The S&P 500 was little changed last week, and that continued the generally sideways “churn” we’ve seen in markets over the past six weeks, as higher yields, AI confusion/anxiety, and geopolitics act as headwinds on stocks. But while these headwinds are legitimate and (if they get worse) could cause a full-blown pullback (5% decline in the S&P 500 or more), the reality is the next two weeks offer an opportunity for the headwinds to abate. And amidst declining investor sentiment, I want to profile the three events that could positively surprise markets here.
Event 1) Oil drops back to manageable levels. The market only “cares” about the U.S./Iran conflict in so much as it is boosting oil and commodity prices and potentially slowing global growth. Right now, markets don’t need a ceasefire for oil to decline meaningfully. To that point, several days last week, 17-18 million barrels of oil transited Hormuz, which is down slightly from the 20 million pre-war. Obviously, that’s not an everyday occurrence, and it’s coming with enormous effort from the U.S. Navy, but all markets need to get Brent crude back into the mid-to-low $80s (or upper $70s) as reassurance that we don’t get stuck in an indefinite situation where, every few weeks, a ship is struck and the U.S. and Iran trade strikes. If that occurs, oil will fall, and stocks can lift regardless of whether there’s meaningful progress towards a ceasefire.
Event 2) Dovish rate hike. Uncertainty surrounding the Fed has been a headwind on this market since Warsh became Fed chair, but next week the Fed can give the market the clarity it needs. By hiking once and signaling the Fed is on hold (so no more hikes after that), the Fed can reestablish credibility on inflation and not damage the economy. That will help to ease the Fed headwinds that have been in this market since May.
Event 3) Tame CPI (Consumer Price Index). Inflation is at the heart of a lot of consternation in this market, and it’s showing up in various forms: Fed confusion/conflict, consumer spending headwinds, margin challenges for companies, etc. Progress on inflation (i.e., a CPI that meets, or ideally beats, expectations) and reinforcement that inflation is being reined back in will be a welcome positive.
Bottom line, there are real headwinds on stocks, but the next two weeks have the opportunity for them to clear. Conversely, if these events don’t turn out positively and we get 1) Further escalation in Iran, 2) no hike by the Fed or the promise of aggressive hikes, and 3) Hot CPI, then brace for more declines in stocks, and a 5% drop or more over these two weeks shouldn’t shock anyone. No need to worry because our moderately conservative positioning is for this kind of volatility.