4/13/17 – Stocks Fall on Heightened Geopolitical Risks

Stocks Fall Amid Geopolitical Concerns

  • Geopolitical risk catches up with markets this week
  • What is the 10-year Treasury telling us about growth?
  • Banks kick off earnings season in a strong fashion

Stocks suffer their second worst week of the year and have now been down in four of the last six weeks. Most of the week’s losses occurred today, with losses accelerating after the news of the MOAB bomb drop in Afghanistan. For the week, the Dow declined 1.0% while the S&P 500 declined 1.1%. Stocks are closed tomorrow for Good Friday.

Geopolitical tensions are increasing as the US is sending a naval strike group to the Korean peninsula while China is amassing troops on the North Korean border. Additionally, the US dropped the largest non-nuclear bomb in the Air Force’s arsenal in eastern Afghanistan today. Many are viewing the Afghanistan bomb as a message to North Korea and potentially Iran. It’s unclear where either of these situations, plus Syria, will go, but clearly geopolitical risk is on the rise.

The 10-year Treasury bond is an important bond in the financial markets and its recent moves raise some interesting questions. A month ago, the yield on the 10-yr was around 2.6%. Today the yield was down to 2.24%. This is a pretty large move in one month, especially since the Fed is increasing the Fed Funds rate. So, why is the yield on the 10-year decreasing? Many theories exist, but it makes me think the bond market isn’t buying into the economic growth story. Economic growth averaged 1.7% annually during the Obama administration and the Trump administration has stated its goal of returning growth to 3%+, inline with the post-World War II average. Investors went along with this forecast on the potential to repeal parts of Dodd-Frank and reduce corporate taxes. Those plans seem to either be waning or taking longer than expected and raise questions about future growth. This could easily be a short-term blip in the markets, but I think it’s an important trend to follow. The 10-yr Treasury shouldn’t be trading at 2.24% in a world of 3% economic growth.

Corporate earnings season started today with Wells Fargo, JP Morgan and Citibank releasing first quarter earnings. All three reported strong earnings and will hopefully serve as a precursor to a strong earnings season overall. The stock market has had a good run the last few months and part of that was based on positive earnings expectations. The next few weeks will tell us whether the optimism was warranted.

Oil moved higher, increasing 1.3% to close at 52.91/barrel. The yield on the 10-yr Treasury moved sharply lower to 2.24% from 2.38% a week ago. The average rate on a 30-yr fixed rate mortgage continued lower to 4.08% from 4.10% last week.

I hope you all have a Happy Easter weekend.

Close Weekly YTD
Dow Jones 20,453.25 (1.0%) 3.5%
S&P 500 2,328.95 (1.2%) 4.0%
Oil 52.91 1.3% (1.8%)
10-yr Treasury (∆ in bps) 2.25 (15) (21)

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