What does the Syria situation mean to the financial markets and client portfolios? Will actions (or inactions) by the U.S. be a catalyst to send the stock market plummeting? Everyone around the world is watching Syria as well as Washington as it determines what the response will be to the tragic use of chemical weapons. A protracted military engagement would be costly and may impede our economic recovery. Should investors be fearful and watchful of how the U.S. responds? I believe investors need to be concerned and that Syria poses a real threat to investment portfolios. Here are some hard cold facts that you should know as this conflict develops.
Hard cold fact #1: The American people have no appetite for another ground war in the Middle East. After the prolonged conflicts in Iraq and Afghanistan, the American citizen is tired of war that costs lives of loved ones, polls are showing this very clearly – Americans are sick of bearing the cost of lives and financial burden of wars that end without any clear resolution.
Hard cold fact #2: The behavior of the U.S. stock market and emerging markets currencies have already sounded an ominous note. In just a matter of one month, the threat of slowing worldwide liquidity precipitated by a nearly 20% emerging markets equity drop happened. This is important because now the emerging markets are considered the new engine of the world economy. Something of this movement in emerging market currencies may have been largely disregarded in decades past, but with emerging nations now comprising about half of the world’s economy, the cumulative impact can prove a determining economic force in the years ahead.
Hard cold fact #3: U.S. financial stocks are always an indicator to buy, sell or hold and now they are telling investors to sell since financials led the previous rally, a reversal of financial stocks is big news, but also a big warning. In ratio terms, the S&P 500 financial sector peaked about six weeks ago on July 22. Since then they have underperformed by negative 3.3%. Odds are this is the beginning of an extended downward trend.
In investment portfolios, the most vital element is that investors get to keep what is left in portfolios at the bottom of the market. What if the bottom of the Dow is 7000? Everyone dreams about market highs, but it’s not the top of the market, but the bottom where investors make a lot of mistakes. So the key to success in portfolio management is not to give back any appreciated gains during significant market declines, it is to be defensive so an investor doesn’t have to give back gains.
So the question is how can investors benefit from the Syria situation in their portfolios? I say by raising cash by selling exposure to U.S. equities.