By CCN Markets: The Dow Jones has fared surprisingly well this year despite simmering US-China trade tensions, gaining nearly 15% heading into the final week of June. The stock market’s latest rally puts it on track to record its best June since 1938.
But the enormous stock market rally faces a new threat – the Trump administration’s decision to increase sanctions on Iran.
Brian Hook, the US special representative to Iran, told CNBC in an interview:
“We are going to increase our sanctions on Iran and continue our foreign policy.”
A bad omen for the Dow
The stock market is clamoring for the US and China to reach a deal so that the protracted trade war comes to an end. Prominent market watchers believe that equities could suffer a spiraling crash thanks to the tiff between the two countries, with the Dow estimated to crash as much as 13% by the end of the summer according to one bearish firm.
The decision to further pressure Iran with economic sanctions – and amplify the odds of armed hostilities – doesn’t bode well for the stock market. That’s because the US stance indicates that the Trump administration will continue going after Iran’s biggest revenue sources.
When asked what the new sanctions would include, Hook told CNBC:
“But I can say that when you look at Iran’s largest sources of export revenues – it’s oil, petrochemicals, precious metals and industrial metals. We have now sanctioned all four of those categories.”
Iran’s oil exports plunged to just 400,000 barrels per day (bpd) in June, according to data obtained by Reuters. This was a sharp decline when compared to April exports of 938,000 bpd and the March figure of 1.86 million bpd.
Further sanctions on Iran could send its oil exports lower, creating a supply shock and resulting in higher prices. In fact, oil prices are already ticking up thanks to US-Iran tensions, so there’s a good chance that we might see higher gas prices this summer.
This could reduce discretionary income and limit consumer spending, potentially hurting economic growth and stifling the Dow’s rally – even if it does boost domestic energy stocks in the short term.
Slower growth could weigh on the stock market
A further escalation between the US and Iran would threaten an already fragile stock market, record highs notwithstanding.
JPMorgan economists slashed their second-quarter GDP growth forecast to just 1% at the end of May. This is way lower than the 2.25% growth they were originally anticipating, and also below the 3.1% US GDP growth reported in the first quarter.
The investment bank was forced to reduce its growth forecast on the back of weak data that’s already showing a drop in consumption and consumer spending. Inflated inventory channels and weak demand led to a sharper-than-anticipated 2.1% decline in orders for US-made capital goods in April.
Overall shipments of durable goods that include small items such as toasters to big-ticket items such as aircraft fell 1.6%, the sharpest decline seen since December 2015.
With another earnings season about to get underway, weak demand could temper the top and bottom lines of Dow components. The fresh US sanctions on Iran could force Wall Street to start pricing in the negative outlook soon enough, potentially even preventing the stock market from successfully recording its best June in 80 years.