Market Summary: Markets Digest Geopolitical Uncertainty
U.S. equities experienced another back-and-forth week amid heightened uncertainty as geopolitical tensions in the Middle East pushed energy prices higher and prompted investors to reassess the outlook for inflation and interest rates.
Equity markets reacted quickly to headlines related to shipping disruptions through the Strait of Hormuz and the potential for supply constraints in the global energy market. As crude oil prices rose during the week, investors increasingly priced in the possibility that higher energy costs could reignite inflation pressures and delay expected monetary easing from the Federal Reserve.
Fixed income markets reflected a similar shift in expectations. Treasury yields moved higher across the curve as investors reduced bets on near-term interest rate cuts.
Overall, this week highlighted how quickly macroeconomic expectations can shift when geopolitical events influence critical inputs such as energy prices. While economic data releases were generally in line with expectations, investors largely focused on the potential second-order effects of rising oil prices on inflation, monetary policy, and corporate profitability.
Oil Prices and Macro Outlook
The dominant theme throughout the week was the market’s sensitivity to energy prices.
Crude oil moved sharply on geopolitical headlines surrounding the conflict and disruptions to shipping through the Strait of Hormuz, ultimately finishing the week 5.5% higher. Each upward move in oil pressured equities as investors reassessed the potential impact on inflation and the Federal Reserve’s policy path.
As energy prices climbed, expectations for monetary easing shifted materially.
By week’s end, futures markets were no longer confident that the Federal Reserve would deliver even a single 25-basis-point rate cut in 2025. Treasury yields reflected that shift, with the 2-year Treasury yield rising 17 basis points to 3.73% and the 10-year yield climbing 16 basis points to 4.29%. Rising yields also weighed on rate-sensitive sectors such as housing and consumer discretionary.
Economic Data and Federal Reserve Outlook
Economic data played a secondary role relative to geopolitical developments but still offered important context for the macro outlook. Inflation data for February was largely in line with expectations.
The Consumer Price Index matched forecasts at both the headline and core levels, and the PCE Price Index - the Fed's preferred inflation gauge - also rose 0.3% month-over-month, in line with expectations.
However, investors largely looked past these readings because they do not yet reflect the recent rise in energy prices. Markets are increasingly focused on the possibility that higher fuel costs could drive stronger inflation readings in the coming months.
Growth data was a bit more concerning. The second estimate of fourth-quarter GDP was revised lower to 0.7% from 1.4%, while the GDP price deflator was revised higher.
This combination of slower growth and firmer inflation pressures complicates the policy outlook and reinforces the market’s concern that the Federal Reserve may have limited flexibility to ease policy in the near term.
Historical Perspective and Long-Term Investing
Periods of geopolitical uncertainty can create sharp market swings and stir up negative emotions, but history suggests that maintaining a long-term perspective remains one of the most important disciplines for successful long-term investing.
Markets often react quickly to headlines, particularly when events have potential implications for energy supply and inflation.
Despite this, the equity market has historically demonstrated a strong ability to absorb geopolitical shocks and recover over time.
For long-term investors, these periods can serve as reminders that volatility is a normal part of the investment cycle.
Remaining disciplined, maintaining diversification, and focusing on long-term objectives have historically proven more effective strategies than reacting to short-term headlines and allowing our emotions to negatively impact our financial plans.
Week Ahead
This week, the primary focus will be the Fed's policy rate decision on Wednesday. Investors will be looking to closely monitor commentary by Fed Chair Powell and look for clues about how the Fed is interpreting recent inflation data and how higher oil prices may impact the broader inflation and growth outlook.
Wednesday will also offer inflation data in the form of the Producer Price Index (PPI), which provides insight into price pressures at the wholesale level and may offer early signals about future consumer inflation trends. With energy prices rising sharply in recent weeks, markets will be particularly sensitive to whether producer prices show signs of accelerating.
Geopolitical and energy developments are also likely to be continuously monitored as oil prices remain elevated and top-of-mind for investors seeking to balance inflation and growth risk.
As always, please reach out to us for any questions and thank you for your trust.
Respectfully,
Michael Neill, CFA