We mentioned in last week’s Market Summary that we saw heightened terrorism risks in 2020, and right on cue, the next day the U.S. assassinated the leader of Iran’s Quds Force. Iran responded with missile strikes against U.S. facilities in Iraq. The risk of regional destabilization was, briefly, on everyone’s minds. Despite overnight turmoil, however, the S&P 500 closed up the next day.
After the strength of the U.S. market over the past few months, we would be surprised not to see a correction, and terrorist activity or Middle East instability would be an obvious catalyst. Indeed, over the coming year, such events could catalyze more than one correction.
Still, absent a regional conflagration, which we view as unlikely, such corrections would be opportunities in the context of ongoing fundamental strengthening of the U.S. economy and several areas of the global economy, and of near-term easing of trade tensions between the U.S. and China. Of course our hope is for peace throughout the world. Still, we believe that bouts of volatility will be buying opportunities.
The U.S. earnings season will be getting underway in the coming weeks, and we see no reasons to expect a poor showing by U.S. corporates, given the incrementally strengthening economic backdrop.
The most fundamental reality for U.S. investors remains the policy of the Federal Reserve, which is ensuring that the U.S. financial system remains in good health and that there is abundant liquidity available. While this is the case, we believe that transient corrections driven by geopolitics or other external issues are likely to be buying opportunities for our favored U.S. themes, such as cybersecurity and defense electronics, big data and the cloud, and medical technology.
As we noted last week, while there are long-term opportunities elsewhere, especially in India and the U.K., our primary allocation remains in the U.S.
Gold may provide some tactical opportunities during the year when volatility unfolds. For more strategic gold allocations, we see a year in which low inflation and low but gradually rising economic and geopolitical risks result in moderate appreciation for gold.
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