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Investors Get Pumped Over Soaring Oil

By John Persinos on May 9, 2018

Crisis plan. Those two words should govern your investment approach for the duration of Donald Trump’s rocky tenure in the White House. Don’t wait for a crisis to come up with a plan.

The main stock indices rose sharply Wednesday, buoyed by a resurgent energy patch. Investors are still absorbing yesterday’s news that the U.S. will leave the Iran nuclear deal and impose “powerful” sanctions. Today, the prospect of higher crude prices cheered investors. That mood will change.

It’s doubtful that the White House calculated all of the potential fallout before it decided to abandon the Iran nuclear treaty. But the consequences already are unfolding.

Notably, the risk of war between Iran and Israel has risen considerably. Saudi Arabia and other countries in the region will feel less constrained to pursue their military ambitions. Bad news from the Middle East — and we’ll get some soon enough  — would crush stocks.

Last year marked low volatility and a steady rise in equities. You’ll be looking back at 2017 as “the good old days.” Expect an increase in market turbulence. Whether you agree or disagree with Trump’s policies, they’re purposely designed to upend the status quo. The scuttling of the Iran deal is a prime example. You won’t wake up one fine morning to find that the dust has settled. Under this administration, it will never settle.

Ensure that you’re properly diversified. The odds of another global stock market sell-off are growing.

Here’s a statistic for you: three of the five worst one-day declines in the entire history of the Dow Jones Industrial Average happened in 2018 (see chart). Let that sink in.

Over the short term, we’ll probably see a rally in oil prices and the U.S. dollar.

West Texas Intermediate spiked today by 3.03% to close at $71.15 per barrel. Brent North Sea crude rose 3.14% to close at $77.20/bbl.

The ICE U.S. Dollar Index (DXY), which measures the greenback against a basket of six major world currencies, rose 0.04% today to hit 93.10, a new four-month high. Oil and the dollar will get driven higher over concerns that the Middle East will destabilize.

As conflicts in the region emerge, investors may pull back from risk assets. But for today at least, it was “risk on” as booming oil prices encouraged the bulls.

The global community awaits the Iranian response. In an attempt to seem moderate and responsible, Iran’s theocratic regime already has indicated that it will continue to work with Russia and the Europeans on nuclear constraints. That means a prolonged period of great power politics, with Iran trying to set the U.S. against its allies. But Iran could also decide to pursue its nuclear program unfettered.

We’re entering uncharted territory. Some of Trump’s top lieutenants, such as national security advisor John Bolton, have in the past advocated bombing Iran. Let the consequences of that sink in.

Investors face further geopolitical uncertainty, with flashpoints not just in the Middle East but also on the Korean peninsula.

These dangerous conditions are manna for oil, gold and the dollar. But you should also stay diversified across asset classes, sectors and international markets.

The Midas Metal’s mettle…

Gold, of course, is the classic hedge against fear and uncertainty. The looming trade war between China and the U.S. only exacerbates Wall Street’s worry and makes the yellow metal even more attractive. Gold is poised to take off.

You should also consider silver, an underappreciated alternative to gold that in many ways is a more effective hedge against crisis. Unlike gold, silver boasts many vital industrial applications, making it less volatile than the Midas Metal. The time to make a move into precious metals is now, not when the rest of the investment herd is piling in.

Get ready for a brutal round of realpolitik. Some nations already vow to continue buying Iranian crude. Iran’s largest oil customer, China, may be hesitant to cut off Iran because of the trade conflict between Beijing and Washington. The enemy of my enemy is my friend, as the old saying goes.

New sanctions on Iran would curtail global oil supply, a tailwind for crude oil prices. However, it’s entirely possible that U.S. production could fill the gap. Thanks to the “fracking” revolution, production is surging in the U.S.

On Tuesday, the U.S. Energy Information Administration hiked its 2019 domestic output forecast by nearly 4% to a record 11.9 million barrels per day. Regardless, most analysts currently predict that the price of crude oil this year will exceed $80/bbl, a far cry from the levels of below $30/bbl that were plumbed in early 2016.

Investing just got a lot harder. Careful stock-picking and informed analysis are more important than ever. Re-calibrate your portfolio’s allocations for crisis conditions. These asset percentages make sense right now: 35% stocks, 35% hedges, 20% cash, and 10% bonds.

You don’t want your portfolio exposed, when market-crushing headlines start scrawling across the bottom of your TV screen. And believe me, those headlines are coming.

Wednesday Market Wrap

  • DJIA: +0.75% or +182.33 points to close at 24,542.54
  • S&P 500: +0.97% or +25.87 points to close at 2,697.79
  • Nasdaq: +1.00% or +73.00 points to close at 7,339.91

Wednesday’s Big Gainers

Online lending platform’s loan volume ramps up.

Cloud services provider posts narrower-than-expected loss.

Enterprise software firm issues strong earnings.

Wednesday’s Big Decliners

Soft drink producer downgraded due to higher gas and aluminum costs.

Beauty firm’s earnings strong, but not strong enough.

Higher fuel costs likely to plague airline sector.

Letters to the Editor

“Do you recommend marijuana stocks?” — Alan R.

Yes, I’m bullish on “canna-businesses” that develop marijuana-based products for medicinal and recreational purposes. However, don’t succumb to the Siren’s Song of thinly capitalized, heavily indebted pot companies that trade on the pink sheets and have never made a profit. Stick to major players with sound fundamentals.

Want insights into the hottest investment trends? Drop me a line:

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

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