US Stocks Continue To Slide on Middle East Conflict; Bonds Also Fall
Good morning,
The Dow (-0.9%), NASDAQ (-3.2%), S&P 500 (-2.1%), and EAFE (+0.1%) finished the week mostly lower. Meanwhile, taxable bonds fell 0.1% and tax-free municipal bonds fell 0.8%. The 10-year Treasury yield rose 0.04% to finish the week at 4.43%.
The Middle East conflict continues to dominate the news and the impact to stocks and bonds. The main impact is the significant reduction of oil that is being transported through the Strait of Hormuz, historically controlled by Iran. About 20% of the world’s oil supply comes through that Strait, so the effects of a diminished supply have caused oil prices to jump over 50% in the last month. While the US is less impacted than other countries by the oil supply disruption, the cost of fuel (gasoline, diesel, heating oil, etc.) in the US is still impacted by world oil prices. The trickle-down effect is what is causing both stocks and bonds to fall, as the Dow and NASDAQ have each fallen over 10% from their peaks in February, entering “correction” territory. The S&P 500 isn’t far behind, as it is down 8.5% off its peak.
The trickle-down effect is that investors are concerned that the rise in oil prices will have an inflationary impact, and we saw what happened in 2022 when inflation reached 9% - stocks and bonds both got walloped. With Treasury prices falling (yields rising and a sign of inflation), the costs of borrowing increase (including mortgages), and the case for the Fed cutting interest rates fades away. While these threats exist, we don’t expect massive inflation to happen this time. The Middle East conflict is widely expected to end soon, with the global oil supply returning to normal, whatever that means and by whatever measures it will take to get oil transported through the Strait of Hormuz again. Once that settles down, it is widely expected that oil prices will fall sharply, inflation concerns to wane, and the global economy going back on the mend. The biggest concern is that this is a Holy War with Iran, and they seem to want to fight to the death, with little to no regard of this oil supply issue impacting them economically more than most other countries. We can only hope that cooler heads prevail. Until then, expect the markets to respond daily to news and rumors coming from the Middle East conflict.
Have a great day and terrific week!
Source: Yahoo Finance
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