The measured confidence prevailing on Wall Street came despite the confusion in Washington. Defense Secretary Mark Esper had to clarify that the United States will not withdraw military forces from Iraq after the leak of a letter from Marine Corps Brig. Gen. William H. Seely III implying as much. And Esper said American forces wouldn’t target Iranian cultural sites, after President Trump threatened to do so, twice, over the weekend. The Trump administration meanwhile is drafting possible sanctions against Iraq.
It may be that the muddiness is mitigating what would otherwise be a more severe reaction on Wall Street. And it doesn’t hurt that investors have learned to look past many Trump-induced geopolitical shocks. “If 2019 taught us anything, it’s that you have to try as best as possible to keep to your process and not get caught up in the headlines,” Strategas technical analyst Todd Sohn tells me. “In a sad way, I wonder if we’ve become used to it. I wonder if the market has learned to discount these events.”
The market’s performance in the immediate wake of other era-defining historical events suggests investors have long been able to keep blinders on. Twenty days after President John F. Kennedy’s assassination, for example, the S&P 500 was up 6.3 percent, according to data from Sohn. It was up 9.7 percent after the same interval following the 1987 stock market crash; 5.3 percent after the bombing of the USS Cole; 4.9 percent after the Sept. 11, 2001, terrorist attacks; and 6.4 percent after the Brexit referendum.
Here’s another look at market responses to major events over the past 80 years, via LPL Financial:
In a note to clients, JPMorgan Funds chief global strategist David Kelly wondered about the relatively muted market response to the Iranian conflict. “Part of the reason for the calm may lie in the changing structure of global oil markets and how the U.S. economy has become less vulnerable to energy price swings,” he writes, later adding, “Part of the reason may be purely psychological. Today’s investors have seen the stock market recover from both 9/11 and the Great Financial Crisis, arguably the greatest geopolitical and economic shocks of our time. This makes it easier for investors to shrug off other [lesser] events.”
Sohn said in the immediate term, market fallout from the Iranian conflict may be more visible sector by sector. And there was some evidence of that on the second day of trading since the drone strike that killed Iranian Maj. Gen. Qasem Soleimani: Energy stocks outperformed the market, while airline stocks fell on fears of higher jet fuel prices.
But with a highly volatile situation in the region evolving by the hour, investors should be wary of assuming the best, argues Mohamed A. El-Erian, chief economic adviser at Allianz SE. “Over the last few years, markets have been conditioned not to overreact to political and geopolitical shocks for two reasons: first, the belief that there would be no significant subsequent intensification of the initial shock; and second, that central banks stood ready and able to repress financial volatility,” he wrote in a Bloomberg Opinion column on Friday. “This is not an unreasonable short-term conclusion. But it is also one that is subject to considerable uncertainty, especially given the risk of a miscalculation of either side.”
— China turns hot for investors. Bloomberg News: "Investors are snapping up Chinese financial assets, encouraged by progress on trade and signs that the world’s second-largest economy may be stabilizing...
"The return of risk appetite in China comes amid growing optimism that Beijing and Washington may sign an initial deal on trade as soon as next week. Momentum is also improving in China’s economy, with recent data showing a recovery in the nation’s manufacturing sector continued in December. 'Risk sentiment is strong onshore,' said Tommy Xie, an economist at Oversea-Chinese Banking Corp. 'There are signs of bottoming out in the economy and a more flexible monetary policy.'"
— S&P 500 outpaced hedge fund returns last year. Bloomberg News's Melissa Karsh: "Hedge funds on average gained 8.6% in 2019, according to the HFRX Global Hedge Fund Index. That compares with a 32% rise for S&P 500 Index, with dividends reinvested."
— Personal income tax audits plummet. WSJ's Richard Rubin: "Individual taxpayers are half as likely to get audited as they were in 2010, after tax enforcement by the Internal Revenue Service fell to the lowest level in at least four decades. The IRS audited 0.45% of personal income-tax returns in fiscal 2019, down from 0.59% in 2018 and marking the eighth straight year of decline, according to a report released on Monday. In 2010, the IRS audited 1.1% of tax returns. The report doesn’t break down audits by income category or provide details about how much revenue they generate.
"The steady erosion of tax enforcement has been driven by years of cuts in the agency’s budget along with a heavier workload. The result, according to tax experts, is that the Treasury is letting billions of dollars annually go uncollected, even as budget deficits rise."
— Tariffs, man: “American businesses and consumers, not China, are bearing the financial brunt of [Trump’s] trade war, new data shows, undermining the president’s assertion that the United States is ‘taxing the hell out of China,’ ” the New York Times’s Jeanna Smialek and Ana Swanson report.
“Examining the fallout of tariffs in data through October, the authors found that Americans had continued paying for the levies — which increased substantially over the course of the year. Their paper, which is an update on previous research, found that ‘approximately 100 percent’ of import taxes fell on American buyers. The findings are the latest evidence that voters and American businesses are paying the cost of Mr. Trump’s penchant for using tariffs to try to rewrite the terms of trade in favor of the United States.”
IMPEACHMENT MINUTE: A speed read on the latest from the congressional impeachment process.
"Bolton’s willingness to testify in Trump’s impeachment trial ramps up pressure on Senate Republicans." By The Post's Rachael Bade, Mike DeBonis, Tom Hamburger and Robert Costa
"John Bolton says he would testify to the Senate. So why not the House?" By The Post's Aaron Blake
"Iran overshadows impeachment as Trump leaves Congress staggering." By Politico's Burgess Everett and John Bresnahan
— Juul plots out path forward: “Juul tapped its brand new chief financial officer to run the embattled e-cigarette maker’s $1 billion restructuring effort, the company confirmed to CNBC ...,” CNBC’s Berkeley Lovelace Jr. reports.
“Guy Cartwright, who became Juul’s CFO in October, will become the company’s chief transformation officer, according to a Juul spokesman. Cartwright joined the company in July as transformation and operations officer, according to his LinkedIn profile.”
— Pier 1 plunges: “Pier 1 Imports Inc. is planning to dismiss about 40 percent of its headquarters staff and shut about 450 stores in an attempt to overhaul the troubled home furnishings business,” Bloomberg News’s Lauren Coleman-Lochner, Matthew Townsend and Katherine Doherty report.
“The retailer has drafted a bankruptcy plan and last month made a presentation to creditors that envisioned a smaller post-bankruptcy company with about $900 million in annual sales, according to people with knowledge of the matter. It’s also canceling some orders and has held talks with current lenders about providing Chapter 11 financing, said the people, who asked not to be identified because the process is private.”
— Boeing considers raising debt: “Boeing Co. is considering plans to raise more debt to bolster finances strained by the grounding of its 737 MAX, according to people familiar with the matter,” the Wall Street Journal’s Doug Cameron reports.
“The aerospace giant isn’t running out of cash. Boeing had about $20 billion in available funds at the end of the September quarter, according to the company’s financial statements. But costs associated with the MAX crisis are rising. Boeing faces compensation claims from airlines and families of the 346 victims of two MAX crashes over the past 15 months. This month, Boeing halted production of the plane, lowering some costs but pushing back the likely date at which payments for finished planes would resume.”
MONEY ON THE HILL
— The tech veteran behind Buttigieg’s war chest: “Three years ago, Swati Mylavarapu had never worked for a political campaign and attended just a single campaign fundraiser. Now, the 36-year-old Silicon Valley investor is a financial force behind one of the best fundraisers in the Democratic presidential primary, serving as national investment chairwoman for Pete Buttigieg, a fellow Harvard graduate and Rhodes Scholar whom she has known for half her life,” the WSJ’s Julie Bykowicz reports.
“Mylavarapu, who started her career at Google and worked at venture-capital firm Kleiner Perkins, brought a Silicon Valley mentality to the campaign, insisting that all donors and those who raise money be called ‘investors’ rather than ‘bundlers.’ (‘We’re asking them to get out there and evangelize why they believe and to raise new dollars by sharing that story,” she said. ‘And what is that if it’s not investment?’)”
— Bloomberg gets help from former Goldman exec.: “Mike Bloomberg’s tech company is bolstering its ranks as it starts to assist the billionaire’s campaign for president,” CNBC’s Brian Schwartz reports.
“Hawkfish has picked up at least 50 employees from a wide range of backgrounds. Those who have signed on to work with the digital start-up were initially discovered by CNBC after a review of the company’s new LinkedIn page, which says it has 51 to 200 employees. Those hired include Elisha Wiesel, who was the co-chief information officer at Goldman Sachs for three years before joining Hawkfish. Wiesel’s LinkedIn page labels him as a consultant, and in a post that was published last week on the site, he says he’s ‘volunteering’ his time to ‘learn from them, and to contribute however I can.’ ”
A couple of charts, via Gregory Daco of Oxford Economics, demonstrate the severity of the Australian bush fires and the temperature rise that has enabled them:
- Pier 1 Imports is among the notable companies reporting its earnings, per Yahoo Finance.