Was it All A Dream? Stocks Rebound After Dramatic Iran-Related Overnight Plunge

It was a really dramatic day...last night.

Major indices are back in the green this morning after a roller-coaster ride in the markets that began when Iranian missiles struck near a U.S. military base in Iran a few hours after yesterday’s close.

At one point, U.S. indices fell more than 1% in overnight trading and crude oil prices climbed to eight-month highs above $65 a barrel. Now it looks like we’re getting a roughly flat open and crude is back down below $63 after Iran left oil targets alone. If you’re just waking up and didn’t watch the news last night, you might think nothing had happened.

Things are still unsettled as investors await word from President Trump this morning. He tweeted last night that he would have something to say, and media reports made it sound like the two sides were looking for an “off ramp” rather than escalation.

We’re not out of the woods, yet, however, so anyone thinking about making trades today should probably keep in mind the chance for more quick moves. That means caution could be in order and you might want to consider keeping your positions smaller than normal in case of intraday volatility. 

The point is, these aren’t one-day or even one-week events. The market could be pretty edgy over the next couple of weeks as more news comes out. This doesn’t mean there’s any need to change your investment thesis. Remember, these types of situations tend to see a lot happen at the beginning and then slowly dissipate. There’s no way to say for sure if that’s going to be the case again this time, so we’ll have to wait and see the next developments.

The Cboe Volatility Index is sitting above 14, not really too high, all things considered. That could change very quickly if things flare up again over in the Middle East or if people interpret something Trump says as threatening. 

Risk is definitely out there, but there’s also a risk in overstating it or getting too caught up in fear. Before yesterday night’s Iran missile strike, there was a sense in the market of, “is that all you’ve got?” Despite Tuesday’s losses, let’s not forget Monday’s sharp recovery off of Sunday night’s pre-market sell-off. This market is acting in a very impressive manner. We’ll see if that continues to be the case today.

Chips Still Crunchy

Geopolitical fear doesn’t seem to be hurting the chipmaker stocks, at least not judging by the kind of rally in chips that happened yesterday. While Micron (MU) and Nvidia (NVDA) made big gains, some late-session selling pushed the overall Technology sector to slight losses by the end of the day even as the chip sector rose nearly 2%. An analyst upgrade of MU might have helped.

Every sector lost ground Tuesday, but Communication Services came closest to breaking even. This partly reflected some healthy gains in Facebook (FB) and especially Twitter (TWTR). The ban on political ads announced by TWTR late last year could be helping make TWTR look like one of the “good guys” in social media, at least in the eyes of regulators. The company could go from looking like one of the worst offenders on that front to being more of the cowboy riding in wearing a white hat, just by being more middle-of-the-road.

At the same time, FB’s apparent decision to ban “deepfakes” (according to media reports Tuesday) is also the kind of news that could conceivably put them in better standing with regulators and Congress. In case you haven’t heard the term, “deepfakes” are manipulated and edited videos that can be used to spread misinformation.

2013 Nostalgia In Gold Market

It was a weird day over in the commodities arena Tuesday as crude took a step back from recent highs even as gold kept climbing the ladder toward seven-year highs above $1,570 an ounce. It’s blown through some technical resistance areas on the way up, and some analysts say the gold rally reflects market fear about the chance of Middle East tension ratcheting even higher.

There may be a case for that, but it’s not the whole story. Gold basically got ignored for a few years. Now it looks like some people don’t want to sell stocks or buy volatility, but think gold might be a cheaper way to hedge. Right now, gold is outperforming just about everything but crude, and it’s pulled away from bonds. 

In fact, the bond market actually fell a little on Tuesday, another blow to the geopolitical tension explanation of Tuesday’s action. The closely-watched 10-year yield is back above 1.8%, so we’re not seeing much follow-through from the bond rally that happened right after last week’s attack.

For now, the gold rally looks more like a commodity-based rally than a risk-based one.

Corporate Corner

Speaking of rallies, energy firm Apache (APA) enjoyed a major one Tuesday as it gained more than 20%. That followed a press release from APA saying it made a “significant” oil discovery offshore in South America. This might be good for APA shareholders, but it also points up once again how much crude is being found in the Western Hemisphere, helping make countries on this side of the Atlantic less dependent on Gulf oil that might be threatened by Iran. For instance, the media reported Tuesday that the U.S. now exports just about as much oil as it imports for the first time in decades (see more on crude below).

Big banks kick off earnings season next Tuesday, but today also has some earnings in store. Shares of Walgreens Boots Alliance (WBA) are trading 6% lower this morning as the drug retailer missed on Q1 earnings. There was better news in the homebuilder sector, however, as  homebuilder Lennar (LEN) beat estimates on both the top and bottom lines. LEN said it increased deliveries, but prices fell 7%.

The strong earnings from LEN back up what seems to be a developing story in the new home market where sales have been relatively strong over the last six months or so. This could reflect consumer health at the higher end of the equation, considering new homes tend to be more costly than existing homes. That’s probably a boost for homebuilders.

Shares of Macy’s (M) also climbed in pre-market trading, rising 3% after holiday sales came in better than many analysts had expected.

Then there’s Boeing (BA). Shares fell 1% early Wednesday after a 737 crashed in Iran. Initial media reports said the crash occurred after technical difficulties, but it’s still too early to really get a sense of what happened. 

CHART OF THE DAY: WHAT A NIGHT! This overnight chart shows the dramatic plunge and rebound in S&P 500 Index futures (/ES-candlestick) and the quick spike and downward drift in crude (/CL-purple line) after last night’s Iran missile attack against U.S. bases in Iraq. The fast turnaround occurred as it sounded like neither side planned to escalate further. Data source: CME Group. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.

Job Search: The first really big economic report of the year is right in front of us as investors prepare for Friday morning’s December payrolls data. The November report was full of fireworks, showing huge jobs growth of 266,000 and unemployment at a 50-year low of 3.5%. Looking ahead to Friday, analysts don’t expect the same kind of extravaganza in December. That might be in part due to some of the higher weekly jobless claims posted that month, and also because manufacturing data continued to look soft. Wall Street consensus for December jobs growth stands at 160,000, according to Briefing.com, with the jobless rate seen holding steady and hourly wages ticking up 0.3%, an improvement from 0.2% in November. If the report does look this way, it would probably receive a vanilla kind of reaction from the market and not get anyone too worried about looming inflation or economic weakness.

Crude Considerations: Two things to remember about crude and the Persian Gulf situation: First, the U.S. produces about 12 million barrels of crude a day, up from around 5 million barrels a day back in 2005. That provides a real cushion for crude prices. Also, a lot of major producers, including OPEC members, are keeping production artificially low. There’s plenty of crude in the tank. That said, the loss of Iran and much of Venezuela’s production over the last few years means any hold-up of Gulf supplies isn’t something the market can simply whistle past.

Another thing to consider is that since the September attack on Saudi Arabia’s crude installations, the U.S. and Saudis haven’t necessarily stood still. There was talk last fall of bolstering defenses of the vast Saudi crude fields, including possibly adding new systems to destroy, detect or jam drones or missiles before they descend on oil facilities, The Wall Street Journal said. The U.S. was also in discussions with the Saudi government to connect its air-defense arsenal to a more sophisticated U.S. system in the region. Still, oil shipping out of the Gulf remains at risk, and Iran could try to block the 21-mile wide Strait of Hormuz. The amount of oil ferried through the Strait is double that of all U.S. oil production, the Washington Post pointed out. 

More Merger Moves Ahead? A recent Barron’s article says mergers and acquisitions (M&A) are poised for a strong 2020 due partly to improved economies and low interest rates. The number of announced global transactions fell 3.7% in 2019, but there was an increase in deals valued at $20 billion or more. United Technologies’ (UTX) $86 billion agreement to buy Raytheon (RTN) was among the biggest. Technology remained the top sector for deals in 2019, followed by Health Care. It’s a seller’s market, Barron’s says, with strong software and financial technology companies trading for 20 times earnings. Many private equity investors think more deals can happen in the first half of 2020 as sellers try to get their deals finished before the presidential election, with merger activity possibly slowing in late summer or fall. If Trump is re-elected, then it’s business as usual for M&A, one analyst told Barron’s. Even if he loses, deal making could accelerate after the election as companies try to get agreements in the books before any changes to the tax code.

Image by mostafa meraji from Pixabay