Hope you are doing well. The major U.S. stock indexes fell for the third consecutive week, with the S&P 500, the NASDAQ, and the Dow dropping around 1% to 2%. Geopolitical tensions and elevated oil prices continued to weigh on stock and bond prices. I expect it to get a bit worse before it improves, but when it improves, the markets should rebound fast. So, trying to time this by selling and going back in is NOT prudent. If you are planning to convert some money into a Roth this year or invest money you have on the sidelines. Then now would be a good time to convert or invest a portion of your intended amount. Ice Cube was in the news this week, winning the Razzie for worst actor in War of the Worlds. I have broken down this week’s update using lyrics from his hit song, It Was A Good Day.
“Lookin’ in my mirror, not a jacker in sight” – Ice Cube
Can oil tankers get through the Strait of Hormuz without worrying about getting hit? Right now, the answer is no. This has caused disruptions to the global oil supply. Causing oil prices to rise. Even though recent inflation data indicated a gradual easing, the latest rise in oil prices points to renewed upward pressure ahead. The fear is stagflation. What is Stagflation? It is a scenario where costs rise while the economy slows. It challenges the Federal Reserve’s traditional economic policies for addressing inflation or unemployment separately. Here’s why I am not yet concerned. The key difference between now and historic periods of stagflation is the continued strength of the labor market. The 4.4% unemployment is very low by historical standards. This reduces the immediate likelihood of a massive economic downturn. Couple that with fantastic corporate earnings, and you are vaccinated against stagflation. The real question is how long shipments will be curtailed through the Strait of Hormuz. I remain hopeful that this won’t take more than a month. There is no way to know. So it’s important to set expectations. The longer it takes, the more we will pay at the pump, and the longer the market volatility will persist. If the conflict does drag on, then the tech sector should be more insulated than other sectors of the stock market. If you are looking for more stable income-producing stocks, I would favor utilities over transportation, shipping, or manufacturing companies. On Friday afternoon, oil was trading around $98. Oil becomes highly problematic for economic growth if it goes and stays above $125 for an extended period of time.
“Shake ’em up, shake ’em up, shake ’em up, shake ’em” – Ice Cube
A shakeup in the downward trajectory of inflation is coming. The U.S. Federal Reserve’s preferred gauge for measuring inflation has remained reasonably low but still above the Fed’s long-term inflation target of 2%. Friday’s Personal Consumption Expenditures Price (PCE) Index reading on core inflation (excludes food and energy prices) came in at 3.1% in January, slightly above December’s 3.0% reading. On a month-to-month basis, inflation rose 0.4%. The Consumer Price Index (CPI) report for February indicated that inflation remained steady. Core CPI rose 0.2% in February and 2.5% year-over-year, while headline CPI increased 0.3% for the month and 2.4% from a year earlier. That was before the conflict in Iran. Expect inflation to rise in the coming months. The recent spike in oil prices will pass through to energy components, which account for about 6% of the CPI basket. Don’t be shocked if CPI moves back above 3%. I don’t think rising inflation will persist long enough for the Federal Reserve to alter its plan to cut rates. I continue to expect at least 2 more rate cuts this year.
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