Market Thoughts: When you can't see where you're going

Uncertainty is heightened. Animal spirits continue to lean into hope Washington is eager to take the first off-ramp it can create. That may be enough to calm fear of a greater selloff than the ‘simple’ correction we’ve seen. Spring seeds optimism.

Market and macro indicators are backward-looking. We’re just beginning to see the supply-side shock effects pass through to data. Preliminary estimates for Eurozone March inflation saw a marked jump higher in headline inflation, to 2.5% year-over-year. That was up from February’s 1.9% reading.

The European Central Bank (ECB) has a single mandate to anchor inflation on its target of 2%. If the war proves protracted, and/or the flow of goods through the Strait of Hormuz is stymied further, inflation will move higher. We may be on a path towards 3% or higher. That puts the ECB in a very tight spot.

No central bank wants inflation expectations to gap higher and become entrenched. Waiting too long to hike might mean having to raise rates more forcefully later, pushing the Eurozone into recession. Markets continue to expect several rate hikes from the ECB and Bank of England this year.

The Federal Reserve has the ‘luxury’ to sit and wait. Their dual mandate is to ground inflation at their target of 2% and maximize employment. In this environment, they likely will focus on core inflation and are able to hold policy rates where they are well into the summer. It’s going to take longer for high energy prices to work their way into core inflation, but they will if the conflict persists.

Oil prices are global. Regardless of narratives touting the U.S. being a net energy exporter—which is true and ‘good’ news—higher for longer energy prices will weigh on consumers globally. They’re a drain on income and a drag on growth.

The U.S. consumer has a buffer currently from fiscal stimulus, but it’s diverting money that would otherwise be spent on goods and services. Rather than a year of above trend growth, we may find ourselves at or below a 2% growth rate. Slower growth will weigh on corporate revenues and margins. None of that has seeped into forecasts. It’s circling.

Financial conditions are tightening. Investors have begun to figure that out. The largest threat ahead isn’t inflation, it’s growth. I’m sure some of the White House eagerness to find an exit in Iran reflects that political awareness. Prediction markets are effectively signaling not only a more forceful retaking of the House by Democrats, but a ‘small majority’ chance for the Senate.

The Middle East won’t be the same. Gulf states have been directly attacked. Should the U.S. de-escalate and the Strait remain under the control of Iran, we may see willingness to pay for the safe passage of goods. I can’t imagine that’s well-received in the region. The UAE a clear case in point.

Markets continue to try to calm. We’ve seen a bit of a relief rally. Hopefully, that continues. But hope is never a recommended investment strategy. Supply destruction of some regional production infrastructure appears significant. It will take time to repair. Even if the war ends tomorrow, energy prices stay higher for longer.

Backward-looking data, whether macro or market anchored, has never been less useful. Investors continue to fly blind. How quickly we hit reset and markets advance, or take another turn down, is anyone’s guess. I expect a bit more of each ahead. Trade guardedly.

We haven’t seen a big enough drawdown to rebalance portfolios. We’re modestly overweight equities and extended credit, funded from core bonds. The risk we’re taking is well-diversified. We’re holding the line on those positions.

Macro consequences of the war are beginning to filter into the global economy. They’re not something to shrug off lightly. Risk assets haven’t discounted a bad, let alone worst case, outcome. That continues to strike me as about right. We don’t know what comes next, let alone aftershocks.

Equity multiples are lower, credit spreads a bit wider. Neither signaling panic. Investors are exercising caution, not overreacting. When you can’t see where you’re going, slow down.

“I skate to where the puck is going, not where it’s been.” Wayne Gretzky; believed to have been said to him by his father Walter. Sage counsel for hockey. Also, investing.

Unless explicitly stated otherwise, all data is sourced from Bloomberg, Finance LP, as of 4/1/26

Opinions, estimates, forecasts, and statements of financial market trends that are based on current market conditions constitute our judgment and are subject to change without notice. We believe the information provided here is reliable but should not be assumed to be accurate or complete. The views and strategies described may not be suitable for all investors.