The U.S. stock market is bracing for a volatile start to the week as tensions escalate between the United States and Iran. Over the weekend, President Donald Trump authorized strikes on three Iranian nuclear sites, raising fears of a conflict that could disrupt global oil supplies. Crude oil prices rose in early trading, dragging U.S. stock futures lower.
While Iran does not pose systemic economic risks like China, the immediate reaction has been market volatility. Secretary of State Marco Rubio called on China to prevent an Iranian blockade of the Strait of Hormuz, a crucial trade route. Unless Iran manages to close the strait, the impact on the economy and stocks should be minimal.
The S&P futures markets typically dictate the opening bell in New York. Hedge funds and other big institutions leverage these futures markets, leading to an initial drop in stock prices. Bond prices often rise in these scenarios, resulting in lower yields.
Traditional safety stocks like Procter & Gamble or Johnson & Johnson may seem like a wise choice, but they currently offer little protection. Instead, focusing on stocks that have solid fundamentals but have been temporarily marked down could prove more advantageous. Knowing the constraints imposed by the overwhelming negative power of the S&P futures, the strategy involves avoiding panic selling.
Heroic buying at the opening is ill-advised.
Volatility in the stock market
Day traders looking to catch the bottom may quickly find themselves posting losses as stocks continue to sink.
Long-term investors, though, can find this an opportune moment to reallocate funds or buy discounted stocks. Contrary to intuition, buying the higher multiple stocks that institutions are offloading can present a good opportunity. These sell-offs provide a chance to lower the average cost basis for these stocks.
Industrials, which have shown resilience, might be a safe bet, given no recession appears imminent. Dollar store stocks, such as TJX Companies, could also stabilize and present buying opportunities. Low multiple tech stocks like Cisco Systems and IBM are attractive, as are data-center equities.
Market leaders like Amazon, Netflix, and Tesla also remain solid options amidst the turmoil. Conversely, food stocks, especially those like General Mills, which are reporting this week, don’t offer much promise. Transport stocks face challenges due to upcoming reports from companies like FedEx.
Oil stocks might not be the best buy now, even though the U.S. can ramp up production to meet demand. The Russians are increasing their output, and while Iran might be selling as much as they can to cover costs, OPEC dynamics with Saudi Arabia likely favor stabilizing prices rather than escalating them. The key to navigating Monday’s Iran-driven market is resilience and strategic purchasing.
Understanding the market’s knee-jerk reactions can help investors make informed decisions amidst uncertainty.
