Recovery Rally

U.S. markets bounce back from early losses to end higher despite heightened U.S.-Iran tensions.

The Market Sum | Insight after the bell By Caleb Silver, Editor in Chief Monday's Headlines 1. U.S. markets rally after early declines to close in positive territory 2. Oil prices pop 1%, then retreat to close lower in choppy session 3. Apple CEO gets a pay cut despite almost 90% share price increase in 2019 4. Iran's role in global oil production 5. Liquidity is the stock market's safety net Markets Closed Dow 28,703.38 +0.24% S&P 3,246.28 +0.35% Nasdaq 9,071.46 +0.56% VIX 13.8 -1.36% Bitcoin $7,598.55 +1.74% US 10-Yr Yield 1.811 +1.29%     Markets Today U.S. markets pulled out of an early tailspin to close higher for the day, regaining some of the ground they lost on Friday after stocks sold off in the wake of the U.S. killing of a high-ranking Iranian general. Oil prices climbed, then fell in a choppy session as investors try to make sense of how the U.S. conflict with Iran will impact supply and prices. Gold futures hit their highest level in nearly six years as investors sought the safety of the precious metal, and the yield on the 10-year U.S. Treasury fell slightly as prices rose. For all the saber rattling over the weekend between the White House and Iran, Monday's session was relatively tame.    Headlines U.S. automakers sold more than 17 million vehicles in the U.S. for a fifth-consecutive year in 2019. Domestic light-duty vehicle sales totaled almost 17.1 million vehicles last year, a 1.6% decline compared with 2018, according to automotive research and forecast firm Edmunds. Ford, GM, Chrysler, and Toyota reported slight declines in sales of 3% or less in 2019. For 2020, auto analysts see U.S. sales of roughly 16.7 million to 17.1 million vehicles.  Apple (AAPL) CEO Tim Cook's compensation dropped 26 percent to slightly under $11.6 million for the 2019 fiscal year, according to company filings. Cook, who has run Apple since his promotion in 2011, had the same base salary, $3 million, as in 2018. However, his non-equity incentive pay dropped from the $12 million it was in 2018 when he received 200 percent of his target payout, compared with $7.7 million in 2019 when he and other executives received 128 percent of the target bonus. Xerox (XRX) has secured financing for its takeover offer for HP, according to The Wall Street Journal. Its backers include Citygroup, Mizuho Financial, and Bank of America. Xerox made the $33 billion unsolicited bid for the printer maker nearly four times bigger than itself in November. Boeing (BA) engineers have found a potential new wiring issue in the grounded 737 Max, according to a New York Times report. Regulators have been informed of the "previously unreported concerns," and there is no confirmation on whether the plane will need design changes or if this means they will be grounded for longer. Bed Bath & Beyond (BBBY) has signed a deal to sell 2.1 million square feet of its space to private-equity firm Oak Street Real Estate Capital and lease it back, according to a Wall Street Journal report. This transaction, which involves about half of the retailer's real estate, will reportedly generate more than $250 million in proceeds. A 608-pound bluefin tuna was sold for $1.8 million at the New Year's auction at Tokyo's Toyosu fish market. This is the second-highest figure on record, beaten only by last year's giant bluefin tuna that fetched $3.1 million. The buyer both times was businessman Kiyoshi Kimura, who owns the operator of sushi chain Sushizanmai.    Iran's Role in Global Oil Shipments Oil climbed, and then fell today in the wake of protests in Iran following the airstrike that killed the Republic's top military leader by the U.S. last week. Commodity investors are still trying to sort out the potential supply disruption of crude oil in the Middle East if the conflict intensifies.    To be sure, Iran sits right on top of the Strait of Hormuz in the Persian Gulf, through which roughly 20% of the world's crude supply is transported on a daily basis. But Iran, which accounts for about 4% of the world's daily oil production, does not influence the oil market as it once did in the 1970s and 80s.   This map and charts from the Energy Information Administration puts it in perspective.   chart courtesy EIA.gov     Still, the Strait of Hormuz is an area of key strategic importance. Among the concerns for oil investors is how much oil production and supply will be impacted by the conflict between the U.S. and Iran, how long it will last, and which nations may become involved. Iran and Iraq have close ties, particularly through the Shiite militias of the Iraqi Popular Mobilization Forces. If the conflict escalates and the threat of supply disruption becomes a reality, look for oil prices to head higher. Liquidity to the Rescue I mentioned last week that U.S. equities could very well continue to outperform given low interest rates and strengthening fundamentals. That prompted a few of our astute readers to question my sanity, which is always welcome. It's true that U.S. stocks - especially tech stocks -  have very stretched valuations and the CAPE ratio, which measures real earnings per share (EPS) over a 10-year period to smooth out fluctuations in corporate profits that occur over different periods of a business cycle, is pretty high given historical standards.      But high CAPE ratios haven't been scaring investors out of stocks like they have in other cycles. Low interest rates are part of the reason, since they typically drive investors out of bonds and into stocks in search of returns.    The other reason - and this is likely more important - is that central banks around the world have been flooding the government treasury market with liquidity.    According to research from Morgan Stanley, the U.S. Federal Reserve, the Bank of Japan, and the European Central Bank are expanding their collective balance sheets by roughly $100 billion per month through asset purchases including government debt. That doesn't include the U.S. Federal Reserve's funding of the bank repo market, which may total $490 billion by the end of the year.    Last week, the People's Bank of China (PBOC) cut the amount that Chinese banks need to hold on their balance sheets by 0.50%. In other words, central banks are doing everything they can to make sure investors feel safe to buy risky assets like stocks. By shoring up the bond market, central banks are signaling to stock investors that the Fed will do what is necessary to make sure there is ample liquidity in the event of a selloff in all assets. The theory being that a selloff in the bond market will also scare stock investors. This chart from Morgan Stanley shows how the S&P 500 reacted in 2019 when the Fed stepped in and announced more asset purchases. The market was caving, but liquidity came to the rescue.     More News: Can Facebook Stock Hit New Highs? Fortinet Shares See Big Buying SolarEdge Shares Saw Big Buying, Up 170% in 2019 (chart courtesy YCHARTS)     As oil prices fell back down from Friday's spike, energy company stocks gained back some of Friday's losses.     Under Armour fell today after JPMorgan gave it a rating of "Neutral." Potato processor Lamb Weston gave up some of its Friday gains. Word of the Day Mean Reversion Mean reversion is a theory used in finance that suggests that asset prices and historical returns eventually will revert to the long-run mean or average level of the entire dataset. This mean can pertain to another relevant average, such as economic growth or the average return of an industry.     Credit: Alex Wong / Getty Images   Today in History January 6, 2014 Today in 2014 Janet Yellen was confirmed by the U.S. Senate as the first female Federal Reserve Chair. She graduated summa cum laude from Brown undergrad and received a doctorate in economics from Yale. She taught at multiple universities, including the London School of Economics and the University of California at Berkeley. She succeeded Ben Bernanke for the job after having served as the vice chair of the Federal Reserve Board of Governors from 2010 to 2014, and having been the president of the Federal Reserve Bank of San Francisco. She slowly raised the fed-funds rate starting in 2015, moving in 0.25% steps to slowly normalize interest rates. Her successor, Jerome Powell, followed this strategy as well until mid-2019, when he lowered rates three times to stimulate the economy. Source: https://fred.stlouisfed.org/series/DFEDTARU https://www.federalreservehistory.org/people/janet_l_yellen How can we improve the Market Sum? Tell us at marketsum@investopedia.com Enjoy the Market Sum? 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