Q1 Recap: Stock Market Rally Amidst Rising Gas Prices and Labor Market Challenges

Let's get to the big story breakdown.

It is a brand new trading month as well as quarter.

The major U.S. stock average rallied hard yesterday but still ended Q1 in the red for the second straight year.

Now investors were more optimistic about a potential end to the Iran war in the coming weeks and rate hike odds are subdued after Fed Chair Jerome Powell said the Fed does not have to take any action on the energy supply shock.

But the U.S. economy could still be in a tricky spot.

The national average for a gallon of regular gasoline is above four dollars for the first time since 2022.

Meanwhile, the labor market does face a key test on Good Friday when the March jobs report comes out.

Joining us this morning to break all of this down is Katy Kaminski, Chief Research Strategist, Portfolio Manager at AlphaSimplex.

Katy, good morning.

Thank you so much for joining us.

A lot of moving parts here.

And as you and I were talking ahead of the show, we can't keep our eyes off the screen.

So, risk-off sentiment did take over the markets over the past few months as investors rotated into safe haven assets.

But take us through this and if it still holds true after yesterday's rally.

Well, I mean, I think it's really important to watch the price action this week and realize that this type of risk on move is focused on hope that there's a resolution for the conflict or some sense that we're moving in a direction where we have finality.

And I think since we don't really have that yet, you have to be careful that it can be investors jumping in as a buying opportunity since the markets haven't been down as much over the last few years.

And the issue that it's still going to take some time to sort out whether or not we have gone to a better place. yet with the conflict.

So I think the way to think about these type of moves, yes they are positive, it shows that sentiment is changing positively, but I wouldn't be surprised if we see more days with a lot of big swings like we typically do when there's a lot of uncertainty about the reality of the economic situation regarding the conflict.

Yeah.

And Katy, as you mentioned, plenty of uncertainty as well as volatility across all asset classes.

And we have seen Treasury yields come down from 2026 highs along with rate hike expectations.

But give us your outlook when it comes to fixed income.

Oh, this is a very good question because fixed income has been very hard to trade this year because you had an outlook where there were hopes for some cuts later this year.

I think, you know, this recent conflict has put a curveball into that narrative.

And what we have seen in the markets as we've seen yields steadily going higher, based on concerns for inflation, whether or not it's temporary or more persistent.

That is difficult for bonds, and it does put rate cuts into question.

So the market has been very tricky to forecast in fixed income, but you're still seeing somewhat short signals as long as the conflict remains front and center.

This resolution is pro-bonds and you are seeing that today.

So some of that concern is abating in the market moves in the last two days.

Yeah.

And while I have you here, I do want to get your take on what we're seeing across currency markets.

So when we take a look at the FX markets, the U.S. currency is higher since the Iran war broke out.

But moving forward, what is your outlook for the U.S. currency, especially given the fact that other central banks have a lot to contend with, with higher energy prices as well?

Oh, this is a good question, because what we had seen is a persistently weaker dollar for quite some time.

Given the recent conflict, that had two effects.

First, we had risk-off sentiment, which tends to be positive for the dollar.

So the dollar benefited from risk-off.

But second of all, the fact that rate hikes would be pushed out and expectations for rate rate cuts, I apologize, were less likely.

That's also pro-dollar.

So the dollar has been in a very strong position during this conflict.

If the conflict de-escalates, I would expect that the dollar will continue to weaken again, given the fact that there has been sort of a push longer term towards some cuts and a change in the Fed.

Yeah, and I do want to get your take on commodities.

And we're not just talking about gold as well as oil.

We're also talking about ag commodities as well, because we are seeing elevated prices for oil above that $100 barrel level for both WTI and Brent.

But we're seeing aluminum prices hit four-year highs as well.

And we've also seen gas prices move north of $4 here in the US.

So what do you expect for energy as well as commodities moving forward?

So when we start with the energy sector that is a little bit trickier than stocks in the sense that we need to see that resolution.

And one of the things that we look in energies is looking farther out in the curve.

So if you look across the futures curve longer term energy contracts are trading at lower levels which means the market is still anticipating that we will have high oil prices.

But At some point, the market is anticipating a dissipation of that and prices to come down to a more normal level.

The challenge for commodities as a whole is that there will be pressure on supply chains.

There will be pressure on prices and costs.

So I think you're seeing commodities as a key sector to watch for other key commodities such as aluminum.

And so I think that's where the situation, having oil prices so high is a stressor for many different things.

And it's part, it's a key input to many different pipelines, which means that it will affect lots of, potentially affect inflation, and that can be not just oil.

And Katy, less than 60 seconds here, but as we head into Q2, what does diversification look like?

Oh, this is a good question.

I mean, because diversification right now this month, what had worked is energy exposure.

It's alternatives.

It's things that are a little different.

Ironically, being able to position dynamically and fixed income worked very well in the recent period.

So being able to profit from an inflation shock has been something that has helped investors.

But the stock bond portfolios had very little diversification recently.

Well, Katy, always great talking to you.

Thank you so much for joining us this morning.

And as always, thank you so much for your insights.