Few, if any, safe havens could be found at the start of the week, but Craig Basinger cautions against panic
Diversification didn’t work very well last week, and it hasn’t worked terribly well to start this week either. Of course, no advocate for broad diversification believes that the approach will win out in every short-term window, but it’s notable that amid the emergence of a new conflict in the middle east, a massive energy shock, and renewed selling activity, many traditional safe havens haven’t done what investors typically expected of them. Gold, for example, came back down from its near-historic highs last week, when every textbook would say that gold should be gaining in this environment. To hear Craig Basinger explain it, though, some ‘weirdness’ has been baked into this market.
Basinger is the Chief Market Strategist at Purpose Investments. He recently penned an outlook of his own explaining why traditional defense didn’t work as it ‘should’ have done over the past week. He spoke with WP about how markets have digested the bombing war between Israel and the United States and Iran escalated into a regional conflict and the world’s most important energy shipping lane was closed. He shared where he and his portfolio management team are looking for opportunities and how advisors can speak to clients about this environment. He emphasized how an odd market situation leading up to this moment has come to shape reactions.
“This market's been fragile for a while,” Basinger says. “In January and February this market was getting weird. Like weird things were happening… Like even the move in gold, like up a thousand dollars in a week, down a thousand in a day, like the halving of Bitcoin… This rollover in tech and the growth factor and this resurgence of like defensives and economic cyclicals. Let's just admit it, those two shouldn't be flying in the same direction together. And they were.”
Unpacking market reactions
Despite that position, markets showed relative resilience last week in the face of this conflict. Basinger attributes some of that to broadly strong economic data out of North America, and the broad expectation that there could be a strike against Iran. Bombing missions, he says, have tended to be short-lived and markets have digested them before. Over the course of the week and the weekend, however, it became more likely that this conflict might drag on, which caused more volatility in markets. The closure of the Strait of Hormuz, as well as the shutdown of major oil production facilities in the Arabian Gulf has also caused energy prices to spike, introducing a stagflation narrative that some investors have latched on to.
While Basinger acknowledges these challenges for investors, he notes that North American markets aren’t quite yet meeting the technical definition of a correction. He looks at long-term oil futures, too, which haven’t moved nearly as dramatically. He notes that global oil remains in a degree of oversupply and that an air war like this can end quite quickly when bombing ceases.
Global equity markets seem to have seen more volatility from the conflict than North American stocks. Some of that, Basinger explains, comes down to proximity to the conflict zone in question. More of that dynamic, however, is tied to composition and trade proxy. The United States’ tech-heavy market has tended to care less about energy prices, especially as North America can largely remain energy independent. Europe and Japan are more sensitive to oil prices, while Europe has tended to be a proxy for global trade. Japan has served as a proxy for Asian trade as well. Those markets also lack the resilient American consumer backing them up, which makes them more sensitive to economic cycles and growth shocks.
Where to allocate now?
In the meantime, Basinger and his team have made some adjustments. They trimmed some of their energy exposures, which were overweight in their North American dividend strategies, and while that might seem counterintuitive Basinger notes the example of Suncor which has stayed largely flat since its initial jump at the outbreak of war. Global equities, which had been hit a bit harder than North American stocks, have been an area where Basinger and his team are looking for oversold names that they might want to enter into at attractive prices.
The diversification question remains challenging, however, with bonds down alongside broad equities. Basinger does note that bonds haven’t fallen as hard as equities, so may provide some benefit. Nevertheless, those two asset classes have shown increasing correlation since inflation returned to high and then normal levels in 2022 and beyond. Gold, he says, would have been that defensive position if it hadn’t undergone a change from defensive asset to momentum trade over the past few years. The only strategy that has worked, Basinger says, has been Bitcoin and US software stocks, which nobody would call a diversification play. He notes, though, that those two assets had been heavily challenged leading up to this conflict.
Challenges can emerge when investors cleave too much towards narrative in their decision making. Stimulus from markets is pretty mixed right now and Basinger notes that the impulse towards simply explaining why things are so we can sleep at night might not lead to the best outcomes. He argues, instead, for a dose of perspective from advisors about where markets are at now and what investors can expect going forward.
“Markets are a bit more fragile, but I would say everybody's had like three really good years and we're clearly overdue for a period of weakness. And that's probably what this is,” Basinger says. “Making abrupt changes in this environment is clearly challenging, but we've got a global economy that was decently improving from a soft patch last summer in the second half of last year. That improvement accelerated at the beginning of this year. We've actually got a good earnings backdrop, a good economic backdrop, and that can change and this can disrupt that, I'm not saying it can't, but, chances are this economy is resilient enough to manage this headline geopolitical risk spike.”
