Insights & Thought Leadership
The Song Remains the Same Despite the Geopolitical Uncertainty, a Resilient US Economy Is Supportive for Stocks Key Takeaways The war in the Middle East enters its sixth week and is likely to persist as the key concern for the markets and global economic outlook. We’ve updated our table of annual maximum drawdowns in the S&P 500 to reflect the 9.1% decline in the index from Jan. 27 to March 30. The average annual intra -year decline over the period from 1990 to 2024 is about 14%. Last week’s nonfarm payroll survey surprised to the upside. The jobs gain of 178,000 well exceeded expectations. Better weather and the resolution of a health care worker strike helped boost results. The jobless rate fell a tenth. This week brings the March CPI report. Bloomberg’s survey shows a 1% jump in the headline CPI expected from Feb., but just a 0.3% rise forecast for the core. Reports on Feb. PCE inflation, personal income, and spending, and the Michigan sentiment index are also due. US equity markets experienced a broad rally in a holiday-abridged trading week as major stock indexes advanced from a perspective of sectors, market capitalizations, and style reflecting gains that ensued on better than expected economic data last week (including an exceptionally strong payrolls gain), served to show the stateside economy in better stead than some had projected. We expect prices of commodities and goods to remain elevated and subject to some fluctuations based on the news flow… In our view, the Fed’s FOMC rate decision indirectly added support to market participant sentiment when it decided to hold its benchmark rate steady on March 18. The move addressed concerns about inflation, which has remained stubbornly sticky at levels above the Fed’s target and is exacerbated by the conflict currently taking place in the Middle East. The decision to leave rates unchanged also allayed worries from corners in the market that the Fed might consider raising rates. The Dow Jones Industrial Average, the S&P 500, the NASDAQ Composite, the S&P 400 (mid-caps), the S&P 600 (small caps) and the Russell 2000 Small Caps rallied respectively last week: 3.0%, 3.4%, 4.4%, 2.9%, 2 .9%, and 3.3%. From the end of February to the end of March (Feb. 27 – Mar. 31) the same indices shed: 5.4%, 5.1%, 4.8%,5.6%, 4.3%, and 5.2%. As the conflict with Iran enters its sixth week persistent concern about the time it will take to arrive at an effective resolution to the conflict will, however, likely remain for now as a negative overhang for market participants to navigate. International markets, particularly those dependent on imported oil and LNG sourced from the Middle East and logistically dependent on the flow of trade through the Strait of Hormuz will likely remain vulnerable to the effects of heightened geopolitical uncertainty for now. We expect prices of commodities and goods to remain elevated and subject to some fluctuations based on the news flow. In our view, a successful ceasefire to facilitate a reopening of the Strait of Hormuz would be a good start. What exactly will be required for that to take place remains in the hands of the negotiators involved in seeking an agreement and the military command. Market participants, businesses, and consumers around the world for now remain reminded day to day of the importance of fossil fuel and its role as the key lubricant to the global economy as tensions ebb and flow along with the pricing of goods affected across the world notwithstanding all the progress made in the development of alternative energies over the last decade. We remain positive in our outlook for the markets and the US economy this year with “resilience” the operative word for providing the market with enough opportunities to climb the proverbial “wall of worry.” We continue to overweight equities, favor diversification across asset classes, sectors, market capitalizations, and style and see fixed income as complementary to equities and useful for current income and diversification.