In March of 2021, the Ever Given got stuck in the Suez Canal. If you think traffic is bad in San Antonio, imagine being stuck behind that ship as it loses control and lodges itself between the two banks of a very busy waterway. The Ever Given was stuck for six days. In that time, there were pictures and stories of ships piling up, unable to continue their trade routes. It caused a measurable supply chain issue.
There were other issues in 2021: factories had been closed in the previous year, different counties had different approaches to COVID shutdowns, and all of that was a ticking time bomb for inflation. However, in March 2021, inflation was below 2%. In fact, that was the last time the US had a print below 2%. I don’t need to remind everyone that inflation shot up, rates were raised to address it, and the economic impact, especially on markets in 2022, was painful. Here is a chart of inflation over the last few years:
Getting inflation below 4%, then 3%, was a hard-fought battle that inflicted pain in investors. Note the green marked “energy” was a huge contributor to inflation and eventually became a contributor to disinflation starting in 2023. The last inflation report showed the inflation rate held at 2.4%, which is great news for the economy, though it comes amid a spike in oil prices due to the military actions in Iran. See the change in oil prices below:
Which brings us to our main concerns as we look ahead. A constant theme of these outlooks has been inflation, rates, and employment. Inflation will certainly rise (I usually like to leave room for “what if,” but I can't imagine a scenario in which it doesn't at least creep up in the next few months). The degree of the rise is up for speculation, but any rise is not something we want. Also, jobs have been bouncing around with jobs created and jobs lost, but an overall trendline in decline. See below:
All that to say, there does not appear to be a significant economic runway for this conflict to continue for a long time. The closure of the Strait of Hormuz is a problem. About 20% of the global oil supply passes through that strait. The International Energy Agency (IEA) has agreed to release oil to supply the disruption, which buys a little time. However, oil is very complicated; it's not as if turning on or off a water spicket. The extraction and refining process is not extraordinarily agile. Relative predictability is something we strive for in energy production, and conflicts like this obviously create massive uncertainty for producers, governments, and businesses. The entire global economy needs energy to be productive. The longer this conflict goes on, and the higher oil prices rise, the more potential pain we may experience. Also noteworthy, treasury yields have snuck up a bit. That is also a potential problem. The bond market is the lifeblood of our economy, and borrowing is paramount in a global economy where all developed nations operate their federal budgets with spending deficits. For reference, the 10-year US Treasury is near the upper end of its trading range, between 4.2% and 4.3%.
We seem to be at a very challenging time. Conservatives have the majority of power and ran on a platform of solving economic challenges. However, the progress made over the last few years, especially the work done by the Fed, is at a crossroads. If oil stays up, inflation will go up and stay up; if unemployment rises, the Fed will be in a nearly impossible situation. I think all of these points put pressure on republicans to end this conflict relatively quickly.
One last note, timing the market is very hard. Many of you know this and have heard me talk about how hard it is. It bears repeating: timing the market is very, very hard. On Monday, I had a few conversations about the market events and discussed possible entry points into the stock or other markets. The market was down, maybe a percent or two in the middle of the day Monday, I remember saying, " It's just so hard to know how this will unfold. That afternoon, a reporter tweeted that she spoke with President Trump, who said the war was going ahead of schedule. The market rallied nearly instantly and ended the day higher. The rest of the week has been flat or down, but this is the sort of volatility that accompanies geopolitical events like this. As a reminder, don’t focus on daily movements; focus on allocation and long-term market themes and trends.
To be clear, I’m always optimistic. I expect this conflict to resolve and for the economy to chug along. I expect longer trends of AI innovation and usage in business to continue to drive efficiency and productivity in the economy. However, it is important to know and be aware of these risks as you consider your risk tolerances and financial goals. If you have any questions or would like to discuss this or anything else further, please let me know - austin@greenwingwealth.com.
Disclosure: The views stated in this letter are not necessarily the opinion of Cetera Wealth Services, LLC and should not be construed directly or indirectly as an offer to buy or sell any securities mentioned herein. Due to volatility within the markets mentioned, opinions are subject to change without notice. Information is based on sources believed to be reliable; however, their accuracy or completeness cannot be guaranteed. Past performance does not guarantee future results.
Investors cannot invest directly in indexes. The performance of any index is not indicative of the performance of any investment and does not take into account the effects of inflation and the fees and expenses associated with investing. S&P 500 – A capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.
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