@theMarket: Iran War Trashes Markets

Twenty percent of the world's energy flows remain bottlenecked by the Straits of Hormuz. As oil prices stay high enough to cripple the global economy and drive inflation, Iran is counting on that leverage to back the world into a corner. And for now, it’s working.

 

It appears that the more real estate the U.S. and Israel destroy with their combined air power, the stronger the resolve by Iran's leaders to ignore Trump's "unconditional surrender." Rather than back down, Iran appears to be determined to not only widen the war to the entire region but also take their response outward to the rest of the world.

 

As the week wore on, the European Union's release of 400 million barrels of stockpiled oil on Wednesday barely dented Brent crude's price momentum. Meanwhile, the administration created even more chaos by claiming a tanker had been escorted through the Straits by a Navy ship. Prices went down once again, only to rise again after the energy secretary's tweet was taken down and denied. Ultimately, it turned out there was no escort, and the tanker in question was an Iranian vessel carrying oil destined for its largest customer, China.

 

On Friday, the administration announced it was easing its embargo on the purchase of Russian oil, and France and Italy approached Iran to see what it would take to allow European tankers through the straits. Administration officials also claimed that the U.S. Navy, together with a coalition of other nations' navies, would begin to escort ships through the Strait. That did halt the climb in oil prices at least momentarily.

 

And it wasn't only the price of oil that yo-yoed this week. Global markets responded in kind, trading lower as the self-inflicted chaos of contradictory statements surrounding the U.S. conduct of the war came into question. 

 

To date, a decision on releasing oil from the U.S. Strategic Reserve has still not been made, nor has it been decided when the Navy would escort tankers through the area "if needed." For anyone who has read my February column, "What is gunboat diplomacy without boats?" you know that our Navy just doesn't have the boats to spare for escort duty.

 

And while traders were laser-focused on oil prices, the Consumer Price Index for February came in as expected, with the inflation rate tied to the prior month's increase at 2.4 percent. The PCE came in worse than expected, rising 2.8 percent in January from a year ago. Readers are aware that I expect inflation to pick up starting this month and continue higher for several more months. The longer the price of crude remains in this range, the higher the inflation rate will be.

 

I also expect economic growth to slow in the months ahead for the same reason, while unemployment will also begin to tick up. The latest update to the fourth-quarter 2025 GDP has now fallen to just 0.7 percent. Economists are blaming the poor results on the government shutdown, which is convenient since the lack of government spending shaved 1.16 percent off fourth-quarter growth. Looking ahead, I expect the impact of higher gas prices on Americans will effectively cancel out any stimulus that may have accrued from the tax cuts in the spending bill passed last year.

 

As for labor, one of the consequences of voters' insistence on curbing immigration in last year's presidential elections is that the unemployment rate is rising. As Baby Boomers retire and AI reduces the demand for entry-level jobs in certain sectors, the U.S. labor market is in flux. Sure, there are jobs to be had, but no one wants to fill them. Americans have no interest in picking tomatoes, working as nannies, or painting homes. The moral of that tale is you reap what you sow.

 

On another front, private credit markets are still a troublesome corner of the market, and that issue appears to be widening. From a "nothing to see here" attitude among the nation's big banks, at least two are now marking down their loan portfolios or reducing the availability of credit to private lenders. In an already-skittish market, this doesn't help sentiment.

 

However, despite the bad news background, the overall markets are holding up. I credit that performance to investors' belief that this war will not last much longer. Investors know that one person started this war on a "feeling," according to his press secretary, and on the advice of his son-in-law, and only one person can call it off — Donald Trump.

 

The S&P 500 Index is only off around 4.3 percent from its all-time high and less than 2 percent year-to-date. Let's face it, despite the volatility, that loss is peanuts in the grand scheme of things. The equity markets were oversold coming into Friday, so the bounce was expected and could last into next week if we get through the weekend unscathed.

 

As I wrote last week, I still think we have a date with the 200-Day Moving Average, which isn't too far below (plus-1 percent). Most believe that the stock market acts as the tail that wags Donald Trump, America's Big Dog. I think that anything lower than a 7-10 percent decline would start the political jaw boning machine. I would expect statements like "we have already won," "mission accomplished," etc., etc. At that point, we bounce, the question is how long or how high?

 

I am becoming more selective and defensive in my stock and sector choices. As inflation heats up, I expect bond yields to rise. I still like commodity exposure, but fewer international investments as the dollar rises. I am not altogether convinced that April into May will see a revived stock market. Quite the contrary, but let's save that for another column.