The International Pressures on the US Stock Market

Posted: Jul 08, 2016 12:01 AM
The International Pressures on the US Stock Market

The International Pressures on the US Stock Market

Investors who are flummoxed by the state of the US stock market can look in many directions for the strange behavior. However, it is critical to understand the international macroeconomic pressures that are undermining what is occurring to US businesses, many of which are multinational corporations that are additionally sensitive to international events. This is one element of The Liberty Portfolios – helping you understand what is important and what is noise.

Ovadia Ovi Levy, or KPL Capital (a private equity fund), has several insights on what’s going on internationally. Much of what he has warned about has come true so far. He’s calling for a major correction this year, and here’s what you should do about it if you are new to investing.


As part of the nuclear deal with Iran, the US lifted sanctions against the country, as did the EU. Thus, Europe can once again begin import and sell Iranian oil. The US won't try and reduce Iran's oil sales, either. That means that, while the rest of OPEC seems to want to cut production and get oil prices back up again so they can balance their budgets, Iran refuses to. Iran desperately needs the money, so they will continue to pump to reap the rewards of a prime industry that it hasn't been allowed to exploit for some time.

Levy said to me earlier this year, “We know that crashing oil prices can help some elements of the economy and hurt others. It may help with consumer discretionary spending, but significantly harm the energy sector. It can also cause disinflation. Iran, however, does not care. Rather than show appreciation for the deal, and work with OPEC to stimulate markets via cuts, they just continue to act in their own interest.”

That’s exactly what’s come to pass. Levy told me to expect a flat market for the first half of the year because of all the uncertainty. That’s also happened.

Not only that, it is that old dancing devil called "uncertainty" that injects both volatility and pessimism into the markets.

Power Plays

A mere 48 hours after the Obama Administration held secret talks with North Korea to push forward on a peace treaty, North Korea engaged in a nuclear missile test. It took almost two months before the US even decided on sanctions against North Korea, and only then, because it got China to come on board.

Russia, meanwhile, has blocked a UN resolution for sanctions for no other reason than Putin enjoys poking his stick at the US any chance he gets. Putin has shown repeated disdain for US foreign policy involving Russia.

“This kind of geopolitical drama is almost always bad for the US stock market. Geopolitical instability has always existed, and it has historically created short-to-medium term volatility and declines in the market,” Levy says.

“With each new geopolitical event, a new risk is created. Risks that the market previously did not consider must now be entered into the risk equation for investors. For example, Russia's aggression in Crimea and Ukraine had multiple effects. Momentum stocks, which had no material connections to this crisis, fell last February and March. Meanwhile, Russia's own stock market fell 13%, and cratered after November's elections and ruble de-stabilization. Risks that investors did not consider suddenly bit them all in the backside. So with these new risks in play, markets sell off as investors run for safer bets. Risk is re-priced, and that can spread beyond just specific sectors,” Levy added.

Gold, for example, has had a solid run over the past few months, which is what Levy expected when we spoke in January. Investors are re-pricing risk on a global basis, partly as the result of both US foreign policy and other geopolitical events. Uncertainty over everything from contracting US earnings estimates to currency fluctuations, and rising sovereign debt levels, are pushing gold higher.

People rush to gold because it is a hard asset. That money has to come from somewhere, and that means it is likely coming out of world equity markets. Investors and institutions are selling into recent rallies because they are re-pricing global risk. Look at the volume coming off the recent corrections. It has not been impressive.


Ovi Levy points out that the market fell, then rallied after Brexit. “What’s strange,” he says, “is that I bet very few people even understand how Brexit might even affect the global economy and earnings power of companies. Yet that one piece of news, about something few people even understand, made the market go nuts. You don’t want to be chained to a market that is this irrational”.


There’s a reason that the Chinese government has been in a panic about currency and the stock market. Growth is slowing dramatically. Even worse, and I want you to be very clear on this point, investors cannot rely on any data coming out of China. I have done business there and many, many colleagues have as well.

“Our experience informs us that the Chinese government expects businesses to hit their numbers every year, so whether or not those numbers are actually achieved or not is never relevant. What gets reported is all that matters, because over there, people are truly in fear of their lives if they fail. So what gets reported is the desired target. So anyone that says GDP growth is going to be 6% or 7% this year doesn’t know what they are talking about, because nobody truly knows what the real data says,” Levy believes.

What we do know is that demand for oil and copper has fallen dramatically. Those numbers don’t lie. It costs more to produce copper than businesses can sell it for. That’s not a winning formula.

There are many US businesses in China. Not only do they live in constant fear that China might suddenly change policies on a dime that hampers US businesses over there, they are also not going to see earnings explode like everyone believed they would. Thus, earnings revisions come down, and multiples contract.

What Should Investors Do?

Ovi Levy says, “Investors should be very careful. The US markets have never been as dependent on geopolitics as it is today. About half of US earnings come from overseas now. My advice is stay put and stay calm. I am concerned about a 30-40% correction coming this year”.

What does this mean for followers of The Liberty Portfolios?

As we learned in my first article, you should be a long-term diversified investor. Corrections will happen and they can be large.

So if you are already in the market, and are in it for the long-term, take a look at your holdings. Evaluate the story for each and if the story has changed or not. If not, stay the course if those stocks are up. If you have losses already on those stocks, you may want to think about selling out because you got the story wrong. You’ll harvest some capital losses to offset future gains, and have cash in case the market does correct.

I also think investors should sell holdings that are within 5% of break-even, whether a winner or loser, to raise cash.

My logic is that if I’m wrong, and the market roars back up to its old highs, that those highs simply are not sustainable given the geopolitical risk. The path of least resistance is down, based on the situation.

However, for NEW investors, you have a different situation. If you have little or no money in the market, you should not be frightened by what I’ve just written. The method of The Liberty Portfolios is to dollar-cost average into the market. What does that mean?

Over a long period of time, the stock market will deliver positive returns. Rather than throw all your money into the market at once, you decide how much you plan to invest, then divide that amount into 20 pieces. Each piece is 5% of what you plan to invest over time.

Like clockwork, no matter what is happening with the market, you invest that 5% on the same day of each month. Over 20 months, you will buy into the market. When the market is high, you will buy fewer shares of things. When it is low, such as during a correction, you will buy more shares. Should the market literally crash during the process – fall 30% or more very quickly – you could put even more than 5% to work since it may present a great buying opportunity.