Market Commentary

• Last week and weekend we saw both sides in the war step back from serious escalations that could have sent energy prices much higher.
• These signs of both sides adjusting their threats to avoid the worst economic case signal that there are political constraints that we think will ultimately restrain the duration of the war.

Oil prices have surged, and the costs to businesses and consumers are and will continue to be widespread across many segments of the economy both here at home and globally. The immediate domestic impacts include higher gasoline prices at the pump when consumers go to fill their vehicle’s tank and higher transportation costs for every business that uses gasoline or diesel to deliver goods from point A to point B. America relies heavily on truckers to transport the bulk of components and finished goods to end users and consumers. Some trucking companies have already initiated surcharges to compensate for the higher cost of diesel fuel. At least some of this additional cost is likely to be paid by U.S. consumers and will result in a number of shorter-term inflationary effects on the economy.

Last week we saw both sides in the war step back from a serious escalation that could have sent energy prices much higher. On March 18, Israel struck an Iranian natural gas field, and Iran retaliated against a Qatari gas facility. But the U.S. stepped in and warned against striking energy infrastructure. The exchange of attacks was “one and done.”

Of course, decisions in war are not always rational. Looking ahead, one side or the other could miscalculate again and send the retaliations escalating in rounds, each time raising the stakes and widening the destruction. But we believe all sides want to avoid extensive structural damage to the region’s main income source. In fact, there was another instance last weekend of the two sides stepping back from such an escalation. These signs of both sides adjusting their threats to avoid the worst economic case signal that there are political constraints that we think will ultimately restrain the duration of the war.

So the question is what should investors do now? Markets have been extremely volatile and will be susceptible to headlines until military actions cease. One area of recommended focus is rebalancing portfolio exposures after the big run-up in energy-related assets. We suggest bringing the portfolio allocation dedicated to the Energy sector down to a neutral weighting and recommend moving those funds to U.S. Large Cap Equities. Looking at overall commodity exposure, we recommend rotating funds from energy-related commodity sectors toward the industrial metals and precious metals sectors. From an equity-sector perspective, Financials (most favored) have noticeably underperformed this year and offer a potential buying opportunity. Our favored sectors also include Industrials and Utilities.

Each asset class has its own risk and return characteristics. The level of risk associated with a particular investment or asset class generally correlates with the level of return the investment or asset class might achieve. Stock markets, especially foreign markets, are volatile. Stock values may fluctuate in response to general economic and market conditions, the prospects of individual companies, and industry sectors. Investments that are concentrated in a specific sector or industry may be subject to a higher degree of market risk than investments that are more diversified. The commodities markets are considered speculative, carry substantial risks, and have experienced periods of extreme volatility. Investing in a volatile and uncertain commodities market may cause a portfolio to rapidly increase or decrease in value which may result in greater share price volatility.

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