NEWS
What Happened This Week
The Federal Reserve chose to leave the steady at 4.25%-4.50% on Wednesday, citing that the potential for rising costs resulting from still uncertain tariff policies has called for greater caution.
Middle Eastern tensions picked up as Israel launched widescale strikes on Iran last week, countered with missiles from Iran striking Tel Aviv.
Iran’s exports of oil averaged about 1.5 million barrels per day in the first eight months of 2024, a small fraction of global oil production that ranks well behind the US, Saudi Arabia, Russia, Canada and Iraq.
Iran’s oil export capability is already severely limited due to ongoing sanctions from multiple countries.
US inflation, as measured by headline Consumer Price Index (CPI), was reported below expectations for the fourth month in a row at only 0.1% month over month. Even the core CPI, removing volatile food and energy prices, only rose 0.1%.
The Producer Price Index (PPI), which measures input prices that can trickle down to the end consumer, also came in with inflation lower than expected: both the headline and core rise was only 0.1%.
Retail sales, as well as housing starts and new permits, all fell in May.
How I See It
I still believe this is a time for added caution, especially for those with short- and mid-term goals for their investments. Focusing on broad diversification is key to reducing the extent of likely volatility, while also maintaining the ability to capture upside if things continue to climb steadily.
Investor sentiment has improved since April. But it’s still cautious.
The problem I see is that, while things could continue strong through the end of the year, investor sentiment remains cautiously optimistic while Purchasing Managers Indexes and the Conference Board’s Leading Economic Indicator shows potential for deteriorating fundamentals.
Sure this could turn around. But it could just as easily get worse with the onset of a negative surprise. It wouldn’t take much to push things over the edge.
While the Israel-Iran conflict is a sad and scary situation, regional conflicts rarely affect global GDP in a meaningful way. This situation warrants monitoring though because of the Strait of Hormuz’s importance to global trade. If Iran were to block the Strait, this could rock markets for a time while new trade routes are instituted. But this is unlikely, in my view, as Iran has never made good on its threats to block the Strait. Such a move also risks ruining its critical relationship with China as its single biggest buyer.
While US retails sales were down, it’s not totally unexpected as many consumers likely chose to make big purchases in April to get ahead of the expected impact of tariffs. Having already made those purchases, many did not recur in May. This is not likely a new trend beginning but the natural result of April’s incentives.
In short, the US economy continues to coast along with mixed signals.
Increasing allocation to the bond and other fixed income portion of a portfolio can help reduce total risk of downside by spreading the risk across assets that move in different ways for different reasons. With interest rates still at a moderate level, if the economy takes a serious turn downwards, bond rates have the potential to drop, which (assuming no default) causes bond prices to rise.
On rare past occasions, stock and bond prices have both been negative in a single year. It is possible. But we invest based on probabilities and weighting the odds.
This type of offset to stocks can be an important risk management tool to help us navigate uncertain times like these.
Disclaimer: The content of this article is provided for educational purposes only and should not be considered as professional financial advice. Readers are encouraged to consult with a licensed financial advisor before making any investment decisions based on the information presented.