Markets are opening higher on this Friday morning and coming off their lowest levels so far this year.
The story the past two weeks has been fears the Iran conflict could be prolonged and of course surging oil prices as traffic in the Strait of Hormuz comes to an effective standstill.
While Adobe shares are sharply lower this morning, largely because of its leadership transition.
We're seeing signs.
Earnings beats just aren't enough when it comes to artificial intelligence.
Now Nvidia dropped the day after its blowout 4th quarter results despite a 75% year over year jump in data center revenue, and the software sector is still facing AI disruption concerns.
And even though we're expected to see $600 billion in AI cap spending from hyper scalers this year.
Well joining me to weigh in is Jim Welsh, a writer at Macro Tides. good morning.
Thank you so much for joining us.
While plenty of volatility this week as the conflict in the Middle East intensifies and the markets closing yesterday at new lows for the year and although we have a higher open today, we'll have to see where we close.
So where do you think the markets stand when you evaluate the macro backdrop?
Well, just from a technical standpoint, first, I mean, it's great to be joining you.
And happy St.
Patrick's Day.
Have to get that in.
The 67 to 70 level, Remy, has been very significant on the S&P.
There were numerous declines, then bounces.
So as long as the S&P is below 6770, I think technically there's a risk that it could drop to about 6550 backdrop.
I think the economy's in decent shape, and you know the key will be oil prices.
How long do they stay up and obviously if we see an additional spike that will cause some near term volatility.
And speaking of oil prices, we're keeping a close eye on both WTI and rent prices on this Friday morning that we have been seeing chances for a June Fed rate cuts, and this does come as oil prices rise and we have uncertainty in terms of the duration of the conflict in the Middle East.
So what is your outlook for US monetary policy?
I think the Fed clearly is on hold at the meeting next week.
I think April's probably out of the question.
Bottom line is coming into the Iran-Contra conflict, GDP is in good shape in terms of this year.
You've got a deficit of almost 6%.
AI spending represents about 1.6% of GDP. earnings are growing at about 3.9%, so the underlying fundamentals, Rey, of the economy are really in pretty decent shape.
That buys the Fed time.
The wildcard is the employment and labor market.
That is the one issue that I think would.
Get the Fed off the dime of holding pat.
So you know we saw a weaker report last week.
I think that was affected by some special factors, but I think that's the trigger point the majority of FOMC members are looking at is weakness in the labor market.
Yes, so we continue to keep a close eye on those inflation figures as well as the labor market data, and this week, given the rise in oil prices, we've been hearing that word stagflation a lot.
So do you think these concerns regarding stagflation are overblown, or do you think there could be some potential as we move forward into the rest of 2026?
It depends how liberal your definition of stagflation is.
In the 1970s, oil went from $3 a barrel in 1973 to $39 a barrel by 1979.
That was an increase of 1,300%.
So when people reference stagflation, they often refer back to the 1970s, and you know, the increase we've seen is pretty meaningful, but I, you know, it's not anywhere near what we saw back then, and I think the economy's in decent footing.
Longer term, the tariffs, oil pressure hits demand, so some of these are laying the seeds for the economy to slow down down the road.
So again, I think the Fed is on hold.
They're going to look through whatever inflationary bump we're going to see in coming months, and we will see a bump from the oil price increase.
I think the Fed is going to look through and stay patient and wait for the other side of this.
And before I let you go, I do want to get your take on artificial intelligence of the implications for the broader market as well as what we're seeing in private credit.
So first and foremost, give us your take on where you think the AI trade stands.
Um, you know, just if you look at the internet, you know, there was a lot of enthusiasm going into 2000, and then there was a reality check that caused a really meaningful dip.
I think we've seen the pendulum swing, Remy, over the last year from, oh, they're spending more, isn't that great?
To investors starting to worry about, are they really going to be able to make money.
So I think the downside pressure on AI stocks is going to continue over the next 6 to 12 months or during that window of time.
The economic impact, it's going to add like 1.6% to GDP this year, so you have to divorce the spending from how the stocks are going to react.
So my bias is I think there's more downside in the next 12 months.
And speaking of downside, I do want to get your take on what we're seeing in private credit right now when we take a look at the financials in terms of sector within the S&P 500, we are seeing that it is the weakest performer and is down about 11% year to date.
But what are your thoughts concerning private credit?
Well, it's similar to, you know, with the bank crisis we saw in March of 23 where people were pulling money out and the banks, the small, the three small banks had to sell stuff.
Well, the private credit can't sell things because they're, you know, pretty illiquid assets.
Some people have referenced that, well, this is our 2008 thing.
I think that's way overblown.
What people have to remember is back in 2007 and 2008, the banks held a lot of mortgage related paper debt on their balance sheets, and their balance sheets were levered 30 to 1.
So I think it's problematic.
We're going to hear more disruption from that sector, Remy, but I don't think it qualifies for a 2008 type of experience.
And given the volatility that we have seen so far in 2026, it's hard to believe we're only in Q1 given everything that's happened so far.
Has your base case changed for the rest of this year.
Well, one thing I've noted over the last few months is the advanced decline line has been making higher highs.
Historically, Remy, the market runs into more serious problems when the AD line does not make a new high as the S&P was.
For instance, in January 22, February of last year, the AD line didn't confirm those new highs, and it led me to believe that we were going to see decent sized corrections.
So the fact that the AD line has been confirming.
Suggests to me that after this bout of weakness, which I said 65 to 50 is a possibility, I think we're going to establish at least a short to intermediate trading low, and then we're going to see the bounce and the quality of that bounce is going to tell us a lot about what to expect midyear and on.
Historically we're going to come up to the midterm elections.
Going back in time, midterm elections have been associated with declines of about 17% in the S&P.
So to me that's the vulnerability.
As we get closer to the summer, I think the probabilities are the Republicans are going to lose the House, and I think the market isn't going to like that.
So there's the volatility you referenced, Remy, it's not going away, I think anytime soon.
Well, Jim, we will have to leave it there for now, but thank you so much for joining us today and thank you so much for sharing all of your insights as well as your perspective.
Thank you, Randy.
Stay well.
