Markets are on the move today with stocks gapping lower as Iran readies a massive military exercise in the Persian Gulf.

“Questions”
By Jeffrey Saut, Chief Investment Strategist at Raymond James
August 2 (
King World News
) – 
Andrew and I field questions from financial advisors, clients, portfolio managers, etc. all day long. Some of the questions, well are questionable, meaning they could easily be answered using Google. A few of them are just plain crazy like, “How often does the Energy Daily Report get issued?” Yet, most of the questions are decent. The three most frequently asked questions recently have been: “What do you think of Morgan Stanley’s bear market call?”; “Should we be worried about an inversion of the yield curve and subsequent recession?”; and “What about the tariff tiff?”…


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We don’t think much of the bear market call since we continue to believe the secular bull market is alive and well. As for the inversion of the yield curve, there were two excellent articles in Tuesday’s Wall Street Journal titled: “An Inverted Yield Curve May Not Portend Doom” (p. A17) by Burton Malkiel and “Yield Curve Throws Investors a Curveball” (p. B12) by Akane Otani. Yet our interests were more piqued by a recent report from the sagacious Spyglass Research (aka, New Constructs), who wrote:

Curves steepen and flatten for varying reasons. It is too simplistic to say that the US yield curve is flattening and it is bearish for US economic growth and stocks. Today, the US yield curve is flattening because short term yields are rising MORE rapidly than longer term yields, which are ALSO rising in response to Fed tightening and improving US economic growth that is catalyzed by fiscal stimulus and improved confidence (see chart).

Plainly, we agree with the astute Spyglass Research organization and will say that a flattening yield curve favors defensive sectors.

As for the “tariff tiff,” we heard from our D.C. contacts yesterday that the administration is going to impose a 25% tariff on the remaining Chinese goods. If true, this will likely cause a downside feint for the equity markets. However, we do not think it disturbs our long-term secular bull market thesis. We will say that our models, with no knowledge of this 25% “tiff,” suggested last week that with the FANGs declining, and the market-leading small caps breaking down combined with our proprietary stock market “internal energy” model being out of gas, a short-term trading top was due. As we write the preopening S&P futures are down a massive 17 points as Iran readies a massive military exercise in the Persian Gulf.

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