Suddenly the prospects of three wars heating up has investors heading for the exists with stocks.
I m talking about 1) the war for control of Iraq, 2) the war between the far right and the far left in U.S. politics, and 3) the war between (mostly foreign) energy producers and U.S. retailers for consumer spending power.
Ultimately, I believe, none of these wars is going to derail the bull market.
But worries about these three wars may continue to spook investors. How much, I do not know. I am not that smart.
But I do believe that any damage that concerns about these three wars cause to stocks will be buyable, and may even be buyable today, since none of these wars will end the bull market.
Let’s take them one by one.
1) Iraq will not fall.
The fact is, Bagdad is much more heavily fortified than Mosul and Tikrit. It will be a lot harder, if not impossible, for ISIS, the al Qaeda splinter group flexing its muscles there, to take over Bagdad. Plus the US will be sending in greater military support, despite the administration policy of shying away from using force in foreign entanglements. Of course, problems and instability in Iraq and the region will persist. But they will go back to more of a back burner status for investors once it becomes clear that Iraq is not falling.
2) Tea party empowerment is ultimately self neutralizing.
This renders the recent defeat by David Brat of House Majority Leader Eric Cantor (R-Va.) less of a worry than investors are making it out to be right now. Here’s what I mean.
One of the major issues that the Tea Party is hard line about, of course, is immigration. But remember why Mitt Romney lost the election? A lot of it had to do with the alienation of Hispanic voters because of the hard right stance on immigration. Thus, like it or not, and whatever your position is on immigration, any Tea Party strength ultimately has a self neutralizing impact, in that it raises the profile of their hard-line stance on an issue (immigration) which alienates a core voter group that they need (Hispanics), especially in many key swing states like Florida, and five or six others.
It’s the same with the Tea Party’s other main issue that they like to play hardball on: Fiscal conservatism. As we saw in the summer of 2011, when Tea Partiers take a hard-line stance here, to the point of using hardball tactics that are perceived as risking U.S. government default and credit rating downgrade, this tanks stocks. When people strapped for cash and jobs see their 401(k) diminish, they look around for a culprit. Tea Party support takes a hit.
Rightly or wrongly, and whatever your stance is on these issues, that’s the dynamic at work here. The more power the Tea Party and the far right get, the more they saber rattle on issues in a way which ultimately hurts them, curtailing their power gain. It has to be a frustrating conundrum for the Tea Party. Maybe they will be smart enough to figure out a way around it. Don’t count this out. But it’s a challenge.
3) Iraq tensions will not lead to a sustained rise in oil prices.
The prospects of an al Qaeda affiliate takeover of Iraq, or prolonged war there which could spill over into other oil production countries nearby, hurting oil production, naturally puts a bid under the price of oil. This spooks investors into worrying that higher oil prices will kill off the fragile recovery. After all, every penny increase in the price of gasoline at the pump reduces consumer spending power by $1 billion. Consumer spending accounts for two thirds of GDP.
But for the reasons I outlined in point one above (Iraq will not fall) the price of oil most likely is not going into a sustained rise here. Thus this fear is a non starter, too, in terms of derailing the bull market in stocks.
The key takeaway: Investor worries about all three of these issues, 1) a change of power in Iraq, 2) a Tea Party resurgence strong enough to put the US credit rating in play as a bargaining tactic, and 3) a spike in oil, may get worse before they get better. But these issues most likely do not represent problems that will persist, and derail the bull market in stocks. How much further stocks go down on these fears before the worries stabilize is hard to call. I know I can’t make a short term sentiment call like that. But ultimately, the weakness in stocks generated by these three concerns will be buyable. And it might even be today.
The best policy, as with any contrarian purchase, is to break up your planned entry into three or four swipes, knowing ahead of time that not all will be at the lowest price, but on average your entry will most likely be lower than if you had piled in all at once. That’s my take on the current market weakness, and I’m sticking to it!
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