Conflict, Shocks, and Continued Uncertainty: How to Pay for it All?
The war continues and markets, although volatile on a daily basis, have reacted as if the war could end any day. And in fact, it could end any day. Problem is a unilateral declaration by the US is only part of the equation with Israel and Iran having a significant say.
The Energy & Derivative Squeeze
In the meantime, oil/gas prices continue to increase, and increases are happening in the many derivative products relation to oil including plastics, synthetic fibers (polyester), asphalt, lubricants, fertilizers, pharmaceuticals, and synthetic rubber.
According to polling, this war is the most unpopular war since WWII. Attempts by the administration to justify the war or communicate goals to Americans just seem to add more confusion to any understanding.
Critical Indicators At-A-Glance
Market Metric | Current Status |
|---|---|
S&P 500 (from recent high) | Down 9.5% |
60/40 Portfolio (Year-to-date) | Down 6.9% |
Inflation Expectations | 3.0% |
Defense Budget Recommendation | $1.5 Trillion |
Direct War Costs | $2 Billion / Day |
Geopolitical & Economic Reality
Today an American F-15 fighter jet was shot down and hopefully both airmen are rescued and ok but any pronouncement that the skies over Iran are safe for American airpower just proved untrue in a terrible way. The Strait of Hormuz remain closed and a satisfactory way out of this conflict is not at all clear.
The rising price of oil is contributing to increased inflation expectations of 3%. These measures were taken before the oil price increase as a result of the Iran war. Still, 5-year inflation expectations remain around 2% which is good news. Employment numbers released today indicate an economic job market that is holding steady and the numbers were better than expected. Again, the survey was taken before the war and there is some concern about reliability of any number generated by the Department of Labor.
Portfolio Challenges
The S&P 500 barely avoided a bear market on Monday closing down 9.5% from its recent high. The disruption due to the war in Iran caused interest rates to move higher as well as stocks lower. The result was that the usual safe haven when stocks decline did not work. As of a week ago the classic 60/40 stocks/bonds portfolio was down 6.9% year to date.
The jobs report indicated growth focuses on health care. Thank you seniors doing more than their share to boost the economy and hiring. I know our household is doing our part. This trend will only grow. At the same time, the administration is recommending a doubling of the defense budget to 1.5 trillion. The choices for spending are already difficult with the war costing 2 billion/day and health insurance premiums doubling for 10-20 million Americans. How to pay for it all????
