Equity markets around the world tumbled after the U.S. and Israel launched attacks against Iran on February 28th.  Iran subsequently closed the Strait of Hormuz, trapping a huge amount of oil and liquified natural gas production inside the Persian Gulf.  Sea-borne oil production from the Gulf, about 20% of the world’s output, has now been shuttered for more than eight weeks as prices for oil and other commodities that are shipped through the Strait have risen dramatically.  (The June contract for Brent Crude nearly touched $120 per barrel today, up from $84 on the day before the fighting started.)  It will take a long time for normal Gulf shipping to resume and for production of oil and gas and other chemicals in the region to reach their prewar cadence and volumes.  Lots of infrastructure has also been damaged, so the extent of the supply problem is not yet precisely calibrated—but in any case, it will take an extended time for things to normalize.

The U.S. stock market, however, seems to think the war is over and that there will be no major long-term sustainable impacts to factors that move equity prices, such as corporate profits, inflation, or commodity prices.  After declining 4.63% in the first quarter, the S&P 500 Index has rebounded strongly in April, making up all that decline and more to reach its all-time high level earlier this week.  Whether the market is correct in rebounding so strongly so soon will not be known for some time, but other factors continue to support stocks in the near term—primarily the prospect for continued strong growth in corporate earnings.  The first quarter reports have been very strong so far and analysts are expecting mid-teens earnings growth for the S&P 500 in 2026, a rate of growth that could support today’s above-average equity prices.

Hormuz Remains Closed / More Inflation in the Pipeline

The Strait of Hormuz remains closed to most traffic, causing an increasingly severe supply shock for the countries that rely on oil, natural gas and fertilizer that is transported through the Persian Gulf.  Higher prices are transmitted to U.S. consumers because oil is priced globally, but the U.S., with its own large reserves of both oil and natural gas, is not confronting the supply shock that much of Asia is suffering.  But the more U.S. consumers spend for gas—which is now over $4 per gallon nationally—the less they will have for other things.  With the Consumer Price Index for March at 3.3%, there will likely be upward pressure on this reading in the coming months as higher energy prices begin to feed into the prices of many goods.  Depending on how long the stalemate in the Strait lasts, we could, in our view, easily see a 4-handle on CPI by the middle of the summer.  If this should happen, potential Fed rate cuts will probably be off the table at least through the end of 2026.

The Fed Chair Transition is Progressing

Incoming Fed Chair Kevin Warsh is likely to be confirmed by Congress very shortly, now that the Justice Department has dropped its lawsuit against outgoing Fed Chair Jerome Powell.  Warsh used to be known to have a hawkish bias when it comes to interest rates, but as Fed Chair he will probably come under significant pressure from the administration to lower interest rates.  In his closing press conference, Powell lamented the assault on the Fed’s independence from the administration and cited this assault for his decision to remain on the Fed’s Board of Governors after his replacement takes over the chairmanship.  Clearly, he feels some responsibility to help preserve the independence of the central bank.  Warsh may have a very tough job pleasing both the administration and the markets at the same time—because they want different things.  If bond investors decide that the new Fed Chair is a political puppet and not tough on inflation, look for long-term U.S. Treasuries to sell off and for rates to rise, making it much more expensive for the country to finance its debt of around $39 trillion.  In such a case, mortgage and auto loan rates would also climb, in effect dropping a wet blanket over the economy. If nothing else, it will be very interesting to see how Mr. Warsh navigates his new job.

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Photo: AI generated