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The price of crude oil approached $120 per barrel early Monday as the war in the Middle East between the U.S., Israel and Iran raged through the weekend. Approximately 20% of the world’s oil production must transit the Strait of Hormuz, which is controlled by the Islamic Republic, to reach global markets. The prospect of an energy supply shock plus a weakening employment situation has investors, traders and speculators on full alert for stagflation.
The front-month crude oil futures contract traded to a nearly four-year high of $119.48 per barrel vs the 16-year high of $130.50 in March 2022, after Russia invaded Ukraine, and the all-time high of $147.27 in July 2008, when a combination of rising geopolitical tensions, a spike in Asian demand and a weak dollar “supersized the bid in the barrel,” Mizuho Securities Director of Futures Bob Yawger notes.
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“Traders have been giving more weight to the potential for higher inflation and dented economic growth,” BMO Private Wealth Chief Market Strategist Carol Schleif writes, “but we remind investors that such stagflationary concerns were also raised in 2023 and stocks have performed remarkably well since that period.”
Conflict in the Middle East “makes the Federal Reserve’s job much more difficult,” Schleif concedes, particularly with a new Fed chair expected this year. (President Donald Trump last week officially nominated Kevin Warsh to replace Jerome Powell as Fed chair when his term is up in May.)
“The Fed has historically looked through temporary oil-induced inflation shocks,” Schleif observes, “but is also dealing with conflicting employment and growth data as the economy’s very foundation is rebuilt amid the transition to a suite of new technologies.”
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Tech leads
Technology led another recovery off intraday lows, with Nvidia (NVDA, +2.7%) posting the second-biggest gain among the 30 Dow Jones stocks, trailing only Caterpillar (CAT, +3.5%).
Energy stocks continued to show relative strength until the last hour of the trading session, with integrated supermajors Chevron (CVX, -0.3%) and Exxon Mobil (XOM, -0.5%) poised to benefit from higher oil prices, at least in the short term.
Consumer staples, including Procter & Gamble (PG, +1.0%) and Coca-Cola (KO, +1.1%), and other names with characteristics of defensive stocks, such as McDonald’s (MCD, +0.8%) and Johnson & Johnson (JNJ, +0.9%), also posted gains.
Financial stocks struggled for much of the session, though Goldman Sachs (GS, +1.3%), American Express (AXP, +1.5%) and JPMorgan Chase (JPM, +0.2%) rallied late to close higher.
The Cboe Volatility Index (VIX) surged to 35.30 as crude futures were spiking but settled to 25.47 vs 29.49 as of Friday. A normal range for the stock market’s “fear index” is between 12 and 20.
At the closing bell, the tech-heavy Nasdaq Composite was higher by 1.4% at 22,695, the broad-based S&P 500 had climbed 0.8% to 6,795, and the blue-chip Dow Jones Industrial Average was up 0.5% at 47,740.
Look at HIMS
As part of the deal to bring Ozempic and Wegovy pills and injections to the HIMS platform later this month, Novo Nordisk has also agreed to dismiss its lawsuit against Hims & Hers.
“The dynamic between the two companies is entering a new chapter,” Truist analyst Jailendra Singh writes. “The rapid cycle of litigation followed by reconciliation underscores that, while both parties lack trust, they remain bound by mutual necessity.” Singh reiterated his Hold rating and his $18 12-month target price for HIMS stock.
“Revenue durability from branded GLP-1 medications is likely to be meaningfully higher than that of compounded GLP-1 offerings,” the analyst explains, “suggesting investors may be willing to assign greater value (and a higher multiple) to this new revenue and earnings stream.”
LITE it up
Lumentum Holdings (LITE, +14.7%), one of the best tech stocks to buy right now, is joining the S&P 500.
Lumentum, which makes optical and photonic products for high-speed networking, data center interconnects and laser technology for AI, 3D and other industrial applications, will be one of four new additions to the index (pdf) as of March 23.
Network materials maker Coherent (COHR, +7.1%), digital set-top-box outfit EchoStar (SATS, +3.5%), data-center designer Vertiv Holdings (VRT, +9.4%) and LITE are joining the S&P 500.
Those four will replace potato products producer Lamb Weston (LW, -0.6%), online dating service Match Group (MTCH, +2.1%), health care manager Molina Healthcare (MOH, +1.1%) and cloud-based HR platform Paycom Software (PAYC, +0.5%) in the 503-stock index.
CPI, PCE and the Fed
Markets will weigh inflation vs employment through the next Fed meeting, which is scheduled for March 17-18.
The release of the February Consumer Price Index (CPI) report on Wednesday and the January Personal Consumption Expenditures Price Index (PCE) on Friday highlight this week’s economic calendar. We’ll also get consumers’ first impressions of the war in Iran.
“The February CPI report will likely run cool as tame housing costs offset the effects of tariffs,” Comerica Bank Chief Economist Bill Adams forecast. “The January PCE inflation report likely ran hotter.” As Adams explains, “These inflation reports cover the period before the war with Iran, so they do not reflect its effects.” And, of course, the Fed prefers PCE over CPI as a measure of inflation.
As the economist notes, the release of preliminary University of Michigan consumer sentiment survey data for March on Friday will reflect the war: “Sentiment likely retreated from February as the headlines and rising gas prices pushed inflation expectations higher.”
