U.S. stocks have been facing serious headwinds in the last couple of weeks and investors may not have many reasons to be bullish about the prospects of stocks on Wall Street. To start with, the spate of geopolitical tensions has increased the level of uncertainty in the market. Wall Street abhors uncertainty and it is not surprising that investors are exiting stocks for safe haven assets such as gold.
One of the main drivers of uncertainty on Wall Street is the war of words going on between the United States and North Korea on allegations that Pyongyang might have miniaturized some nuclear weapons. The fact that Kim Jong-Un has threatened to fire nuclear weapons to the U.S. territory of Guam has stoked the flames and Donald Trump has responded that military action against North Korea is locked and loaded.
Uncertainty locks Wall Street in a fear frenzy
Political commentators have opined that the war mongering was blown out of proportion and that neither Washington nor Pyongyang has the political willpower to start a war now. Tell that to stock market investors! The fact that the U.S. and South Korea has begun ‘defensive’ military drills has done little to calm frayed nerves. Omar Wade, an analyst at ECN Capital opines that “there are few signals supporting the continuity of the bullish trend on Wall Street as geopolitical tensions remain high and expectations for market gains continue to drop”.
The chart above shows how major U.S. market indexes have fared in the last four weeks as the drums of war start to sound in the global geopolitical landscape. The Russell 2000 has lost 5.50% in the last one month, the NASDAQ Composite has lost 2.73%, the S&P 500 has lost 1.79%, and the Dow has only managed to stay flat with 0.57% gains. In contrast, the CBOE S&P 500 Volatility Index (VIX) has climbed up 33.01% in the same period as shown below.
Morgan Stanley says don’t give up on U.S. Stocks
Analysts at Morgan Stanley believe that it is somewhat too early to give up on Wall Street even in the face of increased uncertainties. In a recent note to investors, the firm’s Chief U.S equity strategist Michael Wilson notes that investors should be more “focused on what actually drives stocks” instead of being fixated on the things that are wrong with the market.
Wilson notes that Wall Street is very much in a bull market even though the prevailing market sentiments indicate that it is time to run for the hills. In his words, “our bull market check list remains intact: Economic and earnings growth, interest rates, inflation, Fed/central banks, credit markets, valuation, and technicals.” He advised investors to use the current weakness to buy the dip because the decline in stocks “will once again prove to be short and shallow.”
In other news, analysts at Wells Fargo have also echoed similar bullish sentiments on the prospects of the market. The analysts note that “even though we foresee a short-term equity pullback, we believe that earnings growth and the market cycle will continue into 2018.” The Wells Fargo analysts also raised their market expectations for the S&P 500 and they expect the index to close somewhere between 2.300 and 2,400 by the end of the year.