This week Gary unpacks the ramifications of the ongoing conflict in Iran and the continued closure of the Strait of Hormuz. As Gary describes, the markets hate uncertainty, and where uncertainty goes, volatility follows. Watch the full episode to hear the impact on oil prices, inflation, employment, the new outlook for Fed rate cuts, and international stocks. 

TRANSCRIPT:

Hello, everyone. Welcome to this edition of 7 Market Movers. My name is Gary Qunizel with Wealth Enhancement. There’s no shortage of headline events occurring right now in the globe that are impacting all of the markets, so let’s dive on in.

First and foremost, we all know that the conflict in Iran is continuing on in the Strait of Hormuz, which roughly 20% of the world’s energy flows through, is effectively locked, and that is having an impact on energy prices worldwide. We all know that oil prices have skyrocketed. We’ve seen the price of gasoline go up dramatically. We’ve seen Brent oil go from $73 to $108, roughly a 48% increase.

And the fact of the matter is this volatility, unfortunately, is likely to continue as long as this conflict, drags on. And with the news shifting back and forth, we’re seeing the markets react almost in a very predictable fashion. Right? We see a headline that there’s a negotiation coming.

We see oil go down and stocks go up. And then when that kind of trickles out, we see the the exact opposite, occur. So, unfortunately, we are in a period of of of uncertainty, and market hates uncertainty, and that’s why we’ve seen the S&P 500 and pretty much every other major, equity index go down this month. So year to date, we were relatively resilient as of a few weeks ago, but now we’re down to around minus 5%.

The growth index is down around 10.5%. That’s probably the worst sector overall. International stocks, which actually were notably outperforming prior to the month of March before this event occurred, were notably outperforming, but we’re seeing both developed and emerging indices down around 8.5%. So if you think about it, it obviously makes sense because countries in Europe and Asia are a lot closer to the impacts and more directly impacted by the higher prices of the actual oil that is flowing.

It’s not denominated in Atlantic Basin in the in the indices, and so higher oil certainly impacting these countries. And, of course, those in those numbers that I quoted are denominated in dollars, and we’re seeing a stronger stronger dollar on the back of the flight to quality as investors purchase US Treasuries. And so I’ll talk a little bit about rates now because we have seen notable shifts in the yield curve. If you take a look at the two year yield, which is a key indicator in terms of where the market expects the Fed funds rate to go, we’ve seen the two year yield go from around 3.4 up to around 3.8 just about a month.

That’s a pretty significant shift. We’re also we’ve also noticed that the 10-year yield, which is more of a benchmark yield, has gone from 4 to around 4.4. So we’re seeing a notable steepening of the yield curve, where it was a little inverted on the front end prior to this month. And what that tells us, and if we take a look at the Fed the futures market, is that the market is no longer pricing in Fed rate cuts this year. That is a drastic shift. That’s another reason why equity markets are down is because market doesn’t like when the price of price of capital goes higher.

And if you take a look at the futures market is now pricing around 60% chance of no change and up to a 36% chance of at least one hike, which was not the case one month ago when the market was predicting around 2 to 3 rate cuts. So notable difference on the rate situation, and that, of course, backs into what the market expects on inflation. So if we take a look at some of the indicators out there, we we often quote breakeven rates, which, on the 5-year breakeven rate of inflation, it’s up to around 2.65%, up from around 2.5% when when the conflict began. It peaked at around 2.74%. So expectations are modestly lower than they were, but it’s certainly not egregious if you think about it from that perspective. Now there are some headline grabbers. The OECD came out on March 26.

Noted that headline inflation in US could hit as high as 4.2%, this year as a result of the spike in global energy prices. And Goldman Sachs even came out recently, noted that a prolonged disruption could push US inflation as high as 4.9% as early as it sprang under a worst case scenario. That might sound a little bit extreme, but it could potentially happen. So we certainly have to be cognizant of what would be the impact if this disruption escalates, gets worse, and or remains at its status quo.

Because as of today, the longer oil stays above $100, the more it has an impact on consumers as well as companies. And so we’re starting to see that in some of the other economic indicators. So global composite PMI as reported by S&P is a way of tracking real time data that’s related to manufacturing and services. And we are still modestly in expansionary territory, but the most recent reading did come in lower than expected.

It dropped from 51.9 to 51.4, versus the consensus of 51.9. So came in lower than expected. That’s all you need to know. And what that suggests is that energy shock is adding to the headwinds for global growth in employment.

Now employment overall has remained relatively resilient for now. We did have a weaker jobs report last month, and we probably won’t see a notable change here in the US right away due to the Iran conflict. But it is something, of course, that the Fed pays very, very close attention to. And, of course, it also has a very, very notable impact on our final market mover, which is investor sentiment.

Now there’s a lot of ways to look at investor sentiment. One is simply market activity. As I mentioned, a lot of investors are are doing a flight to quality trade. They’re buying US dollar denominated US Treasuries.

That is certainly one indicator in of itself. Another way is to look at some of the surveys. Consumer confidence hasn’t been updated yet, but University of Michigan consumer sentiment dipped to its lowest level this year. So it does suggest a slight downtick, we would one would expect as long as equity volatility remains high, oil remains high, gas price remains high, we would imagine that consumer sentiment is likely to trickle lower the immediate term.

All of this serves as a grand reminder of why we preach diversification and investing over the long term because, yes, it is likely to remain volatile in the near term, but for those of us with a long time horizon, there can be great opportunities to tax loss harvest, rebalance your portfolios, put idle cash to work, or talk to your financial advisor about potential opportunities due to the disruptions that are occurring. We, as always, don’t recommend making any drastic changes to your long term portfolio based upon current events, but at the same time, it’s important to be cognizant of the risks and be sure that your portfolio is aligned with your long term objectives.

That’s all we got for today. Tune in next week for the next 7 Market Movers. Have a great day and a great week. Take care.

This information is not intended as a recommendation. The opinions are subject to change at any time and no forecasts can be guaranteed. Investment decisions should always be made based on an investor’s specific circumstances. There is no guarantee that asset allocation or diversification will enhance overall returns, outperform a non-diversified portfolio, nor ensure a profit or protect against a loss.

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