Key insights
- The author expresses concern about the market's disregard for rising oil prices and geopolitical tensions in the Strait of Hormuz. They highlight the potential for higher oil prices to impact Q2 and Q3 earnings and CPI, potentially leading to a reacceleration of inflation and reducing the likelihood of a Fed rate cut. The author has reduced equity exposure and increased allocation to short-duration treasuries.
Crude is at 98 bucks. Gas is over 6 dollars in half the country. The strait of hormuz is still disrupted. Trump rejected Iran's latest peace proposal today. And the S&P 500 closed at an all time high on friday for the sixth week in a row.
Amrita Sen from Energy Aspects went on CNBC last week and called this "extremely misplaced euphoria" and said we're sleepwalking into a recession. Morgan Stanley's chief europe economist said we're "nearing a day of reckoning." These are not perma-bears, these are energy market specialists who watch supply flows for a living.
The bull case is all earnings. 29% Q1 growth, 78% beat rate, great. But that was last quarter. Oil was at $85 for most of Q1. It's been $95-100 for the last 3 weeks. That feeds into transport, logistics, manufacturing, food production. None of that shows up until Q2 and Q3 numbers.
CPI comes out tomorrow. Core was 2.6% last month. Polymarket has traders watching for a possible reacceleration toward 3.7% when the oil passthrough hits. The Fed is at 3.50-3.75 with a 96% chance of holding in June. If CPI comes in hot, the one remaining cut everyone's hoping for in September evaporates.
I'm not selling everything. But I moved about 15% of my equity allocation into short duration treasuries last week. If oil cools and Iran resolves, I'll rotate back and miss a couple percent upside. If it doesn't, I'll be glad I have the dry powder. The risk reward just feels off when crude is doing what it's doing and the index is pretending it isn't happening.