The Dow is down more than 400 points thus far this month. No doubt, the selling was precipitated by the "new" war in the Middle East as Israel takes aggressive action to end Hamas and Hezbollah attacks.
In my view, the surprise is not that investors are selling, but that stocks are not doing worse. Even oil prices haven't really jumped as much I'd expect given the circumstances--at least not yet. The current level of violence, and the real potential to draw Syria and Iran into the conflict, could cause a much stronger sell-off in the markets. Oil could also go much higher. After all, Iran has often threatened in the past to close the Straits of Hormuz in the event of hostilities. Because so much of the world's oil must pass through the Straits, if Iran makes good on this threat, $100 per barrel or more would be a real possibility.
Readers of this blog know that I've been bearish on stocks for quite some time. My concerns have centered around high energy prices, rising interest rates, and the end of the housing boom. I remain bearish today. But if there is any good news, it's that I believe there is now a good chance that the Fed will forgo another interest rate hike at its August 8 meeting. Higher energy prices and further evidence of a slowing housing market may be enough to cause the Fed to worry more about an economic slowdown and less about rising inflation.
