The 1970 song "War! What Is It Good For?" was performed by the Temptations on an album and by Edwin Starr as a single. The song's answer to the question is "Absolutely nothing!" The powerful lyrics include: "It ain't nothing but a heartbreaker / Friend only to the undertaker, woo!"
Financial market history shows that geopolitical crises, including wars, often have been good buying opportunities for stocks (chart). That was true during Gulf War III, as the S&P 500 bottomed on March 30 and rose 18.3% through yesterday's close. The ceasefire in the war between Iran and the US ended abruptly today; will that present another buying opportunity? We think so.
The numerous crises and wars in the Middle East since the 1970s have all been good for oil prices, at least initially. The end of the ceasefire today boosted the price of a barrel of Brent crude oil by $4.42 to $78.59 this morning. However, there was a significant bear market in oil before the current war started, which explains why the price didn't increase much more in March and April than it did and why it came tumbling down in May and June (chart).
The S&P 500 Energy stock price index spiked during Gulf War III in March and fell during the ceasefire, finding support at its 200-day moving average (chart). It undoubtedly will bounce off that level today after President Donald Trump declared that the tentative ceasefire with Iran is over after Iran attacked ships transiting the Strait of Hormuz yesterday.
At the NATO summit in Ankara, Trump blasted Iran, saying: “I don’t want to deal with them, but they’re scum. They’re sick people, they’re led by sick people, and they’re vicious, violent people, and if they had a nuclear weapon, they’d use it.”
We continue to recommend overweighting the S&P 500 Energy sector as a hedge against increased geopolitical risk in the Middle East. That's easy to do since the sector accounts for just 2.9% of the market capitalization of the S&P 500 (chart).
We view the recent weakness in semiconductor stocks as a buying opportunity. Their meltup over the past three years has been well supported by their earnings (chart). The S&P 500 Semiconductor industry's forward P/E was 17.4 yesterday.
This morning, the 2-year US Treasury yield is up to 4.21%, reconfirming that the markets expect the Fed to raise the federal funds rate by a couple of 25-bps moves in the coming months (chart).
The 10-year US Treasury bond yield is up to 4.57% this morning, retesting the yield's downward trend line (chart). We think it will hold.
The gold price is retesting support (again) around $4,000 (chart). We expect that support level will hold. Weighing the gold price down currently is the resumption of the war, since it’s boosting the foreign exchange value of the dollar and bond yields.
