- The Dow Jones slightly recovered from a major drop during after-hours trading.
- A tragic Boeing passenger plane crash in Iran could further rattle the equities market.
- Rise of gold and the earnings bubble remain as risks towards the Dow.
The Dow Jones Industrial Average (DJIA) fell by more than 450 points at the day’s lowest point following Iran’s response to the U.S. Its recovery has been short-lived, however, and things may get even worse for the stock market.
#1: Boeing’s Tragic Crash in Iran
Reports from Bloomberg and CNBC confirmed that a Boeing 737 passenger plane headed to Ukraine crashed briefly after departure from Iran, leading to 176 casualties with no survivors.
It is the third tragic accident involving a Boeing plane within two years. The crashes in Indonesia, Ethiopia, and Iran led to 526 casualties.
Boeing has struggled to address the accidents over the past two years. Despite the firing of former CEO Dennis Muilenburg by the company, the criticism towards the aircraft manufacturer has not subsided.
In the past year, the Boeing stock fell by $440 to $337, by around 23.4%. As one of the biggest companies in the U.S., its decline translated to downward pressure on the Dow Jones throughout 2019.
In recent weeks, speculation that Berkshire Hathaway is set to invest in Boeing further fueled its recovery.
However, if preliminary reports are accurate and the Boeing passenger crashed due to a technical issue, it will cause the stock to rattle and add additional pressure to the Dow Jones.
#2: Gold’s Unstoppable Rally
Since November 26, the price of gold surged from $1,449 to over $1,600, by more than 10% within a month and a half.
It would be far-fetched to conclusively determine that the conflict in the Middle East is the sole or the major cause of its rally in recent months.
The gold was rising in tandem with the Dow Jones in the final quarter of 2019, and it may merely demonstrate fears of investors towards the instability of the U.S. market.
Peter Schiff, CEO at Euro Pacific Capital, also suggested that the Fed’s continued repo operations can be considered as a temporary fix, not a permanent one.
Nearly four months after it started, the Federal Reserve continues to run overnight repo operations and it’s unclear when the central bank will actually end these ’emergency’ measures.
High liquidity in the U.S. market has been the single most important narrative around the upward momentum of the Dow Jones in the past year.
If the rapid expansion of the repo market is adding to the rally of gold, it confirms that investors are fearful of the short-term trend of the Dow Jones.
#3: Earnings Bubble at Risk
The criticism of the Dow Jones rally since mid-2019 by analysts has been the stagnant earnings of companies in comparison to their valuation.
Apple, for instance, saw its price to earnings ratio double in 12 months. It indicates that investors are betting on its long-term trend and its strategy, but it still shows that many major conglomerates in the U.S. are overvalued.
Heightening geopolitical risks, worsening conflict with Iran, and the growing appetite for key safe-haven assets like gold present a threat to the momentum of the Dow Jones heading into the second quarter of 2020.