Syria, Schmyria: War Fears Ebb, Stocks Rally

“The Wolf of Wall Tweet” struck again. President Trump today eased back on his threats against Syria by tweeting:

Never said when an attack on Syria would take place. Could be very soon or not so soon at all!

Those few cryptic words were enough to calm Wall Street’s war jitters. The three main stock indices posted sharp gains today, as investors shrugged off concerns that armed conflict would break out in Syria between the U.S and Russia. Also lifting stocks were early earnings reports that supported optimism over first-quarter operating results.

BlackRock (NYSE: BLK), the world’s largest asset manager, kicked off earnings season today with better-than-expected profits. BLK rose 1.50%. Also reporting healthy operating results were Delta Air Lines (NYSE: DAL) and Commerce Bancshares (NSDQ: CBSH). Shares of DAL and CBSH rose 2.97% and 6.33%, respectively.

New jobs data further cheered investors. The U.S. Labor Department reported today that initial claims for state unemployment benefits dropped 9,000 to a seasonally adjusted 233,000 for the week ended April 7. Economists had expected the number to come in at 230,000.

The economy created 103,000 jobs in March, the fewest in six months. But analysts weren’t fazed, citing unseasonably cold weather for the moderation in hiring. The unemployment rate remains at 4.1%, a 17-year low.

Their footing may be wobbly, but the bulls remain in charge.

According to the research firm FactSet, the estimated earnings growth rate for the S&P 500 in the first quarter is 17.1%. The consensus among analysts is that the S&P 500 will see a 16.2% increase in price over the next 12 months.

However, the fact that a single tweet can whipsaw markets should make you cautious. Geopolitical risk, domestic political scandals and rising interest rates could prove a dangerous combination for stocks in the days ahead.

Syria’s alleged chemical attack on civilians dominates the world stage. Lurid images of dead women and children are stiffening the resolve of the United States and western powers to hold Syrian President Bashar al-Assad accountable.

So far, the White House has only responded with tweets. But the Syrian stand-off could blow up into a shooting war between the U.S. and Syria’s ally Russia. Few events crush stocks as thoroughly as the outbreak of war in the nuclear age.

President Trump in a tweet yesterday declared that missiles “will be coming” in Syria, taunting Russia for supporting al-Assad. Moscow has vowed to shoot down any missiles. Today, Trump backed away from his threats. But what will Trump tweet tomorrow?

The markets have taken on an Alice in Wonderland quality, whereby stocks rise when Trump abandons a stated policy position.

Rhetoric versus reality…

Wall Street already is rattled by the prospect of a trade war between the U.S. and China.

China’s Commerce Ministry on Thursday asserted that trade negotiations with the U.S. were impossible because the Trump administration wasn’t making serious efforts at negotiation. China again threatened to retaliate with harsh countermeasures.

The worsening of trade tensions is a far cry from Tuesday when China President Xi Jinping extended an olive branch to America.

The spokesperson for China’s Commerce Ministry said today that Xi’s conciliatory remarks on Tuesday should not be misconstrued as a concession. He claimed that China is willing to negotiate but the U.S. is “not showing sincerity at all.”

Supporters of Trump’s approach argue that the administration must talk tough to get China’s attention. The hope is that when the rhetoric from Trump and Xi dies down, their representatives will undertake the hard work of hammering out a compromise. But history shows that insults diminish trust and often lead to outright confrontation.

The global economy is tightly integrated. It’s undeniable that China cheats on trade. But solving the problem requires a coherent strategy, not bombast.

America and China aren’t the only countries at risk. Protectionist measures would wreak havoc with the global supply chain. The earnings of companies around the world would take a hit, punishing financial markets. The chart below underscores this inter-dependency.

Then there’s the matter of rising interest rates. Minutes of the Federal Open Market Committee were released yesterday that revealed the Federal Reserve’s growing concern over inflation.

Investors worry that the Fed will be prompted to quell inflation by raising rates more often this year than planned.

President Trump also faces mounting legal woes, as Special Counsel Robert Mueller steps up the pressure in his Russia investigation. If Trump fires Mueller, stocks would probably swoon.

Despite these myriad headline risks, stick to your long-range investing plan. The table has been set for further gains in stocks, but we have to get through this rough patch first.

Cushion your portfolio with an ample cash allocation of at least 20%. Hold another 5%-10% in precious metals. Reduce your exposure to momentum stocks. Look for value.

There’s enough good news to keep you in the stock market. But whatever you do, don’t trade according to tweets from politicians. Avoid that rabbit hole, as Alice might say.

Thursday Market Wrap

  • DJIA: +1.21% or +293.60 points to close at 24,483.05
  • S&P 500: +0.83% or +21.80 points to close at 2,663.99
  • Nasdaq: +1.01% or +71.22 points to close at 7,140.25

Thursday’s Big Gainers

  • Chicago Bridge & Iron (NYSE: CBI) +9.53%

Energy infrastructure firm expected to post strong earnings.

  • Shaw Communications (NYSE: SJR) +9.15%

Connectivity firm declares dividend.

  • McDermott International (NYSE: MDR) +6.58%

Engineering firm issues robust earnings outlook.

Thursday’s Big Decliners

  • Bed Bath & Beyond (NSDQ: BBBY) -19.95%

Retailer issues weak guidance for 2018.

  • Novavax (NSDQ: NVAX) -12.98%

Biotech’s IPO priced at deep discount.

  • Verona Pharma (NSDQ: VRNA) -8.94%

Drug maker loses chief medical officer.

Letters to the Editor

“The news headlines are scary. Should I bail out of stocks altogether?” — Diane R.

Securities law prevents me from offering customized advice to individuals. But I can tell you this: If bearish predictions come to pass, the last thing you want to do is bail out of a down market, thereby locking in your losses.

You’re usually better off waiting out a downturn, instead of panicking like everyone else. Distressed assets with improving fundamentals typically bounce back.

Need advice on portfolio protection? I’m here to help:

John Persinos is managing editor of Personal Finance and chief investment strategist of Breakthrough Tech Profits.