The World Is Becoming A Much More Uncertain Place

| About: SPDR S&P (SPY)

Summary

The S&P 500 closed at an all time high on July 22nd.

However, we have entered an era of increased political uncertainty.

It is a good time to adopt a more defensive mindset.

On July 22nd, the S&P 500 closed at 2,175, an all-time high. The rally that everyone loves to hate defies predictions of its imminent demise, as central banks around the world continue to wring every last bit of yield out of the bond market, forcing investors to search for returns in the stock market.

I can vividly remember cable-TV stock-market pundits ranting about the risk of hyperinflation during the early stages of the post-financial-crisis rally. Quantitative easing was a menace, they declared. In the years since, interest rates have continued to fall, and the stock market has continued to rise, but I haven't heard much in the way of self-reflection from these pundits.

Today, I think there is a much greater risk in plain sight, but the complacency brought about by a relatively uninterrupted seven-year bull market rally has dulled our ability to see it.

On June 23rd, citizens in the United Kingdom voted on whether to remain in the European Union. Polling throughout the day strongly indicated that "remain" would win, and in fact at one point political betting markets indicated a greater than 90% chance of "remain" winning. However, as the results started trickling in after the vote closed, they revealed a consistently higher percentage of voters who wanted to leave than had been indicated by polling data. When the results were tallied, to the shock of many, "leave" won by a comfortable margin. After the results, there were calls from opposition candidates from other EU member states for their own vote.

On July 15th, social media started reporting unusual military movements in several Turkish cities. Several hours later it was clear that a coup attempt was underway, complete with TV anchors reading prepared statements from the military, and reports of Turkish President Erdogan seeking asylum overseas. In the end, the coup attempt was defeated, and Erdogan ushered in a swift campaign to purge the military, judicial branch, and Turkish universities of anyone sympathetic to the coup attempt.

On July 21st, Donald Trump gave his acceptance speech as the Republican nominee for president. Although pundits initially dismissed his candidacy as a publicity stunt, he steadily rose in the polls and defeated other, more politically experienced contenders for the GOP nomination. Two of his more controversial positions include his view that the United States needs to rethink its role as the world's policeman (and his relatively friendly view of Russian president Vladimir Putin), as well as his promise to demand better terms from America's trading partners. He is clearly pivoting from the policies and philosophies espoused by previous Republican presidential candidates, and a significant portion of the Republican establishment refuses to endorse him.

I think the financial markets are drastically underestimating the significance of these events. Turkey has the largest army of all NATO-member nations outside of the United States, has quasi-membership status within the EU, and can probably boast of having the most robust democracy in the Islamic nation in the world. Turkey serves as Europe's bulwark against an extremely unstable region of the world, and its stability is vital.

Both the Brexit vote and the ascension of Donald Trump signify the rise of populism in the Western World, and a vote against the free trade policies and international integration that have been core principles in the West for the past few decades. It is noteworthy that the same central bank policies that have dampened interest rates and driven equity prices higher have also probably increased income inequality, and fueled populist anger.

It is well known that when respondents answer poll questions, they sometimes avoid answering honestly when they know their true response is considered socially unacceptable. Much like the Brexit polls underestimated the final vote to leave the EU, I think Trump's polls underestimate his true support. I have no thoughts I wish to share on whether a Trump presidency would be good or bad long term, however do think the markets will be rattled if Trump wins the presidential election in November.

Because of the increasing political uncertainty around the world, coupled with a richly valued market, I think it's a good time to adopt a more defensive mindset. I like owning gold (NYSEARCA:GLD), as well as considering put purchases on the S&P 500 (NYSEARCA:SPY). I will explore these and other defensive measures in greater detail in a future post.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.