March showers bring April flowers

When we last visited with you, markets were struggling under the weight of higher oil prices and uncertainty tied to the war with Iran.

While a ceasefire has helped alleviate some worries, as we enter May, oil prices remain elevated, gasoline prices average over $4 per gallon, and the conflict in the Middle East has yet to resolve itself.

But investors brushed aside concerns last month.

During April, the S&P 500 Index, the tech-heavy Nasdaq Composite, and the Russell 2000 Index, which measures smaller publicly traded companies, set multiple new highs.

Why have investors seemingly looked past the war?

In part, the answer to our question can be summed up with the two words “looked past.”

1. Investors look to the future and attempt to price in the economic fundamentals six, nine, and twelve months down the road. Collectively, investors believe the war won’t linger for a long period, and oil will eventually begin flowing through the now-blocked Strait of Hormuz.

2. A ceasefire has reduced hostilities, the economy continues to expand, and consumers have yet to cut back on discretionary purchases, despite rising gasoline prices. In other words, households are cutting back on savings, tapping into reserves, or relying more heavily on credit cards as gasoline prices surge.

3. Strong corporate profits are dominating the narrative. Earnings in the first quarter have soared, according to LSEG, coming in well above expectations.

On a related note, the AI boom is driving profits of major tech firms.

4. While the Federal Reserve may be backing away from further rate cuts this year, it has not openly signaled rate hikes either. Please note, however, that the nominee to lead the Fed favors rate cuts. His confirmation appears assured, and he’ll take the helm on May 15.

5. Outside of a knee-jerk reaction, geopolitical uncertainty rarely derails markets for an extended period. We’ve seen this pattern play out repeatedly.

While a war in the Middle East has disrupted oil supplies and other important commodities, stocks have proved to be exceedingly resilient.

So far, the S&P 500 Index has avoided what analysts call a market correction—a 10% peak-to-trough decline. One year ago, the implementation of the president’s so-called Liberation Day tariffs lopped 10% off the S&P 500 in just two days (according to S&P 500 data provided by the St. Louis Federal Reserve).

In summary, investors aren’t ignoring the war. Instead, they are pricing it as temporary and manageable, while focusing on earnings, the economy, and future rate policy.

Yet, we want to caution that risk never completely dissipates. Investors could be underpricing pitfalls. What could change sentiment? Markets could react negatively again if:

• Oil spikes much higher (a much greater supply disruption).
• The war escalates significantly.
• Inflation reaccelerates.
• The Federal Reserve unexpectedly hikes rates.

This isn’t our base case, but if we were to see one or more of these scenarios play out, we’d expect a renewed bout of volatility.

I trust you found this review to be insightful. If you have any questions or simply want to talk through your portfolio or other financial goals, please don’t hesitate to reach out to me or anyone on our team.

Thank you for choosing us as your trusted financial advisor. We deeply value your confidence and are honored to help you navigate your financial journey.