US stock indices ended Tuesday lower across the board. The S&P 500 and NASDAQ posted losses of 0.8% and 0.9%, respectively, while the Dow closed 0.7% lower.
The sell-off came in response to heightened geopolitical tensions after President Trump called for Iran’s unconditional surrender, a statement that raised the stakes in an already fragile situation across the Middle East.
Investors are focused on the hostilities between Israel and Iran. But most importantly, they are factoring in the chances of US involvement. This makes for a very fluid, headline-driven trading environment.
Yet despite this, there has been no sense of panic from investors. Of course, as far as the US is concerned, events are taking place a long way from home, and they may consider doing so. But there’s also a feeling that investors are betting on a short and sharp engagement, with Iran coming back to negotiate in good faith, resulting in a more stable position across the Middle East than the one that currently exists.
If so, that’s quite an optimistic outlook. And the question must be: does that factor in US military engagement or not? Investors are betting that the US will not engage. All this comes on top of concerns over trade, tariffs and debt, of course, and it’s worth having a broader look at some other, less popular, US stock indices.
For instance, the mid-cap, domestically-focused Russell 2000 led yesterday’s decline, ending down 1.0%. The Russell is an important, but often overlooked, measure of US business health.
Unlike the S&P and NASDAQ, which, this time last week, came within imminent striking distance of their respective all-time highs from February, the Russell 2000 has failed to keep up. In fact, it is currently around 15% below its record high from November last year.
Source: TN Trader
It's a similar story for the Dow Jones Transportation Average. This, too, peaked back in November. But it is currently around 16% below this level, again telling quite a different story from the tech-heavy S&P and NASDAQ.
What is that story? Well, there are a few interpretations, one of which is that growth continues to outperform value. In that case, it’s quite feasible that the tech-led rally continues, but undervalued corporations play catch-up with big tech, driving up the Russell and Transports.
An alternative is that these overlooked indices are signalling that all is not well with corporate America. And, maybe, the high valuations of stocks within the two big majors fall back towards more reasonable levels. In fairness, there was no indication of any problems from the first quarter earnings season. But much could change before year-end.
In the meantime, the Fed’s FOMC will announce its latest rate decision later today. No change is expected. But the FOMC will also release its quarterly Summary of Economic Projections, including its ‘Dot Plot’ which shows individual members’ forecasts for the Fed Funds rate for this year and beyond.
Fed Chair Jerome Powell’s press conference could also prove enlightening. Will he become less hawkish now, given that inflation continues to soften, while unemployment shows signs of rising? It will also be interesting to hear the Fed’s views on tariffs and geopolitics, inasmuch as they affect the thinking on monetary policy.
