Glass Half Full?
What if worrying here is wrong?
There’s a lot of very reasonable concern that elevated oil prices are raising inflation expectations which are then raising interest rates. In turn, can these elevated rates derail the impressive rally we’ve seen of late?
Again, that’s a perfectly reasonable worry. Fundamentally, though, that’s a concern based on an assumption about the future. Sure, if oil continues to go up then inflation expectations are likely to rise, thus lifting rates and likely hitting stocks. Will oil keep rising, though?
I can’t help but notice that even with rates rising all week, eventually hitting multi-month highs, Friday was the first day we saw bonds really hit stocks and cause them to move down together. Until Friday, stocks had managed to ignore the oil and rate concerns. I consider that somewhat remarkable and worthy of consideration.
What I really wonder is what if the opposite of the common fear happens? What if oil starts going durably down, inflation stress relaxes, and bonds go up? What would happen to the stock market then? The market has been slow to react to the stress, so what would happen if the opposite oil goes the other way? I’d expect it would be quite positive.
Of course, I don’t really have any greater knowledge about what happens next that anybody else. Maybe oil does keep going up and markets get hit. But maybe they don’t. Trump has indicated a reluctance to go back to a war stance, and we failed to restart military action over the weekend despite a fair amount of fear of it. That doesn’t solve all problems but does indicate perhaps a re-escalation is unlikely.
Thus far, the economy has held up well and AI spending has transcended inflationary oil fears. I’d also note this isn’t the Seventies-- the US has much more energy independence than we did back then. That helps soften the blow from energy prices.
If we can settle an Iran war that neither side seems to have much appetite for, I can’t help but think markets could really launch. I doubt I’m alone with that thought, which I expect is part of why the stock market has held up so well over the last month and a half. There haven’t been enough problems and people don’t want to get left behind.
I think there’s been a lot of focus on what can go wrong and frustration that the market has held up so much better than most expected. Instead of focusing on a glass half empty, it’s been better to look at the glass as half full. Even with the bearish end to the week, the market was still slightly up on the week. Eventually, the market will encounter trouble but so far, its rolled with the punches quite well. Maybe that can continue.
My sense is that we’re likely set for some trouble to start the week. It’s easy to imagine investors selling, as oil, rates, and bitcoin are going the wrong way. I’d just caution that maybe this is yet another situation where the market is ‘shaking the tree’ to get weak holders out of their positions and a week or two from now, we’ll be higher. This hasn’t been an easy market, but I still don’t see enough to think a lasting top is in.