Investors Juggle Interest Rates, Oil Prices and Paris
Despite the tragic events that took place in Paris on Friday, the S&P 500 ETF (SPY) - Get Report is actually moving higher on Monday, up 0.95%.
Obviously, investors' first assumption to geopolitical news like this is that stocks will go down, said Jim Lebenthal, CFO and CIO of Lebenthal & Company, on CNBC's "Fast Money Halftime" show.
So far though, investor confidence isn't being rattled too much. However, Lebenthal did point out that even before the Paris attacks, there have been concerns about global growth. Although this event is tragic enough on its own, it could also have an economic impact as well, considering that the European economy is just starting to recover.
Josh Brown, CEO and co-founder of Ritholtz Wealth Management, added that the stock market generally tends to continue in the same trend shortly after the geopolitical event takes place -- although sometimes there is a short-term, knee-jerk reaction.
But in this case, the market hasn't really had a trend. It's been bobbling near unchanged for most of the year, Brown said. Stocks haven't been able to breakout to new highs, and short of late-August and September, they haven't really broken down much either.
The problem is, U.S. equities already trade at 17 times earnings, and with 0% earnings growth in 2015 and negative 4% revenue growth, there's little reason to justify a higher valuation, Brown explained, especially with an uncertain growth outlook and questions surrounding interest rates.
Russ Koesterich, global chief investment strategist at BlackRock, said the near-term impact from the Paris attacks will likely be limited. However, longer term could be a different story. For one, the European Union may change its stance on how its handling the refugee situation and its economy could be impacted. It may also play a factor in whether the United Kingdom decides to stay within the E.U., he said.
So does that mean investors should just avoid European equities and head straight for the U.S.? |
Not so fast, Koesterich says. Investors should realize -- like Brown noted -- that U.S. stocks aren't particularly cheap amid 0% earnings growth. And if the Fed hikes interest rates, the dollar is likely to get stronger, becoming even more of an economic weight in 2016.
If investors believe a rate hike is coming, they should be long regional and big banks that will see a positive impact to net interest margins, he added. As it stands right now, the Fed is already seeing a form of fiscal tightening, since the U.S. dollar continues to go higher, Koesterich explained. Although he still thinks the Fed will hike in December, a continually rising dollar could impact the timing of future rate hikes, he said.
Oil is also affected by a rising dollar. John Kilduff, founding partner at Again Capital, says both the fundamental and technical outlook make it seem likely that crude oil is still headed lower.
There continues to be concern over China's economy, and now Europe's economy may be called into question too, at a time when oil is facing a "mega-glut," Kilduff said.
For a long time, the explanation for falling oil prices has been that energy companies are simply producing too much oil, Lebenthal said. Now though, the concern is shifting to a lack of demand, which would be a negative sign for the global economy.
Turning to Nike (NKE) - Get Report , Jon Krinsky, chief market technician at MKM Partners, made a call on Oct. 20 that the stock would pull back. And pull back it has. Going into Monday's trading session, the stock is down 8.5% since he made that call.
So what now?
Krinsky argued that the stock could see almost 10% more downside toward its 200-day moving average near $108.50. Stocks tend to overshoot in situations like this, he explained.
This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.