Sosnick: Markets don’t really follow geopolitics all that well

Key Concepts

• Geopolitical impact on markets
• Market reaction to potential US involvement in the Israel-Iran conflict
• Oil price sensitivity to geopolitics
• Momentum trade in equity markets
• Impact of geopolitics on corporate bottom lines
• Bond market reaction to geopolitical events and Fed policy
• Economic data and market sentiment
• Federal Reserve (Fed) policy and potential rate cuts
• Tariffs and their impact on the economy
• Consumer sentiment

Market Reaction to Geopolitical Events

• Initial Positive Reaction: The market showed a positive reaction because the situation between Israel and Iran didn't worsen significantly over the weekend.
• US Involvement as a Trigger: The market would need to reassess if the US were to get involved in the conflict.
• Limited Impact on Multinationals: The market views Israel as a relatively small country, and multinationals don't have enough business there to significantly affect their bottom lines.
• Iran's Economic Isolation: Iran has been largely out of the world economy for decades, further limiting the direct impact on global markets.
• Managing the Conflict: The market believes that as long as the US remains on the sidelines and oil prices remain stable, the conflict is manageable and won't significantly affect stocks.

Primary Driver of Markets: Momentum

• Return to Momentum Trade: The primary driver of the market is momentum, with a return to the momentum trade observed.
• Bottom-Line Focus: Equity markets assess how geopolitical events will affect the bottom lines of companies.
• Limited Short-Term Impact: In the short term, the conflict is not expected to significantly affect the revenues, cash flows, and earnings of major companies, particularly mega-cap tech.
• Oil and Bonds as Indicators: Oil and bonds are key indicators to watch. Bonds reacted strangely on Friday, with rates going up and limited flight to safety, indicating concerns about the Fed's ability to cut rates.

Economic Data and Fed Policy

• Worrisome Economy: The economy is seen as more worrisome than the markets are indicating.
• Consumer Sentiment Rebound: Consumer sentiment numbers have rebounded.
• Fed on the Sidelines: There is nothing currently that will push the Fed off the sidelines.
• Tariff Concerns: The Fed is concerned about tariffs, and the resolution remains uncertain.
• Impact of Higher Oil Prices: The prospect of higher oil prices further limits the Fed's ability to act.
• Risk of Economic Slowdown: The big concern is that the economy slows down, and the Fed is stuck on the sidelines, unable to intervene due to inflationary pressures.

Conclusion

The market's current positive reaction to the Israel-Iran conflict is based on the perception that the situation is manageable and won't significantly impact corporate bottom lines, especially if the US remains on the sidelines. The primary driver of the market is momentum, with investors focusing on the short-term impact on revenues, cash flows, and earnings. However, there are underlying concerns about the economy, particularly the potential for a slowdown and the Fed's limited ability to respond due to tariff concerns and the prospect of higher oil prices.