FYI | Jul 23 2014
By Peter Switzer, Switzer Super Report
With professional investors and fund managers holding more cash than they like, and scratching their heads about the overdue correction, the obvious question is – could this Malaysian airline tragedy cause a big market sell off?
I know I have pointed out before that left-field geopolitical events rarely have a lasting impact on stocks, but they can rattle markets short term. That said, what would have to happen to see this gross stupidity of Russian separatists in the Ukraine result in a big market sell off, effectively creating that missing correction?
The spook factors
Here are the possible actions that could really spook financial markets:
• A typically rash Vladimir Putin response to the demands from the West;
• Headlines such as this one from the weekend — ‘Merkel Talks Tough’
• Europe actually taking tough measures, which then bring a tougher response from Putin, which affects energy supplies to Europe;
• The Israel-Hamas missile battle escalates, which is becoming a huge concern;
• The ISIS actions in Iraq become more dramatic;
• All of the above!
The Merkel story is the one I’ll be watching unfold over the week as she refused to let Russia wash its hands of the actions of the separatists. She did not mix her words when she said at a press conference: "It is indeed the case that the separatists are heavily armed, and there are many indications that some of these weapons have come across the border from Russia."
The problem for Germany is that it is a big energy customer of Russia but I did like the take of Ian Brzezinski, a senior fellow at the Atlantic Council, who noted: “We are talking about a $12 trillion, globally-integrated economy versus a $2 trillion gas station with only one customer. It’s time for Europe to stand up.”
This is all true but, if they do stand up, gold will head north and stock markets will trek south.
Robert Bensh, an energy expert with assets in the Ukraine (so he should know what he is talking about) told CNBC that gas storage levels in Europe are enough to get the region through winter, so there is wriggle room for the West to play hardball with Putin.
And hard ball could hit stocks hard but, against that, the leaders of Europe and the US don’t want to rattle confidence and a huge stock market slump following aggressive reactions of the West could be seen as too big a risk to gamble on.
The bottom line for investors is – can the Russia problem affect the world economic growth outlook and the profitability of companies we invest in? Sure, if oil goes to $US120 a barrel because of Putin and his buddies, then there could be a serious stock market issue. Most geopolitical blow-ups don’t have these side effects, however, if serious economic sanctions come out of this, it will be a big watch for markets.
The power of growth
This is a fluid situation and so Monday night's 123-point gain on the Dow, even with Israel starting a ground offensive, shows us the power of the good run of US economic data and company earnings that are keeping stock prices elevated.
Of course, this won’t surprise you that I think a correction caused by geopolitical tension will be a buying opportunity but are there any other risks we should be taking into account as we look towards the second-half of 2014?
Many commentators expect the Fed’s end of tapering in October and the first increase in interest rates will be a spook factor. But because it is a known known, as Donald Rumsfeld would have it, and rates are at zero and have to rise some time, I can’t see the start of rate-rising being an enduring problem for stocks.
Of course, if they raise rates too soon, stocks could fall deeper and longer but rate rises will come with a stronger US economy and that will bring stocks back up.
Last week’s US earnings were better than expected and there are 150 companies up for show-and-tell this week. If the good news keeps coming from earnings and the economy, it will only be the Putin problem and the dark shadow he casts over a weaker-than-expected Europe that will be left to pose a problem for stock players.
That said, I did like the view of ANZ’s CEO, Mike Smith, on where we are post-GFC. He said in The Australian newspaper: “We are certainly in a better position today than five years ago or even one year ago. Now it’s time to focus on rehabilitation. On growth.”
This was talk from a man who does not think the economic expansion and the related stock market growth is about to end soon. Sure, we can have a correction but it will be the overdue buying opportunity I have been banging on about for months.
Peter Switzer is the founder and publisher of the Switzer Super Report, a newsletter and website that offers advice, information and education to help you grow your DIY super.
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