Hope you are all doing well. It was another good week for stocks. The major U.S. stock indexes surged 3% to 5%, roughly matching the previous week’s gains. There is hope for an easing of tensions in the Middle East. That sent oil prices down about 13% which lifted stocks. Krispy Kreme is in the news this week (free doughnuts on tax day 4/15). I have broken down this week’s update using the Krispy Kreme menu categories.
The two-week ceasefire helps the market. But will it last? Any de-escalation is welcome. Despite the drop oil prices remain elevated. Traffic is very limited through the Strait of Hormuz. Volatility has dropped for the time being. However, I think volatility will return. The current ceasefire ends on April 21. President Trump warned that there will be renewed military strikes if talks fail. The President will need to re-escalate to make good on his threat if a deal is not struck. Will the administration, Congress and the American people have the stomach to re-escalate? Iran is betting we don’t. It is questionable how much more can be gained by re-escalating the conflict. The main goal at that point would be for the U.S. to take control of the Strait. If Iran is allowed to maintain control and toll the Strait, all the work we did to degrade its military will have just delayed its nuclear ambition not eliminated it. Negotiators left Pakistan Saturday without a deal though talks are continuing. Over the next 10 days expect the market to move up or down based on whatever headlines emerge. To stick with the Krispy Kreme theme markets won’t be happy with just an original glazed, which would be the U.S. leaving without securing the Strait and being satisfied with just the degrading of Iran’s military.
What will happen to consumers if too much of their budget goes to keeping their gas tank filled? That is the main concern of economists. Rising energy costs lifted the latest Consumer Price Index (CPI) reading to an annual rate of 3.3%. That is well above the U.S. Federal Reserve’s long-term target of around 2.0%. The March figure was up sharply from the previous month’s 2.4% CPI reading. The energy price component of the CPI rose 12.5% year over year. This was the largest increase in CPI in four years. The price at the pump surged 21%. Over the past 40 years there have only been eight months in which inflation has risen this much or higher. However this is the fifth such month since the COVID-19 pandemic, so this is something we have all experienced. The CPI report did have some positive aspects. Shelter inflation (housing costs) continues to trend lower. Why are economists concerned? U.S. consumer spending is the backbone of the economy. It remains to be seen if higher gas prices will weigh on how much people are willing spend. It bears watching as it could slow the economy in the coming months especially if this conflict re-escalates. At this point I am not concerned because I think the higher tax refunds the average American is getting this year will help soften the blow of higher gas prices in the short term.
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