Syria Bombing: What's Good News For Mankind Is Good News For Markets

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Posted: Apr 16, 2018 10:55 AM
Syria Bombing: What's Good News For Mankind Is Good News For Markets

It was a long week for the market, which dealt with a variety of issues and challenges; some were even economic.  It turns out that dark clouds of anxiety hovering above Washington, D.C. cast a shadow over the good business news and the sunny skies in New York City. 

Relatively strong bank earnings helped propel the market higher out of the gate on Friday, but gains faded quickly, and a malaise took hold. From that point, there was no chance the market would find a way to rally into the close as the only hope was for losses to be benign. 

If there is one characteristic of the market in 2018, it’s the sharp afternoon selloff that usually begins around 2 PM.

Often these sell programs are triggered without any visible news; however, on Friday, according to the report from the Office of Inspector General, certain allegations related to former FBI Deputy Director Andrew McCabe reinforced the notion of intelligence community leadership running amok, driven by personal animosities and grudges rather than their oaths of office.

Still, this has nothing to do with the fundamentals of the stocks in your portfolio. 

Nonetheless, it also ratchets up the notion that Rod Rosenstein could be shown the exit very soon, which I don’t think will happen.

If it does, however, the mainstream media and lawmakers such as Nancy Pelosi will scream it’s a ‘constitutional crisis.’  It would not be a constitutional crisis, but it would stoke a media frenzy that could trip up the market for a day or so. In fact, the market has done a good job of regaining its balance after dips associated with political speculation.

The problem is the inability to gain a head of steam.  The market needs to build momentum, which has been hampered by all the noise.

Bombs Away

It was rumored to happen all week long, and it kicked off the weekend.  America led a coalition with allies, including the United Kingdom, France, and Turkey, in retaliatory strikes against the Assad regime in Syria for its use of chemical weapons.

The strikes were precisely aimed at the Assad regime’s ability to make chemical weapons and hopefully deter future actions. It remains to be seen if that’s the case, but this also sets the stage for much more robust responses.

By all accounts, the strikes were successful, but the media immediately leaped on a tweet from President Trump.

President Trump used the term “mission accomplished,” and the feeding frenzy was on.  Of course, the mission was accomplished, and it was successful, but the term was too much for the media to ignore.  They took the bait and went to town. On Sunday, President Trump took another jab at the “fake news” for going nuts and showing their bias.

This week, the criticism will focus more on things such as the long-term game plan from the administration, which is more of a legitimate concern.  I’m glad this played out over the weekend.  If it happened in the middle of the week, the market would have swooned.  Some would have said this was the start of a constitutional crisis.

Now America remains “locked and loaded,” and I think deterring chemical weapons to slaughter the innocent (its use is even illegal among warring soldiers) is good news for the market because it’s good news for mankind.

Earnings Season

Coming into earnings season, big banks were promoted as saviors, ready to grab the rally baton from financials to lead the way.  It turns out that the big behemoths dropped the baton as BlackRock, JP Morgan Chase & Co., and Citigroup fizzled after the strong opening moves on Friday.

In fact, financials (XLF) was the biggest S&P 500 sector loser of the session. 

Investors fled financials and technology and migrated into the safety of utilities, real estate, and consumer staples. Ironically, if investors were seeking the comfort of value, they would have been buying financials.  The S&P 500 Financial sector has the lowest forward price-to-earnings (P/E) ratio of only 12.9.

Value Traps?

Investors are told to focus on value and are told the best gauge is the Price-to-Earnings (P/E) ratio, which is the best way to find these “cheap” stocks. I happen to like the forward price-to-earnings (P/E) ratio more and the PEG ratio even more as a tool to help discover value. Note: nothing beats combing through the actual data to learn more about the health of the stock and its peers.

The best and third best performing S&P 500 sectors have the highest and the third highest forward P/E ratios. Many funds would, therefore, avoid these names, but that’s a mistake.  More often than not, high valuation metrics reflect companies enjoying business momentum and success, while low valuation metrics reflect declines and failures.

Sector Valuations

YTD Change

Forward PE

S&P 500 Index

-0.65%

16.4%

Consumer Discretionary (XLY)

+2.56%

19.4%

Consumer Staples (XLP)

-7.56%

16.4%

Energy (XLE)

-1.18%

19.0%

Financials (XLF)

-1.61%

12.9%

Health Care (XLV)

-0.98%

15.2%

Industrials (XLI)

-2.22%

16.7%

Materials (XLB)

-4.00%

15.7%

Real Estate (XLRE)

-7.29%

 

Technology (XLK)

+3.71%

17.6%

Utilities (XLU)

-5.49%

16.1%

Conclusion

Earnings season is treacherous - 95% of my lifetime losses have happened during earnings periods; more than half the time, I’ve come to regret it within months. Throw into the mix a media ready to make any news or even speculation about the end of the world, and it’s really easy to lose money. Focus on the fundamentals.

For all the wild swings and tabloid headlines, the market finished higher last week. 

This makes me believe smart money is picking its spots to slowly build positions. If you are too intimidated to buy; at the very least, hang in there with companies that are growing the top line organically with pricing power and expanding margins.

I’m not sure how much longer this market remains range-bound, but I’m excited as it becomes more overvalued with each day of earnings releases.

Hang tough.

Today’s Session

The equity futures are up nicely this morning with the Dow looking to open up about 185 points.  A beat on the top and bottom line from Bank of America is helping lift financials.  Retails sales in March were also up after 3 down months, coming in up .6% month over month, and ex-autos up 0.2%.  More on this in the afternoon report.

Let’s see if the market can hold on to early morning gains.