Lee Geiger

• On Wednesday, October 14, the Dow Jones Industrial Average (DJIA) dropped 95.46 points (3.8%, a then record) to 2,412.70
• On Thursday, October 15, Iran hit the American-owned (and Liberian-flagged) supertanker, the Sungari, with a Silkworm missile off Kuwait’s main Mina Al Ahmadi oil port.
• On Thursday, October 15, the DJIA fell another 58 points (2.4%) the next day, down over 12% from the August 25 all-time high.
• On Friday, October 16, Iran hit another ship, the U.S.-flagged MV Sea Isle City, with another Silkworm missile.
• On Friday, October 16, the DJIA fell 108.35 points (4.6%) to close at 2,246.74 on record volume.
• On Monday, October 19, two U.S. warships shelled an Iranian oil platform in the Persian Gulf in response to Iran’s Silkworm missile attack on the Sea Isle City.

As you can see, the U.S. stock market was already in the process of becoming unraveled. But let’s step back even further. Here’s what Wikipedia has to say about the economic climate of 1986;

“In late 1985 and early 1986, the United States economy began shifting from a rapidly growing recovery from the early 1980s recession to a slower growing expansion, which resulted in a brief “soft landing” period as the economy slowed and inflation dropped. The stock market advanced significantly, with the Dow peaking in August 1987 at 2,722 points, or 44% over the previous year’s closing of 1,895 points. Further financial uncertainty may have resulted from the collapse of OPEC in early 1986, which led to crude oil price decreasing by more than 50% by mid-1986.”

The key takeaway from that statement is “further financial uncertainty.” Remember, the stock market had peaked in August,  two months prior to Black Monday. Financial markets often don’t make sense, but one thing is for sure…they HATE uncertainty. Which brings me to Brexit. Though the British vote is more public referendum than legal conclusion, the process of “let’s make Britain great again” has clearly been set in motion (even if it will take years to know the ultimate outcome). Sound familiar? Though it’s not quite the same as Iranian missiles being fired at U.S. warships, the political concept of “populism” is exploding all over the world, and no one knows where the next populist bomb will go off. Scotland? Maybe. Holland? Perhaps. The U.S.? Let’s explore that idea.

Though many Americans can’t wrap their heads around the idea of President Donald J. Trump, this summer’s political conventions will no doubt be “must see TV.” The merits of each candidate, and what it means for their respective parties and who will ultimately have control of the House and Senate, will be debated ad nauseam, creating plenty of uncertainty. One thing seems to be prevalent thanks to the presidential campaigns of the Donald and the Bern; a populist revolt is percolating inside the good old U.S. of A. We’ve got a long way to go until November, and when you turn the election into a three-ring circus, there’s always a chance the dancing bear will win.

Add to the toxic political environment a healthy dose of economic uncertainty. There’s a reason the Federal Reserve keeps kicking the can down the road and postponing raising interest rates. In January the geniuses at Goldman Sachs predicted FOUR rate increases during 2016. In March they scaled it back to three, and in June they cut it back to two. Do you see a trend here? The global economy is slowing down, fast, and we have China to thank for it. Second-quarter earnings season starts in just a few weeks, and I’m not expecting a bonanza of good news.

So what happens next? I believe the world’s central banks are about to go to war, and I have no clue who will win. But I can assure you there will be casualties, the most likely being a significant strengthening of the U.S. dollar. Our Federal Reserve will do their best to accommodate, but let’s be honest. After eight years of zero-interest rates and nonstop quantitative easing, there’s only so much sugar they can add to the punchbowl before it becomes too sweet to drink. I’m not calling for another Black Monday crash tomorrow, but I do believe the U.S. stock market will retest the February lows before the end of this year. 

That’s my story and I’m sticking to it. Have a nice day.