Stocks Whipsawed By Iran Nuke Fears, Close Mixed

Chaos is the new normal. Under Donald Trump’s tenure, Wall Street has gotten spooked whenever the U.S. has abandoned a long-standing international agreement. This familiar dynamic unfolded on Tuesday.

President Trump today announced that the U.S. would jettison the Iran nuclear deal and reimpose sanctions waived in 2015. Stocks closed mixed in choppy trading, as investors tried to digest the unsettling news.

Losses eased in the final minutes of trading. The Dow Jones Industrial Average and Nasdaq managed to eke out slight gains after spending most of the day in the red. At its session low, the Dow was down 158 points. The S&P 500 closed lower, while the U.S. dollar surged to a 2018 high. 

Big winners today included large-cap aerospace/defense stocks, which typically climb when geopolitical turmoil worsens. The benchmark SPDR S&P Aerospace & Defense ETF (XAR) jumped 1.61%.

In exchange for the end of strict international sanctions, Tehran agreed in 2015 to give up the majority of its nuclear fuel and to forgo producing more. United Nations inspections were implemented to keep the Islamic Republic in line.

However, Trump and his hawkish national security team don’t trust Iran’s theocratic regime to comply. The White House ignored the pleas of European allies to stick with the deal. The president’s advisors also have hinted at “regime change” in Iran, the sort of rhetoric that Wall Street doesn’t like to hear.

Oil prices plummeted today. West Texas Intermediate, the U.S. benchmark, fell 1.41% to close at $69.73 per barrel. Brent North Sea crude, on which international oils are based, fell 0.59% to close at $75.72/bbl.

Withdrawal from the nuclear deal will prompt new sanctions on Iran, the world’s fifth-largest producer of crude oil, further curtailing a global oil supply that’s been getting tighter.

So why did crude oil prices fall today instead of rise? Simply put, today’s news was already factored into crude’s elevated price. It’s a classic case of buy on the rumor, sell on the news.

The table has been set for a sustained rise in the price of oil. The U.S. Energy Information Administration estimates that reinstating sanctions on Iran could reduce the country’s daily oil sales by 300,000 to 600,000 barrels. The production cuts OPEC imposed in late 2016 have held firm. Supply disruptions in socially unstable Venezuela also have constrained supply. Economic growth is boosting demand.

However, crude’s ascendancy is a two-edged sword. It’s great for oil exporters, North American shale producers, oilfield services firms, and investors who are long energy equities. But it’s not so great for everyone else. Higher energy costs will eventually take a toll on the broader economy and by extension the stock market.

Corporate America will take a hit on the bottom line, as more expensive oil increases operational costs. Consumers will pay more for gasoline, home heating oil and petroleum-based products. Auto sales will slump, airline carriers will see thinner margins… the line of dominoes is a long one.

The dangerous road ahead…

Trade is another flashpoint. Despite increasing trade tensions, China’s customs administration reported Tuesday that the country’s exports surged in April after an unexpected decline in March.

China’s April exports rose 12.9% from the previous year, exceeding analysts’ forecasts of 6.3% and rebounding from a 2.7% drop in March.

Tuesday’s report also showed that imports in April grew more strongly than anticipated, indicating that China’s economy is holding up well as the country’s consumers clamor for foreign goods. The data reassured investors who are concerned that worsening trade conflict between the U.S. and China will undermine global growth.

But there’s a caveat. Pessimists warn that China’s trade numbers may have peaked and performance this year will wane, as negative factors begin to take their toll. Those headwinds include higher interest rates, hotter inflation, the spread of protectionism — and yes, the rising cost of oil.

Discussions between a U.S. delegation and Chinese officials last week in Beijing made no substantive progress in easing trade tensions. With the midterm elections looming on the calendar, U.S. trade threats are in large part driven by domestic political concerns. The Trump White House is eager to please the president’s base, which means protectionist rhetoric is likely to cast a shadow over the markets until at least November, if not beyond.

If you seek encouragement, look to corporate earnings. So far, slightly more than half of the companies in the S&P 500 have reported first-quarter operating results. About 62% of those have beaten expectations on both the top and bottom lines. Problem is, earnings expectations have been so high, even good earnings are sometimes insufficient to lift a company’s stock.

Volatility is here to stay. To protect your portfolio, elevate cash levels and pare back exposure to growth stocks. Every trading day is fraught with uncertainty. To quote American jazz great Fats Waller: “One never knows, do one?”

Tuesday Market Wrap

  • DJIA: +0.01% or +2.89 points to close at 24,360.21
  • S&P 500: -0.03% or -0.71 points to close at 2,671.92
  • Nasdaq: +0.02% or +1.69 points to close at 7,266.90

Tuesday’s Big Gainers

  • Trex (NYSE: TREX) +10.77%

Household products firm reports record earnings.

  • Valeant Pharmaceuticals (NYSE: VRX) +10.53%

Biotech enjoys revenue beat and FDA win             

  • SeaWorld Entertainment (NYSE: SEAS) +7.13%

Theme park’s operating results exceed expectations.

Tuesday’s Big Decliners

  • Hertz Global Holdings (NSDQ: HTZ) -18.75%

Rental car giant’s earnings miss estimates by a wide margin.

  • Entercom Communications (NSDQ: ETM) -18.40%

Radio broadcaster disappoints on earnings.

  • Veritiv (NYSE: VRTV) -16.12%

Logistics firm misses on earnings.

Letters to the Editor

“Aren’t higher oil prices a huge benefit for solar energy?” — Katherine M.

Yes, but less than you might think. The infrastructure for the solar industry has grown pervasive and entrenched, leading to a “price decoupling” of solar and fossil fuels. Solar and other renewable energies are now part of the energy status quo and no longer need high oil and gas prices to attract users.

Questions about the energy markets? Send me a question:

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


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