WEEKLY MARKET RECAP –
MEGA-CAP TECH TRADE REGAINS MOMENTUM; S&P 500 AT ALL-TIME HIGH
Equities: The MSCI AC World Index declined for the second time in the past three weeks led by weakness in international markets. The MSCI Emerging Market Index fell for the third consecutive week led by weakness in Asia. Within the U.S., large cap growth stocks led the S&P 500 to a fresh new record high. The strength in large cap tech was due to optimism about inflation expectations declining.
Fixed Income: The Bloomberg Barclays Aggregate Index was lower for the second time in three weeks. Treasury yields moved higher after hawkish Fed comments that suggested the path to rate cuts will be slower than markets anticipate. Floating rate instruments and leverage loans were the only area of fixed income to post a gain for the week.
Commodities/FX: The Bloomberg Commodity Index was lower for the second straight week. Despite frigid temperatures across the U.S., natural gas prices plummeted as storage remains full and delays are mounting given the crisis in the Red Sea. Gold prices fell for the second time in three weeks as expectations for an early Fed rate cut were slashed.
TENSIONS IN THE RED SEA
It has been just over 100 days since Hamas launched an unprecedented attack on Israel which has sent geopolitical shockwaves through much of the Middle East and abroad. One of the risks to global markets is a larger, regional conflict breaking out in the Middle East which has the potential to disrupt trade and strain geopolitical relations. While we are not geopolitical analysts, we are watching the situation in the Middle East closely as it relates to potential investment implications.
THE BOTTOM LINE:
The biggest risk at this point from the escalating geopolitical tensions in the Red Sea is the upside risk to inflation. While some Economists have downplayed the impact on inflation we are concerned of the impact this can have on the supply chain and then what it can do to inflation data. We have seen what the damage that disruptions to the supply chain have done to inflation in the past and we have finally repaired the flow of global trade from the pandemic. We can also look at history as a guide to what the impact can be on the supply chain. In 2021, the grounding of a major container ship (which blocked the Suez Canal) held up $9.6 billion worth of goods each day.3 We will continue to monitor these events and what it means for the economy. It puts the Fed in a difficult situation and investors should not be optimistic about aggressive rate cuts this year.