Market Thoughts: Where are we going?

With war on pause, investors have refocused on fundamentals. It’s surprising that on a headline basis markets shrugged off the past few months. That said, with the Strait of Hormuz apparently 'fully open' to commercial ships, animal spirits have revived.

Where are markets heading? They want to take us higher. Investors have an innate ability to look ahead, swinging between sadness and euphoria along the way. That’s what makes a market. Stay focused on the horizon, with sharp awareness of the inevitable curves coming.

As we press higher, investors have discounted tail risk associated with an extended war. It’s increasingly obvious that both the United States and Iran are looking for an off-ramp. Animal spirits are leaning into that narrative. They're pushing hard for peace.

We maintain a modest overweight to equities and extended credit. They’re funded from core bonds. The start to this year has been quite a ride. I'm sure there’s more to come. My sense is that market volatility will prove persistent. Size risk positions accordingly.

‘Power of positive thinking’ is promoting a resurgence of risk-taking. Buying is coming from a few places. Momentum traders and trend followers that cut risk are reversing direction. We may see a tailwind from them leaning in. As we get through earnings season, I expect company buybacks can also lend support.

Institutional and retail investors are inching back into market waters. Gingerly, adding small bites to risk positions. My sense is that it’s firmly anchored on fundamentals. If we land on peace, investors will more readily reengage risk.

Where bond markets lead, risk assets follow. A few weeks ago the market narrative was that inflation was coming on fast. It is, but that’s not the biggest risk to markets if we spiral back into war. The second-order shocks will be to growth and consumption.

The Bank of England (BoE) and European Central Bank (ECB) unfortunately leaned into the ‘scary’ inflation narrative too quickly. That startled markets, with expectations shifting from rate cuts to hikes. The general assumption was we’d see a repeat of 2022. Never assume.

That storyline missed the point. The ramp-up in inflation in 2022 was sparked largely by a demand shock, fueled by stimulus as the global economy reopened post-covid. The extreme constraint in the Strait is/was a supply shock with a significant tail risk attached to it.

That initial misreading caused government bond markets to sell off. It’s taken a few weeks for markets to process the real risk is to growth. The ECB and BoE are walking back rhetoric of imminent rate hikes. They should.

That’s allowed bond markets to settle, which in turn has lent support to risk assets. Credit spread tightening has helped as well. The BoE and ECB may have to hike policy rates. They first need to determine the durability and threat coming from inflation, and to growth.

The Federal Reserve rightfully remains on hold. They didn’t scare markets. Their messaging has been balanced. I’ll throw in that the Bank of Japan needs to hike rates. But I‘d encourage a slow walk getting there.

The reopening of tanker flow in the Strait can give another lift to risk appetite. Asian and European markets have faced the greatest downside risks because of its near closure. US markets haven’t. That isn’t lost on global investors.

What am I watching? Earnings season, which just kicked off. The initial “out of the gate” readings from big banks have been strong. That’s important. Like the bond market, where banks go, they tend to drag along risk assets.

First-quarter earnings should be strong. They’re baked in and backward-looking. While wobbly, the first-quarter has proven relatively resilient across global economies because we came into the year with assured momentum.

Investors will be listening carefully to companies signaling input price pressure on margins. There may be modest C-suite foreshadowing of that ahead. But like central banks, if it proves transitory, markets should look through it. Right now, they are.

Second-quarter earnings are going to be a lot more interesting…

“Day by day another war goes on. Tell me, where are we going?” Marvin Gaye

Unless explicitly stated otherwise, all data is sourced from Bloomberg, Finance LP, as of 4/16/26

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.