On Borrowed Time
I’m going to start this missive with the only thing that matters at the moment, and that is the Strait of Hormuz. Who is controlling it, and what is the transit activity level through it? Everything in markets and the economy is some derivative of this important chokepoint. That’s it, full stop. Below are a couple of charts from BCA research tracking daily traffic levels, which remain nonexistent.
Markets don’t need this to return to pre-war activity overnight. For now, Mr. Market would be fine with just knowing it would return to normal in the near future. Outside of that, the global economy is getting dangerously close to a shock that will ripple through a multitude of supply chains and industries (more on this below). To this point, the shock absorbers (SPR releases, redirecting oil flows, rationing, substituting alternative energy supplies…) have delayed this shock, but that window is closing, and by most estimates, if nothing changes by mid-April, the global economic impact will get much more severe. The domino effects of this war extend far beyond financial markets, with the following areas most at risk of disruption: 1. Fertilizer (food producers/retailers) 2. Cotton (textiles, apparel) 3. Helium (chip production) 4. Aluminum (autos, airplane parts, kitchen appliances, window frames/building siding, canned goods) 5. Plastics (bottles, food containers, electronics, medical devices, tubing).
So far, I would submit that markets have priced in a material, but recoverable impact to the global economy, which is why the broad indices are down roughly 10% from their highs, but only 10%. Don’t get me wrong, there has been clear damage done to the stock market, as the MSCI All Country World index has fallen more than -8% since the outbreak of war in the Middle East. The S&P 500 is down five weeks in a row (coming off its worst weekly loss since the war began) and off roughly 9% from its January high. A broad gauge of global bonds has lost more than -3%, as investors have made the bet that central banks will be compelled to raise interest rates to contain the inflationary fallout and avoid a repeat of 2021/2022. The combined moves have put a traditional “60-40” portfolio of equities and bonds on track for the worst month since September 2022.
Really, the only asset classes that have been providing much value to portfolios as of late are oil and cash. Brent crude is on the rise again today, pushing up to $118 per barrel, up 60% since the war began. This is the sharpest one-month surge ever, and in case you need to be reminded, ever is a long time. Add to higher oil prices a U.S. dollar index rising to 100.35, which is back near the high end of its range over the past ten months. And global interest rates are approaching their highs from last Summer, as traders in the futures market now view the Fed as more likely to raise rates than cut them this year and next. The threat of stagflation (slow growth and high inflation) has the bond market pricing in a 35% chance that the next Fed move will be a rate hike. That is nutty, but this is happening nonetheless.
Long story short, financial conditions have tightened significantly over the last five weeks, forcing a repricing across markets and a degrossing across investment strategies. Since missiles began flying on February 28th, roughly $12 trillion in global equity market capitalization has been wiped out – equivalent to the combined market caps of Germany, Japan, and the UK. For those solely focused on the U.S., the S&P 500 has seen nearly $5 trillion in market cap eroded, which oddly looks minuscule relative to how far it's come over the past couple of years.
It’s hard to talk about U.S. equities without touching on the Mag7, given the degree to which they’ve carried this market higher for years. Therefore, it should come as little surprise (especially those who understand the math and dynamics behind passive flows) that these very same companies are leading us lower. Here is where they stand from their respective all-time highs as of last Friday’s close (as well as a couple other asset classes for reference):
S&P 500: -9%
Apple: -14%
Gold: -20%
Nvidia: -21%
Google: -22%
Amazon: -23%
Tesla: -28%
Palantir: -32%
Meta: -34%
Microsoft: -36%
Bitcoin: -48%
This meltdown in the Mag 7 space has to be put into context, as many of these companies were already selling off before the war broke out. The pressure started last fall, driven by AI capex concerns, accounting issues, and valuation fatigue. The war has only added fuel to the Tech sector’s fire – underlined by the fact that a high-quality company like Microsoft could see its share price plunge more than -35% from the highs (and the other high-flying Tech names are down anywhere from -15% to -35%). Much of the investor anxiety around these names stems from the insane spending spree these hyperscalers have been on in pursuit of AI dominance. McKinsey has estimated that investment by hyperscalers has now been ratcheted up to an eye-popping $9 trillion. It’s difficult to contextualize a number this large.
Nevertheless, investors are now focused on the return profile of these investments. Let’s assume a 10% annualized return target, which implies that investors are looking for about $900 billion of profits (yearly). That comes to nearly one-quarter of the economy’s entire profit base in any given year. Then, if you go a step further and assume a profit margin of around 30% (on $9 trillion in spending), we are talking about $2.7 trillion in profit (nearly 10% of U.S. GDP). Makes you pause when put into context with a roughly $30 trillion U.S. economy that generated roughly $3.5 trillion in corporate profits for all of 2025.
Look, if you’re a bear or negative on the economy and stock market at this juncture, you’re not alone. You have both a solid narrative and some solid data to support such a view. Additionally, you have various markets that moved quite a bit to price in this increased risk, left-tail outcomes, and rising probability of a global economic downturn. However, an objective and balanced analyst should always consider what could go right when things look gloomy, just as the bulls should consider what could go wrong when things are brightest.
I’m going to run through a number of charts that are nearing points of negativity in sentiment, positioning, or technical levels that, in the past, indicated markets were close to a near-term low. This doesn’t mean it was ‘the low’, but nearing ‘a low’ which triggers an oversold bounce.
Let’s start with the weekly RSI on the S&P 500 slipping to 10. This is the lowest print in this metric since April 2025 (tariff announcements), and before that, the Covid lows in March 2020. Such a low weekly RSI on the S&P 500 does not happen often, and when it does its typically not the start of a crash, but rather nearing the end of a correction. This kind of downside pressure shows up late, not early.
The S&P 500's Daily Sentiment Index tells a very similar story as it falls to 15, the lowest print since last April.
The CNN Fear and Greed Index is at 10, and likely going to slip into single digits. Over the last 15 years, when fear and greed index is at 10 or less, the majority of the time we were either at the bottom or getting close to it.
On Friday, the VIX index closed above 30 for the first time in over 10 months. Historically, the S&P 500 was higher 2 days & 3 months later in 9 of 10 cases. However, if the U.S. economy is about to slip into a recession (like 2008 or 2020), this is not a buy signal. In such circumstances, you want to wait for a print north of 45 on the VIX, and even then you need to be prepared to manage through a choppy trading environment.
As for the Nasdaq, which is coming off its worst week since the week of Liberation Day, and has moved lower in 8 of the past 9 weeks, it's getting fairly bombed out at this point. Less than 15% of Nasdaq constituents are above their 50DMA, which has historically signaled a near-term bounce
The Financial sector is another important area to keep an eye on, given that its tentacles reach into every crevice of the economy. 0% of S&P Financials companies are above their 50-day EMA. This has only occurred near the end of major drawdowns in 2018, 2020, and 2022. Each of the three times this occurred (to be fair, 3 isn’t a very big sample size), the S&P 500 was higher over the next 2 months and delivered double-digit gains over the next 12 months.
Yes, we know, the macro is ugly, positioning is defensive, and everyone is leaning bearish. But here’s the problem: earnings refuse to roll over, revisions are above trend, guidance is strong, and EPS growth is accelerating. Analysts normally lag reality but recent market weakness has not yet translated into weaker earnings expectations. Historically, such divergences tend to resolve, but most often not in the way bears would like to see. Year-to-date estimate revisions to S&P 500 full-year EPS are running substantially above 10-year trend.
So, yes there are some indicators suggesting we’re very oversold on a near-term basis, which are creating the conditions for a face-ripping rally at the first hint of valid constructive news. But absent that catalyst, you have a weak equity market at risk of breaking. Should it break, then I would expect fundamentals to catch down to where market prices are leading. Sure, sentiment and positioning have undergone a healthy cleansing, but neither are at levels that suggest capitulation or outright panic on the part of investors. So, anxiety is evident, but panic has yet to arrive. There is still this pattern of behavior among retail investors, where the biggest risk is missing out on any bounce. Then again, this group has been well trained to hold that belief.
I don’t want to end on a somber note, and while I still think there remains a narrow window for this war to work itself out in a manner favorable to markets, I’d be remiss if I weren’t forthright in sharing that my concern level rises with each passing day that the Strait remains ‘closed’.
I’m trying desperately to figure out how everything is going to play out, but this is a fog I have not seen since the Great Financial Crisis. Figuring out how or when this war ends is something completely different because, let’s face it, we are not dealing with rational actors. Not only is Tehran not interested in ending this war, but now the Houthis have joined. Oil is flirting with $100 per barrel, inflation expectations are starting to climb, and no asset class is consistently acting as a risk-off portfolio diversifier. Along with that, central bankers who, over a month ago, were planning for rate cuts are now contemplating hikes.
Now we’re at the point where markets are starting to tune out President Trump just as the Iranians are openly mocking his olive branch attempts to wind down the hostilities with his 15-point plan. It’s looking more probable that this war only ends when Iran says it does, or with a material escalation by the U.S. that ushers in a lot of other uncertainties. No doubt, the Iranian regime has been weakened and hopefully at one point will be doomed, but the current reality is that those who control the army are still in power, and what we have learned is the surreal resilience of a system that was built and perfected for survival for 47 years.
Those, like me, who had high hopes for the war to be a 4-to-6-week affair are now confronting the likelihood of a negotiated ending in which Iran retains implicit veto over the Strait. You would think this is a nonstarter, but then again, Trump is a deal guy and is now clearly looking for a way out. Not to mention the administration has been sending mixed signals on the future course of the conflict, proposing peace plans while sending soldiers to the region. So long as the Strait is effectively closed, global recession risks rise by the day. Tankers that departed the Gulf prior to the escalation have largely completed their journeys and discharged cargoes, so with limited new supply entering the market, the buffer that initially dampened price spikes is rapidly eroding. That is a big problem that lies around the bend, the lags of which we haven’t seen yet.
The lags are not just what lies ahead for WTI, but also for the +45% surge in diesel prices since the start of the war ($5.38 a gallon as of Friday, while gasoline, by comparison, has jumped +33%). It typically takes three months for diesel costs to show up in food prices, keeping in mind that the agriculture industry relies heavily on diesel to fuel tractors and combines (and to truck produce to markets). This is going to compound the fact that fertilizer prices have soared up to +75% since the war started (around one-third of all global seaborne fertilizer trade transits through the Strait). So, in addition to energy, we are soon going to face a surge in food prices (which are already up by 6.5% over the past month in the wholesale market), which is doubly important for the household budget (especially for the lower end). But this is the sort of “inflation” that is really a tax on real consumer purchasing power, and hopefully the brass at the Fed have that figured out.
Cash, the front end of the bond curve, oil, and Energy stocks are just about the only places you can hide during this war, which is proving to be highly unpredictable. Gold hasn’t worked. The most defensive stocks – that have nothing to do with the war and sport great dividend yields and payout ratios (like Phillip Morris) – are down -13% from their highs. One would think Defensive stocks would be a great place to hide, but instead the likes of Lockheed Martin (-10%), Raytheon (-12%), and Northrop Grumman (-31%) have not only sagged but have underperformed. How does that make any sense? And Health Care stocks like UNH (-10%) and CVS (-12%) that ordinarily have no correlation with the price of oil have also been smoked.
All of this is a long-winded way of saying there are many elements of the investment environment at the moment that none of us have any control over. I think risk-assets have adequately repriced for a bad, but non-recessionary outcome. Should we get a ceasefire or a viable path to normal activity resuming through the Strait, then I think markets and the economy should be fine. Equities, foreign markets, commodities, and cyclical sectors that were working before the war should resume their pre-war trends. However, the increasing risk of consequential impacts to growth, earnings, and inflation cannot be ignored and needs to be adequately accounted for in the amount of risk investors are taking. I’m a firm believer that ‘time in the market’ is more important than ‘timing’ the market, but that doesn’t mean risk management, diversification, and adjusting your investment strategy along the way are useless endeavors. Sometimes, mitigating downside is more important than trying to catch every penny of the upside. Now is one of those times.
The articles and opinions in "Capital Market Musings and Commentary" are for general information only, and not intended to provide specific investment advice. Performance, dividends and other figures have been obtained from sources believed reliable but have not been audited and cannot be guaranteed. Past performance does not ensure future results. Investing inherently contains risk including loss of principle. Advisory services offered through Casilio Leitch Investments, an SEC registered investment advisor. Copyright © 2023 Casilio Leitch Investments. All Rights Reserved.