What Happened: Israel and Iran Tensions Escalate 

 

What Does it Mean?

On Monday, a presumed Israeli airstrike hit the Iranian consulate in Syria killing two generals and 5 officers. Iran has now vowed to retaliate against Israel and perhaps their American allies. The risk being the United States gets dragged deeper into an escalating conflict in the Middle East.

 

Why Do We Care?

The market does not like uncertainty, so the threat of further escalation in the Middle East with additional pressure on the United States to get more involved increases uncertainty and ultimately volatility in the markets. However, we have to remember the core of almost every market action in recent months: inflation, the FED, and interest rate. With recent economic news being better than expected and jobs data holding strong the market is not keen on another data point that could keep inflation entrenched or moving higher. This conflict with Israel and Iran, as well as additional conflict in Ukraine and Russia, has increased the price of oil to $86 per barrel. This has increased the average tank of gas to $3.57 per gallon nationwide.

Although our Federal Reserve cannot do much to mitigate geopolitical pressures on the price of gasoline, they are watching inflation data closely to determine when rate cuts should come this year. If gas prices remain high in the coming weeks, it will be important to see how the other components of inflation react.

 

What Happened: US Secretary of State Blinken says Ukraine will be NATO member

 

What Does it Mean?

The Russian and Ukrainian conflict looks far from over and seems to be escalating with NATO becoming more involved. The Kremlin announced this week that NATO ties are at a level of “direct conflict”. Signs seem to point to the potential of NATO entering Ukraine with boots on the ground in this war against Russia.

 

Why Do We Care?

Similar to the news of escalation in the Middle East, this news adds uncertainty to the global political structure. NATO boots on the ground would mean even further involvement and support from the United States. Ironically, war has typically been good for the stock market. However, war and our support in overseas affairs leads to additional government spending and likely increases to the national debt level. These factors play into the long term concerns we have for the health of the United States economy, particularly the possibility of a depreciating dollar.

One interesting thing to watch as these wars continue is the price of gold. Gold, which often increases in times of geopolitical uncertainty, also acts as a potential hedge against a depreciating dollar. Gold continued its run at all time highs this week and does not look, in our opinion, to be slowing down. Quint wrote about this more in depth in our weekly review two weeks ago. Check it out HERE.

 

What Happened: Job growth totaled 303,000 in March, higher than expected

 

What Does it Mean?

The US jobs market remains extremely strong at least on the surface level. Jobs expectations were around 200,000 so a significant upside on that headline number. Potentially more important is the underlying wage growth which was in line with expectations at 0.3%.

 

Why Do We Care?

The FED has insinuated that the most important points for determining the path of interest rates are inflation (CPI, PPI, PCE) and jobs data. The report this morning was higher than expectations, but the market has not reacted in a negative way to the number. Why so? We believe the more important number was not the headline new jobs number but the underlying wage growth increase which came in line with expectations. The market seems to like the latter data point and is reacting favorably in hopes that the FED sees the same thing.

All in all, it was a week of pullbacks in the market with some negative news headlines. It is important to remember in a bull market, pullbacks are expected and typically healthy. The chart below shows the intra-year pullbacks that were seen over the last 40 years with only a handful of those years actually ending down.

Via: JPM Group (accessed April 5, 2024)

We see pullbacks like these as potential opportunities and part of the cycle of a healthy bull market.

Best

~ Logan

 

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