Latest / Markets with Megan: A Quick Financial Markets Update / IMPACT REPORT Oil, Inflation, & War: What Changes Now? | S3 E125 | 03-03-26

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IMPACT REPORT Oil, Inflation, & War: What Changes Now? | S3 E125 | 03-03-26 · Markets with Megan: A Quick Financial Markets Update

• 0:00
  Megan Horneman: We're coming to you today with a special impact report as we're in the fourth day of the conflict that we're seeing in the Middle East.
• 0:07
  Megan Horneman: This is Markets with Megan, and it is Tuesday, March the 3rd.
• 0:10
  Megan Horneman: If you like this podcast, you can subscribe, hit the alarm bell, share with your friends, family, or colleagues.
• 0:16
  Megan Horneman: But we want to break down after we gave a little bit of information yesterday with the first trading day after the war began.
• 0:23
  Megan Horneman: But now we're here into the second day, and it is quite a volatile day in the not only the equity markets, but the bond markets as well as the commodity markets.
• 0:32
  Megan Horneman: So let's talk a little bit about and the two main issues that are causing the volatility today.
• 0:38
  Megan Horneman: First of all, it is expensive the war has expanded beyond just the US and Israel.
• 0:43
  Megan Horneman: Trump has warned that it could take weeks before we see a resolution here.
• 0:47
  Megan Horneman: And then he didn't, he hasn't rolled out completely ground troops, U.S.
• 0:51
  Megan Horneman: ground troops.
• 0:52
  Megan Horneman: So this has caused a lot of fear and anxiety in the markets.
• 0:55
  Megan Horneman: Oil prices, which have skyrocketed here because of this turmoil, that also is disrupting the markets, and we'll talk about that in a second.
• 1:03
  Megan Horneman: And then what is going on in the Strait of Hormuz?
• 1:05
  Megan Horneman: Um, there is Iran has said that they would attack any container ships or shit or any kind of vessels that enter through there.
• 1:13
  Megan Horneman: So while it's not officially shut down, um, that cause of fear has people diverting away from the Strait of Hormuz.
• 1:20
  Megan Horneman: And this does have impacts from an economic standpoint and from an inflation standpoint.
• 1:24
  Megan Horneman: We've seen tanker activity both um west to east and east to west drop significantly in in recent days.
• 1:32
  Megan Horneman: And remember, the Strait of Hormuz is the second largest daily volume of moving petroleum.
• 1:36
  Megan Horneman: It moves about 20 million barrels of petroleum a day.
• 1:40
  Megan Horneman: The biggest destination of the oil that moves to the Strait of Hormuz is to China, because China gets 89% of its oil from Iran.
• 1:48
  Megan Horneman: Now let's just talk about the market perspective.
• 1:51
  Megan Horneman: Um as you know, we're filming this, it's been a pretty ugly day from the equity standpoint.
• 1:56
  Megan Horneman: The VIX has jumped, which is a volatility index, to the highest we've seen since Liberation Day, the SP 500s, and it's the worst day since October of last year.
• 2:05
  Megan Horneman: Small and mid-cap stocks, which have been really one of the favorite areas of the market, are taking the brunt of it today.
• 2:12
  Megan Horneman: And also international equities are underperforming the US because there is a lot of uncertainty what this disruption will do to some of the other developed economies, especially within Europe.
• 2:22
  Megan Horneman: Crude oil is at$77 a barrel.
• 2:24
  Megan Horneman: That's the highest we've seen since January of 25.
• 2:27
  Megan Horneman: All 11 sectors are lower in the SP 500.
• 2:31
  Megan Horneman: It's led by materials, industrials, and consumer discretionary.
• 2:35
  Megan Horneman: And energy, you know, as we when I came into this, it was slightly lower for the day, but very muted decline.
• 2:42
  Megan Horneman: The dollar is higher, and then treasuries are weaker as we're seeing inflation expectations increase.
• 2:48
  Megan Horneman: We've seen two-year inflation expectations rise to a 10-month high.
• 2:53
  Megan Horneman: The good news out of that is long-term inflation expectations have been relatively contained.
• 2:59
  Megan Horneman: Because of the concern here from an inflation standpoint, Fed funds futures contracts for year end coming into this at the end of last week, that was about 3%.
• 3:09
  Megan Horneman: So looking for a few more a couple more interest rate cuts, it's now at 320.
• 3:12
  Megan Horneman: So the market is pricing out some interest rate cuts for the year.
• 3:16
  Megan Horneman: So let's break this down from an economic standpoint.
• 3:19
  Megan Horneman: What does the higher oil prices mean for GDP and inflation?
• 3:23
  Megan Horneman: There are some estimates that a$10 increase per barrel of oil, if it's sustained, can cut GDP between 10 and 20 basis points.
• 3:33
  Megan Horneman: The headline inflation, um, that is a that's a little bit more concerning because you can see that that a$10 per barrel increase could increase headline inflation, remember that includes energy, by 20 basis points.
• 3:47
  Megan Horneman: And given that we've already seen a 10 per a$10 increase in um oil prices year to date, and this is before we the turmoil began, we do expect that this can have a bit of a bigger impact.
• 4:00
  Megan Horneman: And again, I want to stress if this continues for a prolonged period of time, now that can have an impact to GDP specifically through taking away spending power from the consumer.
• 4:11
  Megan Horneman: So there's a there's a rule of thumb that for every you know one cent increase or one dollar increase in in gas prices, it reduces annual spending power by um a billion dollars.
• 4:21
  Megan Horneman: So we're looking at you know tens of billions of dollars of reduced annual spending power.
• 4:26
  Megan Horneman: Again, this just depends on how long this goes on.
• 4:30
  Megan Horneman: So let's give a, you know, our our bottom line and our takeaway from this.
• 4:34
  Megan Horneman: This was not an unknown event would happen.
• 4:37
  Megan Horneman: The timing of it was a little uncertain, but it also isn't surprising given the activity and movement towards Iran in recent weeks.
• 4:46
  Megan Horneman: The one there's two things that that will really impact how these markets pan out with this.
• 4:51
  Megan Horneman: It's the duration of the conflict, which we know will go on for several weeks, and then how much of this disruption continues in the Strait of Hormuz.
• 4:59
  Megan Horneman: Um, because this is probably gonna last for weeks, we expect equity volatility to continue.
• 5:04
  Megan Horneman: Um, oil will probably remain high as well.
• 5:07
  Megan Horneman: We don't know exactly how high it can go.
• 5:10
  Megan Horneman: There's a couple positives here.
• 5:11
  Megan Horneman: Um, first of all, the U.S.
• 5:13
  Megan Horneman: is the largest producer of oil right now.
• 5:15
  Megan Horneman: We're also the largest exporter of liquid natural gas.
• 5:19
  Megan Horneman: Also, OPEC has already agreed to increase production starting in April, and this was before the war broke out.
• 5:26
  Megan Horneman: So they they even did debate increasing it more.
• 5:30
  Megan Horneman: So there's is still that on the table that we can have an increase from an oil supply perspective.
• 5:35
  Megan Horneman: That can take some of the pressure off that upward move in the price.
• 5:38
  Megan Horneman: Um, if this does become prolonged, then you will see some more increase in inflation expectations.
• 5:45
  Megan Horneman: And that is something we're keeping an eye on because of the fact that inflation was already starting to stir a little bit before this.
• 5:52
  Megan Horneman: So anything can um, you know, really disrupt that inflation, specifically at the headline level.
• 5:58
  Megan Horneman: The the impact to the core level, which is what the Fed looks at, may um be a little bit more delayed, but we do expect to see maybe some ugly inflation prints here in the near term.
• 6:08
  Megan Horneman: Again, we haven't expected a significant amount of rate cuts this year because inflation was starting to emerge again.
• 6:15
  Megan Horneman: Um, but we think now at this time you can really kind of price out rate rate cut expectations and maybe rate hikes may be on the table.
• 6:23
  Megan Horneman: Now, sounds like bad news, and it's really um watching the markets like we're seeing today, watching the consistent coverage on the news can be very, very um create a lot of anxiety and a lot of angst with investors.
• 6:35
  Megan Horneman: And we're here to tell you that we've looked at a lot of different geopolitical events.
• 6:39
  Megan Horneman: Um, we went all the way back to the early 80s, we've looked at many things that have impacted the Strait of Hormuz and we and and and what that has meant from an equity standpoint.
• 6:49
  Megan Horneman: And what we see is that typically these end up being buying opportunities.
• 6:53
  Megan Horneman: We don't think this is gonna have a long-term impact on growth because we don't think this is going to be a long-term event.
• 7:00
  Megan Horneman: A few weeks, maybe, yes, but Iran was already in such a difficult situation coming into this that we don't think they're really gonna have much legs to stand on.
• 7:11
  Megan Horneman: And they have um really angered a lot of other countries in that Middle East region.
• 7:15
  Megan Horneman: So they really, I don't think, have a good way out of this.
• 7:19
  Megan Horneman: Um, we do think that, like we mentioned, the volatility will be there, but historically it's presented good opportunities to buy.
• 7:26
  Megan Horneman: So we're looking at some how this shakes out, we're looking at some of the valuations in the market, and we won't be afraid to add to our equity exposure if we see some opportunities here.
• 7:37
  Megan Horneman: The other area that is likely to get hit from this will be on the credit side.
• 7:41
  Megan Horneman: High yield credit, we've avoided, and that's been because spreads did not give enough reward for the risk, but there may be some opportunity there to get some more yield in the portfolios.
• 7:53
  Megan Horneman: We were positioned coming into this with a short duration and fixed income.
• 7:58
  Megan Horneman: And remember, if inflation is a risk, you'll see yields higher.
• 8:01
  Megan Horneman: So we have seen a lot of weakness in long-term treasuries.
• 8:04
  Megan Horneman: So we've been in that short-term rage.
• 8:06
  Megan Horneman: That should help cushion some of this volatility from a return perspective.
• 8:10
  Megan Horneman: We had sold some equities in January, and we are now underweight global equities across all of our portfolios.
• 8:17
  Megan Horneman: And that's because Iran is just one of many risks that we saw were being underappreciated in the market.
• 8:23
  Megan Horneman: So we did come into this with an underweight global equity exposure.
• 8:27
  Megan Horneman: And as I mentioned, we'll continue to look at maybe opportunities.
• 8:30
  Megan Horneman: What history has shown us is in the one, three, six, and twelve month time period, equities are higher after these types of events.
• 8:39
  Megan Horneman: And actually, believe it or not, in the events that we looked at, there are six of them going back to the early 1980s, oil prices were lower.
• 8:48
  Megan Horneman: Um, so this may take some of that concern out of longer-term inflation, and that may be why we're not seeing long-term inflation expectations really tick up.
• 8:57
  Megan Horneman: From a consumer standpoint, there is the one big beautiful tax bill, which is offering a lot of relief to consumers for the first half of the year.
• 9:06
  Megan Horneman: So instead of, again, it's not great to see oil prices higher.
• 9:11
  Megan Horneman: We have seen um gasoline prices go up to$3.10.
• 9:15
  Megan Horneman: So they're up about 30 cents.
• 9:16
  Megan Horneman: But the there is some extra room here, wiggle room with consumers.
• 9:20
  Megan Horneman: It does not mean it won't they won't pull back in spending in some other areas, but at least it's a very timely offer here for consumers that can get the tax refunds, and we're seeing them pick up significantly as we get to the height of the tax filing season.
• 9:35
  Megan Horneman: Now that's all we have today.
• 9:36
  Megan Horneman: If you have any questions, please feel free to reach out to your financial advisors.
• 9:40
  Megan Horneman: We'll be back with more impact reports as this unfolds and if we see that there's um opportunities in the market to make you aware of.
• 9:47
  Megan Horneman: But again, remember this is a short we think this is a short-term geopolitical event, and historically these do present good buying opportunities for investors.
• 9:57
  Megan Horneman: Thank you, Mm.