Why To Focus On Foreign Headlines

| About: Vanguard Total (VT)

Summary

Potential movement of U.S. embassy to Jerusalem risks the possibility of worldwide uproar.

John McCain referenced Russia's alleged cyber-attack as an "act of war".

China has threatened "big sticks" if Trump follows through with his threats on trade.

Since Donald Trump's victory, the market has focused almost solely on his economic policies and proposals. From the benefit of decreased regulation to the hopes of an America-first economic focus, the reason for optimism is certainly there. Nevertheless, while the overall economy is obviously the main driving force of any stock market, foreign affairs can make some headlines and move the market at times as well. In that regard, the market faces much in the way of uncertainty and downright concern.

  • Iran: From reports of Iran already violating the controversial nuclear deal to reports of scientists writing to Trump recently encouraging him to maintain the deal, don't be surprised if Tehran receives much attention this year. At the same time, you could argue Trump is certain to be left with a lose-lose scenario. By not abiding to the deal, he alienates the EU and some in Congress who will argue this would only remove restrictions on Iran's nuclear arsenal. At the same time, by adhering to it, he only provides more power and money to a country that continues to view the U.S. and our allies, such as Israel, in a negative light.
  • Israel: The tense relationship between President Obama and Israeli Prime Minister Netanyahu has not only left Israel to face more criticism from the global community, it also has driven some on the right to be even more sympathetic and supportive of our closest ally. Consequently, a plan supported by both the GOP and Trump to move the U.S. embassy to Jerusalem is certain to be faced with widespread disdain from various groups and could cause further violence in the region.
  • Russia: John McCain recently called Russia's alleged cyber-attacks an "act of war". Coupled with Obama's sanctions and the subsequent expulsion of Russian diplomats, Trump faces another unique challenge regarding how he handles the Kremlin. Already accused of being too cozy with the Russians, the pressure on his administration to at least refrain from being friendly with Putin will certainly be there.
  • China: Trump's tough talk on trade policies has also elicited tough talk from the communist country which threatened "big sticks" if he follows through on his campaign promises. Following the capture, and subsequent release, of an American drone, the relationship with China is as unsettling as that with Russia.

Preparing Your Portfolio

As with most things, a Trump administration offers both positives and negatives for different industries. Coupled with the world concerns aforementioned, here are some sectors which could generate much attention very quickly.

What to Avoid

  • Chip Companies: By the end of 2014, seven companies had revenue exposure to China of greater than 50 percent with 12 of the top 15 consisting of computer chip companies. While most, such as Broadcom (NASDAQ:AVGO) and Skyworks Solutions (NASDAQ:SWKS) have largely missed out on the recent market spike, they also haven't sold off as investors take a wait-and-see approach. Of course, with most of these stocks posting solid returns over the past few years, any hint of a trade war could leave these names to face intense selling making them too risky to hold.
  • Homebuilders: With home sales already declining, any noteworthy inflation caused by potential trade wars could lead to a further exodus of potential buyers. As a result, for stocks like KB Home (NYSE:KBH), which projects earnings growth this year of 51 percent, the room for disappointment is certainly there.

What to Buy

  • Defense Stocks: With Iran growing more provocative, strained ties with China and Russia and a growing level of worldwide anti-Israeli sentiment, the biggest winners as Trump's term begins look to be defense stocks. While shares of such names like Northrop Grumman (NYSE:NOC) and Lockheed Martin (NYSE:LMT) have experienced significant gains in recent years, a combination of unstable world developments and their low betas, both come in at 0.7, still make them relatively safe investments.
  • Commodities: If that trade war does happen and costs rise significantly, this could prove to be a positive scenario for commodities such as gold and silver. Alongside that potential inflation, the questions surrounding not only Trump's domestic, but also international policies, could make the flight to safety even more pronounced.

While political headlines, especially those with a focus on international affairs, can sometimes seem unimportant or be quickly discarded by investors, it's important to consider and understand the times in which we live. For traders, failing to keep up with worldwide events is as dangerous as buying a stock without researching its recent news and financial reports.

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.

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