The flare-up in hostilities between Lebanon and Israel, obviously, creates a wild card to normal economic and stock market predictions, but, in my judgment, it actually augments the trends that I have been discussing. I believe that the US economy will slow over the remainder of 2006 to a 3% growth rate. The odds of this are increased as a result of today’s record high oil prices. The following is a short list of observations regarding the implications of the Middle East hostilities. I will expand on these points later, but I want to get my thoughts in front of everyone as soon as possible. There will be plenty of hand wringing going on, but I don’t think things are anywhere near as dire as the news media will portray it, or the stock market will reflect it. 1. World wide economic growth will not be significantly impacted by the fireworks in the Middle East.
2. Higher oil prices will act much more like a “tax,” slowing the economy, than adding to inflation problems.
3. The slowing economy will favor larger companies over smaller companies, higher quality companies over lower quality companies, and multi-national companies over domestic companies.
4. If the fighting intensifies, the odds of additional Fed hikes diminish.
5. If hostilities continue, the most attractive industry sectors over the next 12 months would likely be Consumer Staples, Energy, Utilities, Healthcare, Financial, and Real Estate Investment Trusts. Basic Industries, Technology, Telecommunications, and Consumer Cyclicals will be weak. Industrials will be neutral, but Aerospace and Defense within the sector will perform well.
6. Quality bonds and preferred stocks will do well. Interest rates have likely seen their highs. The outbreak of fighting between Lebanon and Israel could include Syria very quickly, and we all know that Iran is behind all of it. Because Iran is the second largest producer of oil, oil prices will be dicey for the near future. That is why we are buying more oil stocks today. This situation is different from Iraq. World powers are aligned with the US against Iran in it adventures in enriching Uranium. Not every country sees it the way the US or Israel does, but they all realize that it is not in their best interests to allow Iran to continue its talk of “eliminating Israel from the face of the earth.” I have said this before and I do not want to minimize the situation in the Middle East, but oftentimes when the fighting actually breaks out, the solution is closer than during all the rhetoric. Having said this, I still pray for the peacemakers and that wisdom and peace will prevail. Anyone reading this knows that we are very conservative and slow to make changes in fluid times. Having said this, we believe the sell off in stocks is a buying opportunity. We will be nibbling in the areas I mentioned earlier. I will have more later.
