As we noted at the end of last month, there is quite a lot to be said for the constructive influence on equities of the typical early quarter upbeat earnings announcements. Yet of late those have been more questionable, especially in some key areas like fast food and high tech. All of which seems to point to a consumer that is less upbeat about either their personal finances or possibly the global picture. The latter is understandable based on factors reviewed in our TrendView Video analysis excerpts.
A consistent geopolitical theme emerges which also seems to have become relevant for global economics, and ultimately the equity markets: The lack of US leadership has left the world a less certain place. Our stronger focus on the confluence of geopolitical problems from a couple of months ago allowed that those might take a while to filter through to the economic aspects.
Well, it appears they have. And the question becomes what to look for next?
To briefly revisit the geopolitical aspects noted previous, some assert the current situation is the worst it has ever been. Yet we have seen this before. The phenomenally geopolitically inept U.S. administration that fomented similar types of global disarray was the Carter regime. Please revisit our previous recent posts for our anticipation of how the Ukrainian situation and other disturbances would potentially affect the equity market mentality (which has now finally occurred), and remain a potential future stressor.
As we have anticipated might be the case over the past month-and-a-half or so, equity market participants had possibly still not taken the potential risks inherent in multiple unstable geopolitical developments quite as seriously as they should. That came home to roost in the form of the recent US announcement of greater sanctions on Russia. These were more extensive than expected from what had been a lax approach, and carried the risk of a backlash of economic pressure on a still weak European economy that now seems to be the case.
Yet those did not really hit the markets until the response from Russia was that they could respond in kind regardless of how much that might hurt their economy. And that is now abetted by the renewed geopolitical disarray like the Isis situation in Syria and Iraq, and the renewed concerns over the Russian ‘aid’ convoy attempting to enter the Ukraine. Of course, that drag on the equities is also glaringly apparent in the drop from higher trading levels on today’s latest Russia-Ukraine flare up.
For the first time since the late 1970’s (which we suppose the majority of current market participants did not live through) there is a sense of politico-economic (to borrow a physics concept) ‘entropy’. That is the lack of enough energy to structure a given system, which leads to it becoming more chaotic.
It also carries the social connotation of ‘decline’ or ‘degeneration’. As we have already discussed this at length in previous video analysis posts, suffice to say for now that the Obama administration not applying sufficient focus and credible timely action in foreign policy is leaving the world a more chaotic place. And that may be affecting overall confidence, and even the future path of corporate earnings. The old saying is, “The market (which is to say the equities) dislikes nothing quite so much as uncertainty.”