The market continues to show strength in the face of high energy prices and an uncertain Middle East situation.
Stocks continue to rise with almost the entire pullback since the attack on Iran started on February 28th now erased. The dip buyers have been richly rewarded once again. The VIX has moved back below 19, the lowest it has been since pre-Iran. This is despite WTI crude oil still in the $90’s and flows through the Strait of Hormuz far from “normal”.
Interest rates remain elevated from pre-Iran conflict. In economic data today, the for March, the first post-Iran conflict data, saw both headline and come in a tick lower than forecast, though the headline number gapped up huge to +0.9% from February’s 0.3% due to energy prices. While the Michigan surveys saw 1-year rise from 3.8% to 4.8%, the 5-year inflation expectations only rose from 3.2% to 3.4%.
For the trailing month, the sector winners are basic materials (+2.3%), which include industrial gases and fertilizer companies, financial services (+2%), energy (+1.8%), and, importantly, due to the heavy weight, tech (+1.6%). Losers are the more defensive sectors of healthcare (-3.2%) and consumer staples (-2.9%). Momentum stocks are back in a big way, up 6.1% for the trailing month.
U.S. interest rates are essentially flat today, while international rates have ticked higher, recovering some of their large pullbacks after the ceasefire was announced. The exception again is Japan, whose 10-year is up 7bps today to 2.45%, now up 27bps in a month. Japan is the only major stock market that is down today, though still up 9.2% YTD.
The market’s strength is centered on growth and momentum stocks once again as the earnings season is upon us, with the Magnificent 7 strong after pulling back to P/E levels as low as they’ve been in many quarters. Semiconductors are now up 10.7% in a month.
The focus in the short term will remain on what happens in Iran. If it unwinds and the missiles fly again, we will certainly see some downside volatility again. But the rebound we’ve already seen has certainly given dip buyers new confidence, and the momentum is a vote of confidence in the many forecasts for the market to achieve new all-time highs by the end of the year.
The longer-term trend is positive, with a bumpy ride still likely until Iran is in the rear-view mirror.