Corporate earnings season has just started for Q3, but early results are positive. Industry estimates for members of the S&P 500 indicate profits of 1.3% higher than a year earlier – a nice improvement from the second quarter’s decline of 2.6%.  S&P 500 earnings, excluding energy stocks, are expected to show a 6.2% gain after rising 3.6% in the second quarter.  Expectations for the fourth quarter are up a robust 10.8% from a year earlier.  Profits are making a comeback.

There is, of course, plenty that could go wrong, including recession and war.  But if earnings growth keeps picking up, the stock market may be headed higher anyway.

A generation of investors have been brought up on the premise that U.S. Treasury notes and bonds are a safe-haven asset. If you wanted to park your money, Treasuries were the way to go.  But as of the end of September, the 20+ year U.S. Treasury bond ETF (TLT) was at new lows and down 51% from its all-time high in August 2020.  That is almost as large as the 57% decline experienced by the S&P 500 during the financial crisis and worse than the 49% decline in stocks during the dot-com bust.  Treasuries riskier than stocks?  What has this world come to?  Keep in mind when TLT was peaking, the Fed was assuring the market that rates would remain low and stable.  Now the Fed is saying “higher for longer.”  Can we really trust the Fed’s forecasting?

How can investors avoid the volatility and awful performance of long-term Treasuries?  We recommend buying only short-term and medium-term bonds (mostly short-term) to avoid the interest rate risk of long-term bonds but still pick up a healthy yield.




Israel is tiny relative to the global economy with a GDP roughly similar to that of Colorado, and the Gaza Strip even much less relevant.  So direct disruptions to global value chains from the war are unlikely to be significant or persistent.

However, geopolitical headlines can drive market moves.  When news of the war broke out, Treasury yields plunged.  But these moves should not last.  As a general rule, for every spike in oil, plunge in Treasury yields, or downdraft in stocks due to the conflict, we would expect a quick reversal. 

There is one notable exception in this case.  If the conflict broadens to include war between Israel and Iran, disruptions to the global economy could be enormous.  Iran would likely block the Strait of Hormuz, a passageway from the Persian Gulf to the open ocean that handles 17 million barrels of oil exports per day.  In that case, oil prices could spike to over $100 a barrel, in our opinion.  The Strait of Hormuz also hosts about one-quarter of global LNG supply.

We assume this problem would be dramatic but short-lived as the U.S. would get involved to break the log jam.  But how would investors react to the U.S. troops being involved in the war?  Not well, we would guess.  Many investors are surprised the S&P 500 is up since the first headlines of war.  Our view is that other issues are more important to investors in the short term, like corporate earnings season.