Plus the February jobs report, Treasury and mortgage-rate moves, and retail sales results.
Rising tensions with Iran have erupted into coordinated attack by the U.S. and Israel targeting missile infrastructure, air defense systems and senior political and military leadership, resulting in the death of Iranian Supreme Leader Ayatollah Ali Khamenei.
Now in day seven of the conflict, energy markets are repricing sharply higher with oil up $20-plus a barrel since last week to over $90 for both WTI and Brent crude (increases of 28% and 35% in price, respectively) as traffic through the Strait of Hormuz has come to a near stop.
OPEC has responded by announcing a larger-than-expected supply increase (206,000 barrels per day, up from 137,000), however, the issue is access to supply (shipping) as opposed to supply itself; the Strait of Hormuz connects the Persian Gulf to the Indian Ocean and accounts for roughly 30% of seaborne oil trade. About 20% of the world’s supply of liquefied natural gas passed through the channel last year as well.
Iran has retaliated with missile attacks across the region and directly attacked energy infrastructure to effectively shut the Strait of Hormuz down to commercial shipping. As of press time, the U.S. is calling for Iran’s “unconditional surrender” and the president has pledged the U.S. Navy will escort tankers through the Strait to ensure the free flow of energy. U.S. Treasury Secretary Scott Bessent has also signaled measures to ease fuel prices are forthcoming.
Investors are trying to now gauge the duration and depth of U.S. military involvement in the region, as reports vary from a few weeks to a months-long extended program. There are also other knock-on impacts to consider. For example, farmers worldwide are desperate to secure supplies of fertilizer as the war is disrupting supply chains, with one third of fertilizer supplies passing through the Strait. Insurance costs for ships traveling through the Gulf could now jump by as much as half.
Financial markets globally have tumbled in response to these developments, with the U.S. markets down between 2% for the tech heavy Nasdaq Composite to over 3% for the more value-oriented Dow Jones Industrial Average. With more energy independence than other economies and energy companies accounting for less exposure in key market benchmarks, U.S. stocks are repricing less dramatically than foreign stocks, though that doesn’t mean there are not still big moves happening. But by comparison, key international and emerging market benchmarks are down by 3% to 8%.
Notably, U.S. bond markets, rather than serving as a typical flight-to-quality safe haven, moved quickly to price in the inflationary impacts of war, with the 10-year benchmark Treasury yield rising above 4%. Sadly, this has affected the 30-year fixed mortgage rate, which had briefly and finally dipped below 6% in February only to swivel back higher this week for the upcoming important spring homebuying season.
In addition to these grave geopolitical developments, the February jobs report revealed a sobering 92,000 job losses for the month, and an unemployment rate that ticked higher to 4.4%. Job cuts were concentrated in the health care, information service providers (tech/media/telecom) and government segments. Adding to worries was the accompanying report on January retail sales, showing softening retail momentum to start the year, with a 0.2% contraction for the month, though it showed solid year‑over‑year 3.2% growth, led by e-commerce and food services.
War with Iran is only adding to anxiety already building in investors about the strength and durability of financial markets after a breathtaking three-year run of price increases. We remain firm in our advice to you not to make large shifts in your allocation due to these developments. Time and again, we have experienced how geopolitical risk has had only transient market impacts—pullbacks are often far shorter-lived than the conflicts that trigger them, and in the meantime, businesses adjust and investors return their focus to market fundamentals. It can be very costly from a tax and timing perspective to think you can both time the markets out and back in to fulfill your investment and planning goals. During times of stress, we want to be very thoughtful about the long-term implications these short-term decisions can have.
Our collective focus should be on identifying near-term cash needs (and provisioning for them) and otherwise using volatility to fine-tune the asset allocation and diversification of your portfolio.
Sadly, geopolitical risk seems now to be a more persistent part of our economic and market backdrop, rather than an episodic factor. That is something to consider as we work on your investment plan—managing your portfolio’s resilience to bouts of volatility may be prudent. Sometimes it can make sense to include allocations to alternative and hedged investments or in market segments beyond bonds as a volatility buffer. We also suspect that this short-term shock to energy prices is likely to spur more anxiety around affordability heading into the midterm elections and rising political volatility close to home. However, over the long term, the best arbiter of your financial success is being and staying invested in growing companies and aligning those investments to your overall financial plan.
Written by a human.