Market Commentary

• There will likely be some short-term inflation effects for the economy. Gas prices are a constant reminder for consumers.
• But there are important differences now when compared with past oil spikes.

Financial markets trade on clarity and expectations. And right now, we are lacking clarity and it’s tough for investors to have a high comfort level with their expectations as oil prices are on a roller-coaster ride. Overall, our view is that the Strait of Hormuz, through which 20% of the world’s oil and liquified natural gas production travels, is likely to resume supertanker traffic in what is likely a matter of weeks but could be as short as a few days. As a result, we foresee limited oil-price impact for the U.S. economy.

Are prices at the gas pump going to be higher for consumers? You bet. They already are. In fact, the U.S. average price for gasoline has moved up approximately 60 cents per gallon since the middle of January as oil prices rose in response to the U.S. military-vessel buildup in Middle Eastern waters. So while some areas of the country (Oklahoma) saw gas dip below $2 and other states saw lower prices than they had in a while, consumers are going to have to get used to paying more to fill their tanks, at least in the near term. But the average price of gasoline, at least so far, remains well below the peaks above $4 seen in September 2023 and June 2022.

So there likely will be some short-term inflation effects for the economy. Gas prices are a constant reminder for consumers as most of us put gas in our cars every week. Consumers also have a lot of exposure to grocery-store prices as that is a frequent stop as well. At least in the near term, it’s going to cost more for truckers to get groceries and other goods from point A to point B. Note that U.S. diesel prices, like gasoline, have surged as crude-oil prices have jumped.

But there are important differences now when compared with past oil spikes experienced in the first two Gulf Wars (in 1990 and 2002). Financial-market turmoil did grip investors in both of those past periods just as it has currently. But two things come to mind that separate those experiences with the war today. To begin, the U.S. economy is much more service oriented today rather than very energy intensive as it has been in the past. But also, the U.S. is now a net exporter of oil. While other countries could be at risk of a supply shortage, the combination of U.S. and Canadian production should keep plenty of oil flowing domestically. We could see a temporary bump higher in inflation until energy flows again out of the Persian Gulf, but we believe a recession looks unlikely thanks to U.S. energy resources.

What to do now? Rebalancing exposures after the big runup in energy-related assets is favored. To begin, we suggest bringing the portfolio allocation dedicated to the Energy sector back down to neutral and moving those funds toward U.S. Large Cap Equities and U.S. Mid Cap Equities. Financials (most favored) have underperformed recently and offer an opportunity in our view. We also favor Industrials and Utilities. In terms of Commodities exposure, we suggest bringing allocations back to neutral and then rotating funds from energy-related commodity sectors toward the industrial-metals and precious-metals sectors.

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. Foreign investing has additional risks including those associated with currency fluctuation, political and economic instability, and different accounting standards. These risks are heightened in emerging markets. Small- and mid-cap stocks are generally more volatile, subject to greater risks and are less liquid than large company stocks. 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. Investing in gold, silver or other precious metals involves special risk considerations such as severe price fluctuations and adverse economic and regulatory developments affecting the sector or industry.

Sector investing can be more volatile than investments that are broadly diversified over numerous sectors of the economy and will increase a portfolio’s vulnerability to any single economic, political, or regulatory development affecting the sector. This can result in greater price volatility. The Energy sector may be adversely affected by changes in worldwide energy prices, exploration, production spending, government regulation, and changes in exchange rates, depletion of natural resources, and risks that arise from extreme weather conditions. Investing in the Financial services companies will subject an investment to adverse economic or regulatory occurrences affecting the sector. There is increased risk investing in the Industrials sector. The industries within the sector can be significantly affected by general market and economic conditions, competition, technological innovation, legislation and government regulations, among other things, all of which can significantly affect a portfolio’s performance. Utilities are sensitive to changes in interest rates, and the securities within the sector can be volatile and may underperform in a slow economy.

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