by Ivan Martchev
April 9, 2024
Right about the present level of the 10-year Treasury yield (4.4% as of Friday’s close) the stock market began to feel pressure last summer. That pressure lasted for three months, from August 1 to October 27. While it is difficult to see bonds selling off and yields rising, if the Fed is to cut rates, maybe the bond market is seeing something on the inflation front that the Fed has not realized yet. Could inflation be stickier than previously expected, prompting the Fed to not cut rates – to leave them higher for longer?
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
Another issue whipping around stock and bond markets is trouble in the Middle, East, which is likely to see some type of escalation in the coming week due to the bombing of the Iranian consulate in Damascus.
Some extrapolate the present situation to what happened after President Trump ordered a strike on Iran’s General Qassem Soleimani in January 2020, which is to say not very much. I think this situation is more dangerous than that, as Israel took down part of an Iranian diplomatic compound, which suggests Iran may do the same. When a circle of acrimonious recrimination gets going, no one can be sure where it will stop, so extrapolating the relatively benign outcome of the Soleimani strike on the present situation may be premature. We simply do not know what Iran’s response will be if the situation spirals out of control.
It is hard to see Treasuries selling off in such a scenario, but it is not hard to see the stock market deliver a much-needed correction, which could be in the 3%-5% range, which is to say nothing out of the ordinary. This preliminary estimate assumes that no real war erupts between Israel and Iran.
If a real war erupts, then the correction may be much larger, as it has serious implications for the price of oil, which is already moving higher in anticipation of increased hostilities.
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
The stock market last week did something that it doesn’t do very often. The S&P 500 had a range of 110 points on Thursday, basically going from up 1% to down 1% on news of a pending Iranian response (last magnified bar, circled, on chart). This is a huge move and a classic reversal – also called a bearish engulfing pattern – where the high is above the prior day’s high and the low is below the prior day’s low. Such patterns tend to indicate a trend change, so if the trend is up, it can mean a coming correction.
Note that a similar, but smaller bearish engulfing pattern in March did not result in a correction, yet just such an action at the end of July 2023 (the first magnified bar above) nailed the top in the market for the summer and the beginning of a three-month correction. My guess is that if the Iran-Israel situation does not erupt into a full-scale war, then a 3%-5% pullback would be likely, and normal, while a full-scale war increases the possibility of a much bigger pullback – one of the magnitude that we saw last summer and fall.
Whatever the size of the correction, remember that when they get going, we have no idea how far they will carry. We can have an idea of what might happen but ultimately, no one knows what the future holds. All we can say right now is that a correction would be normal, and that without a full-blown war in the Middle East or some other nasty geopolitical outcome, it is unlikely we’ll see a full-blown bear market.
All content above represents the opinion of Ivan Martchev of Navellier & Associates, Inc.
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Why Raising Tax Rates Does NOT Raise More Tax Dollars
Global Mail by Ivan Martchev
With 10-Year Treasuries At 4.4%, How High is Too High?
Sector Spotlight by Jason Bodner
No April Showers on the Horizon
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Ivan Martchev
INVESTMENT STRATEGIST
Ivan Martchev is an investment strategist with Navellier. Previously, Ivan served as editorial director at InvestorPlace Media. Ivan was editor of Louis Rukeyser’s Mutual Funds and associate editor of Personal Finance. Ivan is also co-author of The Silk Road to Riches (Financial Times Press). The book provided analysis of geopolitical issues and investment strategy in natural resources and emerging markets with an emphasis on Asia. The book also correctly predicted the collapse in the U.S. real estate market, the rise of precious metals, and the resulting increased investor interest in emerging markets. Ivan’s commentaries have been published by MSNBC, The Motley Fool, MarketWatch, and others. All content of “Global Mail” represents the opinion of Ivan Martchev
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