Geopolitical concerns always spook the markets short term, but longer term investors most likely shouldn’t panic by making bold changes to their overall investment strategy. The situation overseas can change nearly overnight in some cases, and history shows that lost ground due to panic selling is often made up within several weeks or months.
After a nice rally off the June lows (around 1,225 on the S&P 500) it appears we will retest those lows, which would not be a bad thing. Rather than try and predict what will happen in the Middle East, I will instead be focusing on Q2 earnings reports. The three or four dozen companies I follow begin reporting on Monday. Recent stock price action suggests the numbers will be weak, but I am not convinced quite yet that will be the case, despite the negative reports thus far from the likes of Advanced Micro Devices, 3M, EMC, and Alcoa.
If we look back three months ago, I was pleasantly surprised by how well the companies I owned did. Stocks were mostly flat to slightly down after reporting profits in-line or above expectations. Several blowout quarters were rewarded nicely by the Street, and most importantly, there were only a handful of poor reports.
I don’t see a lot that has changed over the last few months, so my gut says that the reports won’t be as bad as stock prices are currently indicating. Of course, that doesn’t mean they will all pop to the upside if numbers are solid, but it would give me comfort in an otherwise tough market environment. In addition, there have to be at least some cases where stocks will react very well to decent reports, just because the shares were pricing in bad results.
If I am right and this earnings season turns in a fairly decent performance, hopefully the market will stabilize. Right now I have no reason to believe we are heading below the 1,200-1,225 range on the S&P 500, which is 1%-3% lower than current levels. The low end of that range represents an official 10% correction from the highs, and the high end signifies a successful retest and holding of the aforementioned June lows.