Daily Commentary

MarketMinder’s View: This article centers on several publicly traded companies, so please note MarketMinder doesn’t make individual security recommendations. Their mention is coincident to our highlighting a broader theme: Oil and gas producers continue adapting to wartime disruptions in ways that will secure more long-term supply while curbing the Strait of Hormuz’s relevance. For context, many of these companies have dialed back investments in exploration projects in recent years, opting to stay lean after overextending themselves during the shale boom and getting caught out when oil prices plunged, leaving them with high fixed costs and less revenue to cover them. But it seems high oil prices and the desire to reduce a regional chokepoint’s importance have incentivized them to ramp up drilling again while distancing themselves from potential disruptions in the Middle East. Producers are targeting new drilling sites “in Africa, South America and the eastern Mediterranean that could refill their reserves for the next decade.” We see a couple of investor takeaways here. One, as previously noted, this shows how high oil and gas prices help strengthen producers’ balance sheets and incentivize new production. Just as we saw after Russia’s invasion of Ukraine, global producers are ramping up supply to fill the shortfall. Two, while today’s investments may take years to come online, they point to a future where oil supply is more diverse and geopolitically stable, much as Europe’s investments in natural gas import terminals did in 2022. This is something investors ought to keep in mind when these conflicts begin. While headlines focus on worst-case scenarios, there are potentially positive outcomes, too. For more, see today’s cover story, “Easing Hormuz’s Grip for the Long Term.”

MarketMinder’s View: Inflation in the Great White North accelerated to 2.4% y/y in March, slightly cooler than analysts’ estimates but still faster than February’s 1.8%. And as the title notes, much of this acceleration stemmed from higher gas prices tied to the Middle East conflict. “Gasoline prices jumped by 21.2% on the month, according to Statistics Canada’s report on Monday, marking the largest increase on record as the Middle East conflict drove up oil prices globally.” However, natural gas prices’ -18.1% m/m fall helped offset some of the pain here by dampening the rise in overall energy costs. As we noted with February’s reading, Canada’s hefty domestic oil and gas industry helps shield them from global price shocks, which came in handy in March. Prime Minister Mark Carney’s temporary pause on federal fuel excise taxes until September 7 should help ease energy costs, too. Pair this with core inflation’s (which excludes food and energy) 1.9% y/y rise in March, and it appears Canada, like the US, isn’t suffering from higher oil and gas prices’ bleeding into other categories. Outside of this, while we don’t think central bank moves are possible to predict, it is interesting that sentiment expects a rate hike this year even as the Bank of Canada “has signaled it plans to look through the short-term impact of the oil shock.” This strikes us as more evidence investors are fighting the last war, in this case central bankers’ rapid U-turn toward aggressive rate hikes in 2022.

MarketMinder’s View: We don’t think everything in this meandering piece quite adds up, but there are some good points to highlight. First, though, a light criticism: While we appreciate that it tries to discern between investing and gambling and rightly excoriates products that try to blur the line, we don’t think it goes far enough in that. Friends: Investing isn’t gambling. It isn’t a game of chance. The stock market is not a casino. In a casino, games are designed so that the house wins, and none of them are a market function. The stock market, by contrast, rises much more often than it falls. While its short-term moves can be noisy, you can generally bank on it moving (up or down) over the mid to longer term based on how corporate earnings perform relative to expectations. When you buy a stock, you buy a slice of those earnings—nothing like a gamble. Now, with that out of the way, the salient points. One, yes and amen, prediction markets aren’t investment vehicles. They are speculative tools. Watch their movement to get a bead on sentiment if you like, but know that they are about gambling and dopamine, not building long-term wealth. Two, it is indeed important to watch out for flashy products and a bull market dulling your risk sensitivity. And, three, recency bias makes a lot of folks downplay how bad a bear market can be. “The last brutal bear market in stocks ended 17 years ago last month—most of a lifetime for many young investors. Between Oct. 9, 2007, and March 9, 2009, the S&P 500 lost 55.3%, including reinvested dividends. That bashed every dollar down to less than 45 cents. The S&P 500 didn’t recover and stay above its 2007 high until the end of 2012.” The bear markets since have been either sharp and short (2020’s COVID lockdowns) or shallow and sentiment-fueled (2022). It is quite likely the next brutal bear market will catch folks off guard, potentially making its panicky final throes very bad. That isn’t an action item today, but preparing mentally for the next bear market is a good practice.