creation.

The S&P 500

– Look for the S&P 500 to continue trading sideways, possibly forming a short or long term consolidation and continuation signal. Near term support is near 2,320 and a target for potential triangle consolidation. A bounce and break to the upside from this level would be trend following with targets as high as 2,475 in the near to short term. This pattern will be affected by earnings season, which gets under full swing in the next week.

The Dollar

– The dollar may see volatility and range bound trading into the next round of central bank meetings, only a few weeks away, but the bias is to the upside. The FOMC is not expected to raise rates again at the next meeting but that doesn’t mean they won’t sound hawkish, or that other central bankers won’t sound dovish. There have been signs of stability in both the EU and Japan, the two nations most able to affect dollar value, but neither central bank has indicated they are on the path to tightening. The ECB is on a taper, but Draghi has said recently the market is overexpectant of any true tightening.