Market Update: US-Iran Conflict

Market Update

The US-Iran conflict is starting to show real macroeconomic impact. The Strait of Hormuz is fully closed, oil has surged past $100 a barrel, and inflation expectations have increased. When situations like this escalate, markets often react first and ask questions later, but this time it seems the market is pricing in expectations that the conflict will remain manageable. If the strait reopens soon that may end up being appropriate. The market moves so far have been mild but that can change quickly if sentiment about the likely duration of this conflict changes.

Here’s the key point for your plan: you don’t need to make changes to your investments as a result of this conflict. Geopolitical shocks can create short-term volatility, but they rarely change the long-term drivers of portfolio returns. We’ve seen oil shocks before – the 1970s, the Gulf War, 2022 after the invasion of Ukraine – and markets have adapted every time.

What I am watching:

  • Timeline: Both sides have incentives to de-escalate, but demands remain far apart. The next week or two will tell us a lot about whether this stays manageable or becomes a bigger problem.
  • Energy markets: If oil prices spike further, it could rattle stocks.
  • Rates + the dollar: Higher oil prices could keep inflation sticky and delay Fed rate cuts.

What to do right now:

  • If you’re diversified and your plan already has a cushion, stay the course. That’s what the plan is for – so you don’t have to play the guessing game during stressful stretches of time.
  • If you’re investing on a schedule (401k, monthly brokerage contributions), keep going. Volatility can feel uncomfortable in real time, but it’s also how long-term investors get rewarded.
  • If you have a big near-term cash need (house down payment, tuition, tax bill), let’s double-check that your “this money is soon” bucket is still appropriately protected.

Most importantly, remember the drill. We stick to the plan and we don’t time the market. Long-term investors know wealth is built through times of uncertainty.
Keep calm and invest on.

Kaylin Dillon, CFP®

Market Update: Tech Selloff

Market Update

The S&P 500 officially entered a market correction this week, meaning it has dropped at least 10% from its all-time high in February. While that might sound alarming, corrections are a normal part of investing.

This downturn has been largely concentrated in tech stocks. The silver lining? Unlike many other recent market declines, bonds are actually doing their job as a buffer, providing a stabilizing effect in portfolios.

As of today (Friday), we’re seeing a bit of a rebound. Does that mean we’ve hit the market bottom? No one can say for sure—we only recognize the bottom in hindsight. That’s why we don’t try to time the market. Instead, we stay focused on the same proven strategies that keep you on track, no matter what the headlines say:

➞ Stick to the plan.

➞ Time in the market beats timing the market.

➞ If you’re investing cash as part of your plan, enjoy the good deals.

➞ If you’re withdrawing from your portfolio, remember: we built in a cushion so you don’t have to sell in a downturn.

These are times that separate the winning portfolios from the losers. We’re here for the long-term compounding.

Keep calm and invest on.

Kaylin Dillon, CFP®

What to Make of the Current Market Volatility

The Federal Reserve intends to move more aggressively in fighting inflation. The Fed will likely do this via a series of 50 basis point rate hikes, beginning with the May Federal Open Market Committee meeting. This is going to be the first time in 22 years that the Fed has doubled the normal 25 basis point increase.

Chairman Powell remarked at a panel discussion at the IMF on April 21st that it is appropriate “to be moving a little more quickly” on rate hikes. He also communicated that, according to him, financial markets are “acting appropriately generally.” This means that markets are adjusting to the expectations of higher rates and the recent volatility is generally to be expected in light of the anticipated rate hikes.

Markets are forward-looking, so prices today reflect what markets think will happen in the future. Markets are having trouble interpreting this rate increase information because we have yet to see corresponding data showing whether or not rate hikes are working. Until we have more data to work with, we can expect continued volatility.

 

Has Inflation Peaked?

March inflation reached a 40-year high at 8.5% annualized. This inflation rate wasn’t a surprise, but it’s still a startling number for consumers. The remaining question is whether the Fed actions and a gradual resolution of supply issues will help inflation to resolve relatively quickly, or if inflation is here to stay longer term.

There is one positive note: Core inflation, which is defined as all prices except food and energy, fell in March. As we enter late spring, warmer weather will likely bring down energy costs. Additionally, consumer and government pressure may result in lower prices at the pump as oil companies bring more drilling online.

Bond yields have increased significantly, and the dollar remains relatively strong as US growth continues to outpace that of other countries.

Why does this matter? Historically, the dollar appreciates at the start of Fed hiking cycles. And a stronger dollar means imports are less expensive, which could help offset inflationary pressures.

 

Are Markets Concerned About Global Growth?

The war in Ukraine has had an immediate and drastic impact on global growth. The IMF recently released a report on the world economic outlook that found lower growth would be likely.

The IMF is projecting that global growth will slow from an estimated 6.1% in 2021 to 3.6% in 2022 and 2023. This is 0.8 and 0.2 percentage points lower for 2022 and 2023 than projected in January. Beyond 2023, global growth is forecast to decline to about 3.3% over the medium term.

 

What is Happening with Earnings?

What’s happening at the company level is also important. After four record quarters of earnings results in 2021, investors are looking to the second-quarter earnings season for insight into where the markets are headed.

Over one-third of the companies in the S&P 500 have reported earnings this quarter and, so far, nearly 80% of them have beat the Wall Street analysts’ expectations. We typically only see around 60-70% of companies beat earnings expectations.

While revenue growth is likely to be strong, earnings per share expectations are moderating. This means that margins may be getting stretched – and companies with pricing power will be in better shape to withstand ongoing inflationary pressures.

 

How Should Investors React to the Market Volatility?

Increased market volatility is normal given the number of economic variables that remain unclear currently. Markets really dislike uncertainty. However, the overall takeaway is that the fundamentals of the economy remain strong.

Demand for consumer goods is strong. Demand for better wages and more job opportunities are leading more people to return to the labor markets. Additionally, The Institute for Supply Management is reporting signs of resolving supply chain issues.

For investors with long-term investment horizons, it’s best to stay the course of your financial plan and your investment strategy. There’s no reason to try to predict what direction these economic variables will go in the short-term.

 

The Bottom Line

We’re definitely at an inflection point when it comes to inflation, interest rates, and global growth. Inflection points feel tense but remaining disciplined in the face of uncertainty is the best time-tested strategy.

 

 

The information contained herein is intended to be used for educational purposes only and is not exhaustive. Diversification and/or any strategy that may be discussed does not guarantee against investment losses but are intended to help manage risk and return. If applicable, historical discussions and/or opinions are not predictive of future events. The content is presented in good faith and has been drawn from sources believed to be reliable. The content is not intended to be legal, tax or financial advice. Please consult a legal, tax or financial professional for information specific to your individual situation.

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