Market Commentary – The Impact of the US Military Operation in Venezuela
By: Eric Sterner, CFA, CAIA, FRM, CIPM
Chief Investment Officer, Apollon Wealth Management and Apollon Financial
As we start the New Year, one of the biggest stories is the United State’s military operation in Venezuela including the capture of President Nicolas Maduro on Saturday, January 3. Geopolitical conflicts can certainly cause investor anxiety and emotional reactions. While the human toll is by far the most important concern on our minds, it is also our job to determine the potential effects to the markets.
Market Reaction
There were no major negative impacts on US equities as markets re-opened on Monday. In fact, equities continued their strong rally. Oil prices remained stable. Gold and silver both rallied higher as they typically do after geopolitical conflicts.
Geopolitical events can affect the US economy through three channels: financial market conditions, the banking system, and trade. But none of them pose a significant threat, considering recent developments.
Trade and financial linkages between the US and Venezuela are far smaller today after decades of sanctions and political pressure. US exports to Venezuela were just $3.6 billion over the past 12 months, or less than 0.2% of total exports, and imports are similarly small, while the banking-sector exposure is low.
Venezuela was once a major oil producer and claims to have the largest oil reserves in the world, though production has dwindled to less than 1 million barrels per day, compared to total global production of 103 million barrels per day. The country’s production could be reduced in the near term if the US continues its intervention and naval blockade, though with global oil markets already in surplus, the impact on global oil prices will most likely be limited.
Source: Oxford Economics
Why did the US military take action?
Oil and critical minerals were a motivation for the US taking this action, but there were also other drivers.
Drug trade was certainly a major factor as well as removing an authoritarian leader. During Trump’s first term, removing President Maduro was one of the top foreign policy goals. Therefore, the White House administration considered this unfinished business. Additionally, this military operation is consistent with the “Donroe Doctrine,” which is a term for President Trump’s foreign policy in the Western Hemisphere to diminish influence of Iran, Russia, and China, and to reassert US dominance in the region.
What is next?
Fully monetizing Venezuela’s oil reserves may take decades and hundreds of billions of dollars of investment due to years of under-investment and poor oil-related infrastructure.
In the near-term, the key risk is whether this military action raises geopolitical risks elsewhere. If China were to take action against Taiwan, it could severely disrupt global semiconductor supply chains. There is no evidence to support that this US military operation raised that risk, but it is certainly something many will be watching.
What does this mean for investors?
We must always be mindful of all risks in the markets including geopolitical ones. Obviously, there are already many risks in the markets that we are navigating including trade wars, tariffs, and heightened federal budget deficits. US corporate profits remain very healthy, and while US consumer spending and the labor markets are moderating, both have proven to be very resilient over the past several years. Investors should avoid making emotional decisions during these highly stressful times. The best plan is to stay diversified and disciplined to your investment plan.
Apollon Wealth Management, LLC and Apollon Financial, LLC (“Apollon”) provide advice and make recommendations based on the specific needs and circumstances of each client. For clients with managed accounts, Apollon has discretionary authority over investment decisions. Investing involves risk and clients should carefully consider their own investment objectives and never rely on any single chart, graph, or marketing price to make decisions. The information contained herein is intended for information purposes only, is not a recommendation to buy or sell any security or strategy and should not be considered investment advice. Market performance information and projections have been provided by third-party sources and, although believed to be reliable, have not been independently verified and its accuracy or completeness cannot be guaranteed. Any opinions, projections, forecasts, and forward-looking statements presented herein are valid as on the date of this document and are subject to change. Index returns are gross of fees; investors cannot invest directly in an index. Past performance is no guarantee of future performance. Please contact your financial advisor with questions about your specific needs and circumstances.
