Markets, War, and Economic Uncertainty
News just keeps coming.
Today employment numbers were released showing a loss of 92,000 jobs, with the unemployment rate ticking higher. Wage growth was still ok, keeping up with inflation. Job losses were reported across the board. With inflation persisting and job numbers weakening, the Fed is caught between a rock and a hard place. As we have discussed previously regarding inflation and Federal Reserve policy, this type of environment makes policy decisions increasingly difficult.
The reaction in the bond market to the Iran war has been higher interest rates due to increased fears of inflation, driven in part by a 10% increase in gas prices so far. The administration is also preparing to ask Congress for increased defense funding, with estimates placing the daily cost of this war between $1–$2 billion. The three jets shot down accidentally by friendly fire cost approximately $100 million each.
There are also fears that stocks of munitions may be at risk, with both offensive and defensive weapons stockpiles diminishing quickly.
Today President Trump demanded unconditional surrender by Iran, but it is unclear who would surrender since leadership has been killed and, according to many administration officials and Republican legislators, this is not officially considered a war. The uncertainty around the conflict continues with no clear end date and unclear goals. Iran continues firing drones and missiles while Israel expands military operations into Lebanon. The conflict is widening, and its ultimate consequences remain uncertain but increasingly costly.
The economy is at risk in many ways because the clarity of U.S. goals remains uncertain. There is consensus that it is a good thing that the Ayatollah is gone, but beyond that there is little agreement.
Polls show that the majority of Americans are against this war, but that appears to make little difference in decision making. The stock market is in a steady decline, with recent lows crossing levels last seen in October. All major averages are negative year to date.
However, year-to-date performance of mid-cap and small-cap indexes, value indexes, and international markets remains positive. This again highlights the importance of diversification across markets and asset classes. The past two weeks also demonstrate once again that markets tend to fall faster than they rise.
Bonds did not provide much protection during the past week; however, year to date bond prices are higher and yields lower.
Remember tariffs. That was so last week!!!!
One role this Iran war may be playing is to distract Americans from other issues such as tariffs and the Epstein files. This week 15% tariffs take effect after the Supreme Court ruled against the legality of the previously negotiated tariffs based on the International Emergency Economic Powers Act (IEEPA) of 1977.
These new tariffs operate under different rules that will require Congress to act within 150 days, and both the majority of Americans and the majority of Congress do not favor tariffs. We have written before about how tariffs and policy uncertainty affect markets.
As oil prices approach $100 per barrel, the lack of clarity continues. What we do know on the ground is that gas prices continue to increase and, with a Fed meeting next week, it is unlikely there will be any change in interest rates.
This website is informational only and does not constitute investment advice or a solicitation. Investments and investment strategies recommended in this blog may not be suitable for all investors. SAS Financial Advisors, LLC and its members may hold positions in the securities mentioned within this newsletter. SAS Financial Advisors, LLC is not responsible for any third-party content referenced.
The SAS Newsletters are posted weekly on the SAS Blog: https://www.sasadvisors.com/blog
