I Still Don't Think Conflict With Iran Will End The Current Good Market In Stocks

Includes: AMWD, APA, JPM, MRO
by: Martin Lowy

A week ago or so I published an article called "Don't Be In a Hurry To Sell stocks Just Yet." In it, I canvassed a number of the factors that might make stock markets go down, including the possibility of military hostilities between Iran and the U.S. or Israel. Some who commented took me to task for making too many assumptions, some of which might well not be correct.

First, let me respond by saying that as investors, we necessarily make many assumptions every day, regardless of whether we state or recognize them. We do not have a choice but to make assumptions. We are better off knowing what our assumptions are and evaluating the relative danger of their being wrong compared with the benefit of their being right.

Second, as commentators here at SeekingAlpha, I think our job should be, after providing data, to discuss our assumptions explicitly. That is what we can do to help readers to evaluate their own assumptions.

Third - and the main point of this article - here is what I said about Iran:

No question: Iran is a problem. But I think the U.S. is not stupid enough to try to punish Iran militarily and Iran is not stupid enough to invite the U.S. bombers and drones in by attacking Israel. The Imams may be crazy, but not that crazy. And Israel will not do anything that it does not believe can succeed. Israel probably does not have the power to succeed with a targeted attack, and the U.S. at this time is not likely to authorize such an attack.

Continuing boycotts and sanctions against Iran likely will continue to roil the oil markets, keeping prices higher than they would be otherwise. But a blowup is unlikely.

As the comments pointed out, I made several assumptions in those two short paragraphs - assumptions about the U.S., about Iran, and about Israel. Are they likely to be correct?

I believe that events/policy statements of the last week confirm my assumptions, at least as to the medium term, which is what I was addressing, since the context was whether this is the time to change one's asset allocation by selling stocks. Iran is signaling that it wants to talk; President Obama is taking a firm stand but is saying that the military option is a last resort; and Prime Minister Benjamin Netanyahu seems to be accepting the American point of view so long as America takes a firm stand.

I do not know what will happen regarding Iran a year from now. But for the next several months, I am more confident than I was a week ago that sanctions will be applied, that Iran will regard the sanctions as open hostility but not war, that Israel will not take unilateral action, and that Americans and Iranians, along with their allies, will seek a way to talk about the problem. Whether such a way to talk about the problem will be found, I do not know. But it likely will take months of diplomacy to find out.

Uncertainty over Iran probably will, nevertheless, tend to make oil prices higher than they might have been. My guess is that this effect will diminish over the next month or two. I also am not sure that higher oil prices necessarily will have a large impact on the U.S. economy. People tend to adjust to higher oil prices so long as the surge is not a shock. Here is some confirmation of that view posted today by Calculated Risk:

From Jim Hamilton: Oil prices and the U.S. economy:

Although the prices of oil and gasoline have risen significantly from their values in October, they are still not back to the levels we saw last spring or in the summer of 2008. There is a good deal of statistical evidence ... that an oil price increase that does no more than reverse an earlier decline has a much more limited effect on the economy than if the price of oil surges to a new all-time high.

One reason for this is that much of the impact on the economy of an increase in oil prices comes from abrupt changes in the patterns of consumer spending. ... ut if consumers have recently seen even higher prices than they're paying at the moment, their spending plans and firms' production plans are likely already to have incorporated that reality.

... based on what has happened to oil prices so far, I find myself in the unusual position of being less concerned about the impact of oil prices on the U.S. economy than many other analysts.

For these reasons, I remain of the view that neither Iran nor oil prices likely will spell the end of the recent good market for stocks in the near future. I remain long and have added to holdings in JPMorgan (NYSE:JPM) and, more as a hedge, to oil companies that have U.S. oil reserves such as Marathon (NYSE:MRO) and Apache (NYSE:APA). I also am looking at increasing my housing exposure a bit, such as, perhaps, through American Woodmark (NASDAQ:AMWD), a cabinet manufacturer with a strong balance sheet that has survived the lean times. I own a miniscule amount of AMWD just to make sure that I read the quarterly reports, since I liked the company during the late, lamented housing boom of the mid-2000s.

Disclosure: I am long JPM, MRO, APA, AMWD.