Welcome back to Market Movers.
The opening bell.
The markets have just opened for the final two trading weeks of Q1.
The major US stock averages are opening higher, with the Dow, Nasdaq and S&P 500 all higher by at least 0.7%.
Now as we kick off the week, we're also keeping a close.
Eye on oil prices.
The biggest risks hanging over the market right now are a prolonged conflict in the Middle East as well as surging oil prices around the globe.
And add to that a fresh wave of tariff uncertainty as the US ramps up investigations into imports from major trading partners including Canada, Mexico, and China.
And also the software sector and private credit continue their struggles while the big banks are down by about double digits here today.
And joining me as we kick off a big week for central banks is Brian Jacobsen, Chief Economist for Annex Wealth Management.
Brian, good morning and thank you.
Much for joining us.
So the markets were red in Q1 last year and then went on to rally, but given all of this uncertainty regarding geopolitics and what this means for the global economy, what do you expect to see as we head into the final weeks of Q1?
Yeah, thanks for having me.
I think that, you know, every year it seems like it starts with a little bit of chaos and then we get through it, and a lot of that is just driven by the fundamental strength and resilience of the corporations in the United States, right?
If you think about the way in which management can adapt to an ever changing and evolving situation.
It's pretty impressive the way in which companies have been able to maintain their profit margins.
I do think though that that is going to really come under some testing when we get into the Q1 earnings season.
So as we approach the end of this quarter, I think analysts are beginning to really focus on which companies do indeed have pricing power in an environment in which consumers are still feeling the pinch and also supply chains aren't exactly healing completely from the tariff shock, and now we have this supply shock coming from oil prices.
So we could continue to see some of this chopiness, but I think we'll get through it.
Speaking of uncertainty as well as supply chain, we're all keeping a close eye on oil as well as the geopolitical situation in the Middle East, and we know that we will be hearing from the Federal Reserve this week in regards to the economic outlook.
So given the fact that there are concerns about artificial intelligence as well as private credit brewing underneath the surface, how are you factoring all of this in when it comes to the outlook?
Sure, so I think the Federal Reserve is going to try to do no harm, right?
They have hopefully learned the mistakes that have been committed by them and other central banks in the past, and will know that when you have commodity price increases like this, like with oil prices, the worst thing that they can do is hike rates or get too hawkish about it.
Yes, it is likely going to increase inflation in the short term, but it also has a growth dampening effect, and those growth.
Dampening effects can be more long lasting and important than the temporary inflation effects.
So I think that the messaging from Chair Powell when he takes that podium with the press conference is going to be about vigilance.
They're going to watch it, but they're not necessarily going to react or overreact to it.
Now we do have the artificial intelligence and private credit issues also percolating, so artificial intelligence, I think, is actually going to be a positive over the longer term.
Productivity with some short term disruptions to certain industries.
I think we already saw that with the information technology jobs numbers over last year.
That was one of the areas that we saw a decline in the total number of payrolls.
So I think it is really showing up, especially with those entry level positions in the information technology area, but it should eventually be a positive for growth and also a benefit in terms of lower inflation.
Private credit is the big wild card just because it's private.
We don't know where it's all held and where it's distributed, so I think people are kind of making some, uh, almost worst case assumptions about it.
But when we look at the total magnitude of it, about a $1.8 trillion market for private credit, and then we look at the big banks.
What they hold on their balance sheets, it's probably less than, you know, like 3, maybe 2 to 3% of their total loan book in terms of any sort of, in my mind, worst case exposure.
So I think that the market is overreacting a little bit too too much to this private credit situation.
I'm glad that you brought up banks because financials are the weakest performing sector within the S&P 500 down over 11% so far year to date.
So given the fact that you're monitoring all of these situations, there's also the issue of rate differentials as well as the US dollar.
So what do you make of what we're seeing in the FX market and of course the bond market in terms of yields?
Yeah, so I think that the rate differential between what the US is doing, Federal Reserve either on hold or biased towards cutting eventually, but then you flip it over to in Europe with the European Central Bank, it seems like they're actually closer to hiking than what we are.
So I think that really is going to help drive that wedge, eventually push the dollar weaker again.
That is a trend that I think got put in place with the announcement of those tariffs last year, and I It's a trend that's going to continue.
It's just right now we're taking a little bit of a detour towards dollar strength because of the geopolitical issues and the dash for cash with a lot of those Middle Eastern sovereign wealth funds or their central banks because when push comes to shove they still do need dollar liquidity.
So I think it is a temporary factor that is pushing the dollar stronger, and I think that we're eventually going to see the dollar break lower again and it could be one of those things where it Happens rather abruptly, which then from an investing perspective in my mind would really favor either international credit, so kind of think about international bond strategies, or with international equities.
We saw international equities return more than like 30% last year and very rarely do you see that type of outperformance as a one and done.
It's usually you get at least a repeat performance in terms of the outperformance, not maybe of that magnitude, but at least directionally.
And Brian, finally, before I let you go, we have about 60 seconds here right now on this Monday morning.
We are looking at the national average for a price of a gallon of gasoline hovering right around the $3.71 level.
Do you expect this to continue in the near term, especially as we head into summer driving season?
Yeah, this is a horrible time of year for it to happen, right, with airlines getting hit with weather issues now their fuel costs going up and with the consumer approaching that important summer driving season.
Keep in mind though that the percentage of the typical consumer's budget that's spent on gasoline has fallen dramatically over the years.
It's about half of what it It was about 30 years ago, so it's important but not as important as it used to be.
So I think that it is likely to persist with these higher prices, but only for now.
I would expect that maybe a month from now we could see that number, that national average price, drift back down towards the low threes instead of the high threes where they are now.
Well, Brian, we will have to leave it there for today, but as always, thank you so much for joining us and thank you so much for sharing all of your insights as well as your perspective.
My pleasure.
Thank you.
