Weekly Update 10/10/2023
Israel-Hamas at War!
Will Israel-Hamas Conflict Derail Market Rally?
Oil, Gold, Jump on Middle East Conflict
More Stocks Hit 52-week Lows
Could an Israel-Hamas War Change What the Fed Does About Interest Rates?
Weekly Meetings:
NO MEETINGS THIS WEEK. ENJOY YOUR FALL BREAK!
—Market Madness—
Oil, gold jump on Middle East conflict; US stocks end higher
Oil prices jumped more than 4%, gold gained and the safe-haven U.S. dollar edged up against the euro on Monday as military clashes between Israel and the Palestinian Islamist group Hamas fueled worries that the conflict could spread beyond Gaza.
U.S. stocks ended higher, with energy shares rising along with oil prices. The S&P 500 energy index (.SPNY) ended up 3.5%.
Israel’s shekel weakened sharply. The dollar was up about 3% at 3.955 shekels .
The Bank of Israel earlier said it would sell up to $30 billion of foreign currency to maintain stability. Israeli government bonds also fell.
The Israeli military said on Monday it had called up an unprecedented 300,000 reservists and was imposing a total blockade of the Gaza Strip, in a sign it may be planning a ground assault in response to the devastating weekend attack by the Hamas gunmen.
“Typically the most sensitive asset classes to geopolitical risk are emerging markets, commodities and currencies – and, true to form, we’ve seen hits in all of those areas,” said Tina Fordham, geopolitical strategist and founder of Fordham Global Foresight.
“Wars are inflationary and wars in the Middle East especially are inflationary,” she said.
Brent crude rose $3.57, or 4.2%, to settle at $88.15 a barrel, while U.S. West Texas Intermediate crude settled at $86.38 a barrel, up $3.59, or 4.3%.
Emerging market stocks (.MSCIEF) lost 0.20%, while safe-haven gold was in demand, rising 1.6% to $1,860 an ounce.
On Wall Street, shares of U.S. airlines, hurt by rising oil prices, ended sharply lower. United Airlines (UAL.O), Delta Air Lines (DAL.N) and American Airlines (AAL.O) suspended direct flights to Tel Aviv.
How She Built a $360 Million Candy Company at 26
An Israel-Hamas war could change what the Fed does about interest rates
The unfolding conflict between Israel and Hamas has financial markets weighing how a war in the Middle East may impact the Federal Reserve’s next policy steps.
For now, fed funds futures traders see a higher chance of no further action by the Federal Reserve this year. They boosted the likelihood of a pause in November to 88.5% from 72.9% a day ago, and of no action by December to 74% from 57.6%, according to the CME FedWatch Tool. That would leave the Fed’s main interest-rate target at a 22-year high of between 5.25%-5.5%.
Read this next: Here’s what Israel-Hamas war means for oil prices as fighting continues
There’s a pretty big caveat, however. Traders, investors and even the Fed have all been wrong before, particularly when they underestimated the strength and durability of price pressures in the run-up to the current inflation era. So it’s equally possible that the Israel-Hamas war leads to a resurgence of inflation via higher oil prices. Macro strategist Henry Allen and research analyst Cassidy Ainsworth-Grace of Frankfurt-based Deutsche Bank DB, -1.40% are warning of the risk that 1970’s-style stagflation — or an unwelcome mix of inflation and slower growth — may repeat itself.
“It’s too early to say whether the knee-jerk reactions seen in the market on Monday are going to be maintained or accelerate. It depends on how quickly and how far this conflict expands,” said Randal Stephenson, head of investment banking at FE International, a mergers-and-acquisitions advisory firm headquartered in New York.
In addition to rising market-implied chances of no action by the Fed this year, greater demand was seen for 10- and 30-year Treasury futures, boosting the possibility that those corresponding yields could slip when the cash market reopens on Tuesday. The Treasury market was closed on Monday for Columbus Day and Indigenous Peoples Day.
Gold rallied on its safe-haven appeal and oil prices settled more than 4% higher on Monday. U.S. stocks DJIA SPX COMP finished with gains in volatile trading as investors focused on remarks from Dallas Fed President Lorie Logan that suggested there may be less need to raise the fed funds rate. Separately, Fed Vice Chair Philip Jefferson said he remains cognizant of the impact higher Treasury yields are having, and will take into account financial-market developments when assessing the future path of policy.
“The Fed has had a period over the last year where it probably thought it was achieving what it needed to in order to reduce inflation and have a softer landing,” said Stephenson of FE International. But an unexpected shock like the one over the weekend from the Middle East “risks undermining the efforts of central banks to bring inflation under control.”
“If this conflict remains contained between Israel and Hamas, that probably won’t have larger ramifications on financial markets in the longer term,” Stephenson said via phone on Monday. However, “if this conflict spreads to other regions, that could cause a rise in oil prices and that would be inflationary and would affect what the Fed is trying to do.”
The Fed’s most recent projections, released on Sept. 20, implied there would be one more rate hike by year-end and reflected policy makers’ expectations for inflation to head toward 2% through 2026 and over the longer term.
Brent Schutte, chief investment officer of the Northwestern Mutual Wealth Management Co. in Milwaukee, said his team is watching the news out of Israel and that “these tragic events have a very real human impact that we would be remiss not to mention.”
“The situation is also already having an impact on markets and could act as a growing headwind, particularly if it spreads,” Schutte said in an email. “We will be watching the situation and its potential impact on markets closely.”
Stocks are still in a bull market but it’s one of the weakest on record
The current rally in stocks that began in October 2022 and led to a more than 30% rally in the S&P 500 at its peak is one of the weakest bull markets on record, according to Ned Davis Research.
The investment firm highlighted last month that the rally in stocks is the third weakest start to a new bull market since 1950, and for good reason.
NDR’s Ned Davis said in a Monday note that elevated valuations and ongoing monetary tightening policies from the Federal Reserve have limited the potential upside in the stock market.
Even though NDR remains overweight stocks, especially as the market enters a favorable period of seasonal bias heading into year-end, there are still plenty of reasons why investors should remain cautious.
These internal signals of the stock market highlight just how weak the current bull rally in stocks has been, according to NDR.
1. Price-to-sales ratio is high
The S&P 500’s price-to-sales ratio is still too high as it treads above its dot-com bubble peak in 2000. That suggests to Ned Davis that the stock market is expensive.
“The market remains overvalued. While valuations are not good short-term indicators, in the long run, value matters,” Davis said.
2. Demand for stocks is weak
Typically when a bear market in stocks ends, demand for stocks soars, as measured by trading volumes. Ned Davis measures the difference between volume demand and supply, which often flashes a buy signal and surges to +5 or higher in the early innings of a new bull market.
“It did not do that in this bull market, showing poor underlying demand, and then it gave a sell signal on August 17,” Ned Davis said.
3. Key breadth signal never flashed
Breadth is a key measure of how many stocks are participating in the upside of a market rally, and it’s currently low relative to other bull markets in history.
“We did get breadth thrusts early in this bull market, but a buy from the percentage of stocks above their 50-day moving averages never happened. It also failed after 1987, but a ‘failure to launch’ here in a bull market is very rare,” Ned Davis said.
4. Narrow stock rally driven by mega-caps
The year-to-date returns of the S&P 500 are flat if you remove the top eight mega-cap tech stocks, including Amazon, Apple, Alphabet, and Nvidia, among others. The other 492 stocks in the S&P 500 have been mostly flat, according to the note. That’s not what usually happens during a new bull market.
—REAL ESTATE WORLD—
$2B of real estate potential hits the market from troubled company
AUSTIN, Texas — Real estate developer StoryBuilt has put more than two dozen properties up for sale after it entered a voluntary receivership and announced major layoffs, furloughs and a restructuring.
Receivers A&G Real Estate Partners and Onyx Asset Advisors put 28 commercial and residential properties up for sale across Austin, Dallas, Denver and Seattle, according to KVUE’s media partners at the Austin American Statesman.
The sale includes 17 projects in Austin, five in Seattle, three in Dallas and three in Denver. They are for sale as one purchase or separately.
Onyx Asset Advisors told the Statesman the sale includes properties running from seven to more than 800 units. They include fully complete and partially or nearly complete projects in Austin, as well as land parcels in various stages of approval, including several fully approved projects.
“Some of these sites are essentially shovel-ready, with the municipality having already reviewed and green-lighted the plans,” K. Kevin Otus, managing partner of Onyx Asset Advisors, told the Statesman. “It is a major advantage for developers looking to seize opportunities in these high-demand markets.”
In Austin, the properties for sale are:
- Bruno at 2001 S. First St., which is 35% complete
- George at 2211 E M Franklin Ave., which is 40% complete
- Frank South in the 900 block of S. First St., which is still under construction
- My Darling Clementine at 5107 Menchaca Road, which is 66% complete
StoryBuilt was founded in Austin in 2001 as PSW Real Estate and builds mixed-use developments that include apartments, condos, townhomes and single-family homes.
It entered a voluntary receivership on July 31 to try and avoid bankruptcy following major layoffs and furloughs. The company is currently facing lawsuits from former employees seeking back pay and other financial compensation.