Don’t be too quick to jump in the safety trade

Pras Subramanian Yahoo Finance

Fresh evidence detailed by the U.S. suggests it was in fact pro-Russian separatists who fired a Russian-made missile that led to the crash of a Malaysian Airlines jet. While the U.S. said its investigation wasn’t complete, it seems from its findings and those of the Ukrainian government that the separatists were at fault.

Heading south towards the Middle East, Israeli Prime Minister Benjamin Netanyahu began his ground offensive into the Gaza Strip with the stated goal of ending Hamas rocket attacks. The death toll of Palestinian civilians is rising precipitously, and with Mr. Netanyahu ordering the military to prepare for a wider ground assault, the conflict in Gaza could actually worsen.

The markets reacted the way many expected: volatility spiked, gold rallied, and oil pushed higher. The safety trade is on, but question is should it last.

A few weeks ago longtime stockpicker Hugh Johnson of HJ Advisors warned investors to look out for exogenous headwinds and yesterday they arrived with a vengeance. When it comes to the safety trade, Johnson says don’t be too quick to jump on it.

“What you learn in this business… is to expect to the unexpected,” he says. “What you have to try to learn to do is to look through that first reaction and ask yourself the real question which is, ‘does this event change the outlook or prospects for the economy of the U.S, for the economy and earnings of Europe?’”

Johnson advises if you don’t see exogenous events affecting these large macro systems, then it’s best to leave your portfolio alone, and as of right now he’s not seeing anything to warrant a long-term strategy adjustment. “When you see a market reaction [to similar events], it’s usually a kneejerk reaction. It’s fairly severe, it’s fairly emotional,” he says. “Stick with your strategy unless there’s going to be some fundamental change.”

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