Mark and Elise Levy’s October Economic Update
A rising stock market is called a bull market, while a declining equity market is called a bear market. For the past three years or so, we have been in a bull market. As markets rise, there is a saying that bull markets climb a “wall of worry.” This is especially relevant today, as concerns about rising interest rates and oil prices have created potential headwinds for equity markets.
The latest developments in the Iran conflict have shaken the fragile consensus that disruptions to the Strait of Hormuz and the Red Sea would soon be resolved. U.S. military bases and naval escorts in the region have come under fire. The critical East-West pipeline in Saudi Arabia, which could provide a partial bypass for the bottlenecked Strait of Hormuz, is not yet fully operational and continues to face attacks. Meanwhile, energy stockpiles are declining in the U.S. and around the globe. Despite reports from the UN summit that the U.S. and Iran are exploring a deal to reopen the Strait of Hormuz—which President Trump rejected—WTI crude remains elevated at more than $90 per barrel as of yesterday.
Predicting the path of this conflict is extremely difficult as the back-and-forth continues. Recent headlines have provided some encouragement for a diplomatic resolution. Ongoing pressure from China, Gulf allies, sanctions, and voters’ concerns about affordability ahead of the midterm elections could help provide the final push needed to bring the conflict to a resolution.
Beyond oil prices, rising interest rates may be the biggest piece of the wall of worry right now. The 10-year Treasury yield recently reached 5.2%, its highest level since 2007, when the yield peaked at 5.30%. Higher interest rates can create a near-term headwind for stocks by increasing borrowing costs and putting pressure on equity valuations.
History suggests that higher interest rates and anticipation of Federal Reserve rate hikes can create stock market volatility, but these periods of weakness have typically been relatively short-lived. As LPL Research recently noted, across the six Fed tightening cycles since 1994, the S&P 500 generally struggled during the first several months following the initial rate hike before regaining its footing and moving higher. During non-recessionary tightening cycles, gains in the 12 months following the initial hike averaged 14.3%, with a median gain of 7.2%.
Investors have plenty to worry about as fall begins. The conflict in the Middle East continues to disrupt critical energy infrastructure and transportation routes, keeping oil prices elevated and adding uncertainty around inflation. At the same time, higher interest rates and the prospect of additional Fed rate hikes could contribute to near-term market volatility. The enormous amount of capital being committed to artificial intelligence also raises questions about how much return that investment will ultimately generate.
All in all, LPL Research believes these risks remain manageable. The economy has demonstrated resilience in the face of these headwinds, and corporate earnings remain strong. The stock market’s track record during non-recessionary Fed tightening cycles is encouraging, although past performance does not guarantee future results. Higher Treasury yields may constrain valuations, but strong corporate earnings provide a powerful offset. And while the AI investment boom will inevitably produce both winners and losers, the cash-flow outlook for the broader market remains healthy. Finally, one of the strongest 12-month seasonal periods of the four-year presidential cycle for stocks is approaching, with the midterm elections only five weeks away.
Bottom line: These crosscurrents may limit near-term upside and create periods of volatility, but they do not undermine LPL Research’s constructive intermediate- to longer-term outlook for equities.
As always, please contact us if you have any investment questions or concerns.
~ Mark and Elise
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