Market Thoughts: Fear builds a wall of worry

Wall Street finds itself again scaling a proverbial wall of worry. Investor sentiment is quickly shifting. I continue to think investors haven’t discounted enough tail risk. That’s particularly the case as it relates to further escalation of what’s seemingly pivoting from a war in Iran to one incrementally being waged across the Gulf.

Oil and gas prices continue to climb, but as a recent note put out by Natasha Kaneva and her commodity research team at J.P. Morgan’s investment bank highlights, investors are watching the wrong oil price. I find their research insightful. I'd say the same about Michael Feroli’s.

WTI and Brent remain the energy guideposts for most market makers. The leading indicators to watch are Middle Eastern benchmarks. They’re showing more stress, in particular spot pricing. They’re the canary in the coal mine as the energy shock we’re seeing spreads across geographies.

Energy futures markets have been in backwardation. The further out in time a contract, the lower the price. Prices for immediate delivery are showing stress. But longer-term prices are beginning to rise. The higher they go, the greater the concern investors are reflecting. As a percentage of energy supply, we've just seen the largest shock in history.

We also don’t know if this spirals from energy supply disruption to destruction. Iran’s recent attack on Qatar’s Ras Laffan liquefied natural gas facility clearly reflects the existential fight the regime feels they’re in. Rhetoric for each side is incendiary. Today things look very much like they get worse before better. I say that as a pragmatist, not alarmist.

That’s the backdrop the Federal Reserve (Fed), European Central Bank (ECB), Bank of England (BoE) and Bank of Japan (BoJ) found themselves looking at as each held their monetary policy meetings. I believe the two central banks that find themselves in the toughest spot are the BoJ and BoE.

The Bank of Japan needs to hike rates. The Bank of England should ease. Both held rates steady. The Fed and ECB don’t need to cut rates. They held steady as well. The message the market received from each was that rate cuts are squarely off the table for now. Markets have begun to price in the chance of rate hikes from the BoJ, BoE, ECB and Fed in the months ahead.

The wall of worry for central banks is twofold. Most continue to look at inflation caused by the current energy supply shock as transitory. I know, an awkward word choice for how those same central banks chose to put off curbing rising inflation post covid.

Investors haven’t factored in the effects of a protracted surge in energy prices. In particular as it broadens from oil to liquefied natural gas, gasoline, diesel, industrial gases, fertilizer, agricultural commodities and metals. Rising inflation expectations are key to keep an eye on.

The knock-on effect is obviously inflation. You can see that it’s already having a negative impact on government bond yields. They’re pressing higher.

Pay close attention to the front-end of bond curves. They’re moving from pricing in no rate cuts to hikes. That’s not a predetermined outcome. But to borrow a line from Jay Powell at his press conference: “We just don’t know.”

The secondary effect being missed? Rather than expecting a hawkish pivot to higher policy rates because of an energy-driven spike in inflation, central banks may have to cut rates. On the horizon, there’s looming concern of a shock to global growth. Skate to where the puck is going; where bond markets lead, risk assets follow. They're both currently under pressure.

If energy markets unravel, the threat to markets is we see a world where a global economy that’s been growing steadily and above trend gets knocked to its knees. That will weigh on labor markets, consumption, topline revenue growth, margins and, ultimately, valuation levels.

There is roughly a 15% chance in any given year of recession. Wet finger in the air, I think that number directionally has risen to let’s call it 25%, maybe 30%. Enough to pay close attention to the associated rising risks and plan accordingly. Diversify risk, don’t chase it.

I went back to find the quote I recall reading years ago in Edwin Lefèvre’s Reminiscences of a Stock Operator. “One reason that people lose money today is that… they profess to have the long term in mind and yet cannot help following where the hot money has led.” That’s particularly the case as fear builds a wall of worry.

All in all, it’s just another brick in the wall. Pink Floyd.

Unless explicitly stated otherwise, all data is sourced from Bloomberg, Finance LP, as of 3/19/26

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