Daily Commentary

MarketMinder’s View: According to this long, very long and meandering article, the global economy will be worse off because of the Iran war—it is just a matter of magnitude. As argued at the top, energy prices are “painfully high” and supply cuts to commodities including oil, natural gas and fertilizer could make daily life even more difficult—potentially even setting off a global recession. Even if that worst-case scenario doesn’t come to pass, countries with fewer resources (e.g., those in developing Asia) may still suffer more than their developed peers. After running through a few possible outcomes, the piece concludes holding cash during this uncertain, volatile time would be a sensible move for investors. Look, we aren’t here to critique any specific forecast or economic outlook—these are opinions based on educated estimates, and a few of them may end up being correct. But we urge investors to refrain from treating them like crystal balls, especially because they won’t reveal what stocks will do. To us, the main value with mainstream economic forecasts is as a sentiment measure. When the consensus is expecting the titular “bad, very bad and much worse,” that suggests reality has a low, very low and even subterranean bar to clear to exceed expectations—a bullish development. As for the concluding investment advice, we think it errs greatly in focusing on feelings, not goals.  Sure, holding cash may feel “safe” as markets bounce around, but what happens when the negativity ends and the bull market continues? Missing out on a rebound and subsequent bull market is even more dangerous, in our view, than riding short-term volatility. We think it is wise to factor your comfort with volatility as you select an investment strategy, along with your goals, cash flow needs and time horizon. A blended portfolio of stocks and bonds, which reduces expected volatility relative to an all-stock portfolio, strikes us as a much wiser tactic than having far more cash than you need for an emergency fund—and thus missing returns—or hopping out of stocks every time things feel rocky. For more, see yesterday’s commentary, “Some Timeless Counsel After March’s Volatility.”

MarketMinder’s View: “Companies in the UK expect to raise their prices more rapidly over the coming months as the war in the Middle East drives up costs, Bank of England research shows. The Bank’s regular survey of more than 2,000 chief financial officers conducted last month, after the Iran conflict began, shows they now expect to raise their prices by 3.7% over the coming year. That was a rise from 3.4% in February, while the bosses’ expectation of inflation across the economy has risen from 3% to 3.5%.” Those takeaways aren’t surprising, though we also wouldn’t set them in stone. Oil and natural gas prices are elevated now, but it isn’t assured they will remain high for an extended period. Moreover, businesses won’t necessarily pass on higher costs to customers right away even if they want to. As challenging as recent years have been, some firms may decide to swallow higher costs or substitute products to maintain market share. Bank of England Governor Andrew Bailey acknowledged as much in an interview quoted here: “‘Businesses constantly say to me that they’re operating in a context of an absence of pricing power,’ he told Reuters on Wednesday.” That points to consumers’ opting for substitution, which makes sense when you consider money supply growth is tame. Absent that tinder to ignite hot inflation, high energy costs can’t spark broad inflation. Lower demand elsewhere will be disinflationary. In 2022, inflation spiked in the wake of double-digit money supply growth. We reckon this feeds into why Bailey warned markets may be “getting ahead of themselves” when it comes to rate hike expectations. Nothing involving human decision-making is automatic, so if you are penciling in a rate hike based on today’s fears, we suggest reading our commentary from three years ago: “Two More Lessons on Central Bankers’ Unpredictability.”

MarketMinder’s View: This piece touches on a couple of political developments, which isn’t our interest here. Rather, we highlight this in-depth look at California’s fuel prices to discuss a separate point: Global trends tend to outweigh local ones, but the latter still matter. Yes, the conflict in the Middle East caused global crude oil prices to jump, which has downstream consequences for products like gasoline and jet fuel. But global crude alone doesn’t determine prices you pay at the pump. As shared here, “California is isolated from the rest of US refining capacity. While three pipelines—Western Gateway, Sun Belt Connector and HF Sinclair—are planned to help transport more American refined products to the market, they are years away from completion. The state is set to lose roughly 280,000b/d of refining capacity with the closure of sites operated by Phillips 66 and Valero, said Rob Wilson, chief operating officer at East Daley Analytics, an energy intelligence company. Combined with earlier conversions and shutdowns, California’s supply has been structurally reduced.” That leaves California more reliant on imported gasoline and jet fuel, and alongside strict environmental regulations, sky-high taxes and high operating costs, it is little surprise the Golden State’s gas prices are the nation’s highest. While there isn’t a direct investment takeaway from this news, it is a useful reminder for investors to not overstate any one driver’s effect on prices—reality tends to be more complex. For more, see last month’s commentary, “Pain at the Pump Won’t Hurt the Global Economy.”