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Dow Jones Today: Geopolitical Risk Returns

Todd Shriber

Geopolitical risk returned in significant fashion Monday, but fortunately, it didn’t involve President Donald Trump and his Twitter (NYSE:TWTR) account. As widely reported over the weekend, drone strikes against Saudi Aramco production facilities knocked about 5% of global daily output offline.

Source: ymgerman / Shutterstock.com

A Yemeni militant group claimed credit for the attack, but the White House is pointing the finger at Iran, and Saudi Arabia believes it has conclusive proof that the weapons used in the attack were Iranian-made.

The kingdom is now racing to restore lost production at the impaired facilities, and while some output can be restored quickly, it will likely be weeks before all that lost production is back online.

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“While President Donald Trump hasn’t directly blamed Iran for the attacks, Secretary of State Michael Pompeo has,” reports Bloomberg. Two U.S. officials said the location of the damage and weapons used suggest the attack was not launched by the Houthis, who have been fighting the Saudi-led coalition in Yemen for four bruising years.

Amid tensions in the Middle East, the Nasdaq Composite fell 0.28% while the S&P 500 dropped 0.31%. The Dow Jones Industrial Average slipped 0.52%, snapping its winning streak at eight days. In late trading, just seven of the Dow’s 30 components were higher.

Not surprisingly, Dow’s big winners on the day were its two energy components – Exxon Mobil (NYSE:XOM) and Chevron (NYSE:CVX). The two largest U.S. oil companies each gained more than 2% to start the week.

This scenario is really easy to explain: lost Saudi supply will boost demand for U.S. oil exports. The U.S. already exports 3 million barrels of crude per day, a figure that could swell to 4 million barrels due to attacks in Saudi Arabia.

Apple Stock, Again

Yes, Apple (NASDAQ:AAPL) sure does get a lot of run in this space, but usually with good reason. Today, the stock was one of the steadier non-energy names in the Dow, gaining 0.53% on some potentially good news regarding the recently unveiled iPhone 11. Remember that at last Tuesday’s new product launch, Apple unveiled three new iPhones – the iPhone 11, the iPhone 11 Pro and the iPhone 11 Pro Max.

“We think there is inherent upside to Sept-qtr EPS given AAPL isn’t staggering their launches but announcing all the three products simultaneously,” said Evercore ISI analyst Amit Daryanan in a recent note. “This we think will have a positive impact to revenues and EPS in the sept-qtr, though depending on the reception of these products it may be more of a pulling in of revenues from Dec-qtr.”

Bearish Dow Commentary

Shares of Dow component JPMorgan Chase (NYSE:JPM), the largest domestic bank by assets, slid almost 1% after an analyst said investors shouldn’t expect JPM to keep up its lengthy out-performance of the broader financial services group. Long one of the best-performing large-cap names in the S&P 500’s third-largest sector weight, JPM is up 23% this year.

In a note out today, James Mitchell of Buckingham Research lowered his rating on JPM to “neutral” from “buy,” noting the stock is pricey relative to rivals.

“After materially outpacing the peer group in recent years, [JPMorgan Chase] shares now trade at nearly a 30% premium on a [price-to-earnings] basis,” said the analyst. “Much of the fundamental outperformance is being priced in.”

Dow Jones Bottom Line

Tensions in the Middle East and subsequent rises in oil prices do make for compelling headlines, but these types of events are usually short-lived. Moreover, the energy sector’s weight, one largely controlled by the aforementioned Exxon and Chevron, has been declining in broader domestic equity benchmarks, so it’s unlikely there’s enough heft in the energy patch to lead the market higher.

Indeed, there are other issues for investors to consider over the near-term. For example, China released three economic data points overnight, all of which came in lower than expected. Those were industrial production, retail sales, and fixed asset data.

Additionally, the Federal Reserve meets later this week and with talk that some politically vital states are seeing economic softness, the Fed could be compelled to oblige the White House with another rate cut.

Todd Shriber does not own any of the aforementioned securities.

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