As the war in Iran moves into its second week, Wall Street isn’t thrilled about the prospect of the Strait of Hormuz remaining impassible – and the record high gasoline prices that could follow as a result.
Nor is the “smart money” eager for another ripple effect: sharply higher food prices in another few months as surging fertilizer prices filter through to supermarket prices.
The strait is a major global choke point not just for oil, but also for roughly half of the world’s urea-based fertilizer shipments.
As I wrote last week, I still believe the most likely outcome is that this war sticks to a time frame close to President Donald Trump’s four-to-six-week estimate.
Whether we actually meet our objectives is anyone’s guess.
But as soon as we hit a certain economic pain threshold, Trump can simply decide that the Iranian regime has been degraded to the point that it no longer poses a threat and pull the troops home.
Whatever happens in Iran, I expect Trump to quickly pivot to juicing the economy.
I believe that shift could spark a rare “Midterm Meltup,” and investors who position themselves before the next wave of policy moves hits the market could be in line for historic gains. And I’ll show you why during a LIVE presentation on March 17. Click here to reserve your spot on the event list.
I consider this benign scenario the most likely.
But we’d be naïve not to at least consider a more bearish scenario in which the war drags on and does real economic damage.
That was my rationale for recommending a fertilizer stock in the last issue of Green Zone Fortunes. We’re already up 17% in a week, and the longer the Strait of Hormuz stays shuttered, the more I expect the stock to run.
Last week, every sector except energy was in the red. The State Street Energy Select Sector SPDR ETF (XLE) eked out a 1.1% gain.
The damage was particularly bad in the economically sensitive materials sector.
The State Street Materials Select Sector SPDR ETF (XLB) was down a brutal 6.7%, followed by the State Street Consumer Staples Select Sector SPDR ETF (XLP) and State Street Healthcare Select Sector SPDR ETF (XLV), both down 4.7%.
It doesn’t necessarily “make sense” that the generally more conservative consumer staples and health care sectors would take bigger losses than the S&P 500 Index.
But it’s obvious that Wall Street is in a panic, and it’s a “sell first, ask questions later” kind of market.
Key Insights:
- Wall Street is concerned about the economic impact of the Iran War.
- We could quickly see a surge in food and energy inflation.
- Energy is the only sector staying above water.
Energy Looking Strong
I ran my customary screen of the biggest movers in the energy sector that were also still within 10% of their 52-week highs last week. The idea is to look for solid, market-leading stocks that are getting stronger.
Here’s what I came up with:
We have plenty of “Bullish” rated stalwarts to choose from.
The three strongest performers last week – refiner stocks Marathon Petroleum (MPC), Valero Energy (VLO) and Phillips 66 (PSX) – are rated “Strong Bullish,” meaning they score higher than 80 on my Green Zone Power Ratings system.
With Middle Eastern crude oil effectively bottled up in the Strait of Hormuz, American refiners are in an excellent position to profit for the duration of the war.
Warning Signs in Materials
I ran my customary screen of the sector’s biggest losers for the week that are still trading within 10% of their 52-week lows. The idea is to find beaten-down gems that look poised to recover.
Unfortunately, after the major run in the materials sector, most of the biggest losers were well above their 52-week lows.
So, I relaxed the criteria just to focus on the materials stocks that sold off the hardest last week. This is what popped up on my screen:
Unfortunately, there’s not much in the way of hidden gems this week. Not a single stock on the list rates as “Bullish” on my Green Zone Power Ratings system. In fact, 6 of the 10 rate as “Bearish.”
As a case in point, International Paper (IP) rates a 2 out of 100, making it one of the lowest-rated stocks in the entire market.
There will be opportunities to aggressively buy materials stocks. But for now, my system is advising us to steer clear.
To good profits,
Adam O’Dell
Editor, What My System Says Today
