This evening, the prices of a barrel of Brent and WTI crude oil are up about $15 to $107. The price of gold is falling because the dollar's foreign exchange value is rising. The 10-year bond yield is up to 4.195%. The S&P 500 and Nasdaq futures are down by more than 1.7%. The Nikkei is down 4.5%.
This chaos in the financial markets is all about the Strait of Hormuz, where a tanker was reportedly hit by an Iranian suicide drone on Saturday morning. This oil shock won't end until ships can sail freely through the Strait. Until then, the financial markets are likely to become increasingly concerned about a 1970s-style stagflation scenario; back then, the period of stagflation included two recessions.
According to Polymarket.com, the odds of a recession this year jumped to a three-month high of 34% on Friday from 21% on Wednesday, February 25, just before the war started. We started to see trouble ahead last week on Tuesday, when we predicted a 10%-15% correction in the S&P 500 because of the war. Now we can't rule out a bear market and even a recession. It all depends on how long the Strait will be closed, obviously.
For now, in response to the fast-paced developments in the Persian Gulf, we are raising our odds of a 2026 recession from 20% to 35% and slashing the odds of a boom/meltup scenario from 20% to 5%. We are sticking with our Roaring 2020s scenario and counting on the resilience of the economy, but the risks of a "Stagflating 1970s Redux" scenario are increasing every day that the Strait remains impassable.
We are also tracking Polymarket.com for the odds that the House of Representatives will flip from a Republican to a Democratic majority. It wasn't looking good for the Republicans even before the war (chart).
It also isn't looking good for the stock and bond markets. Both the S&P 500 and Nasdaq are likely to fall below their 200-day moving averages on Monday (charts).
The 10-year US Treasury bond yield has been remarkably subdued, between 4.00% and 4.25%, over the past year (chart). Soaring oil prices are likely to disturb that calm, sending the yield higher. Commodity price indexes excluding crude oil and petroleum products are likely to tumble on recession fears. Even the price of gold has stumbled because the oil shock has boosted the dollar's foreign exchange value.
Our recommendation on December 7 to rebalance portfolios from Stay Home to Go Global worked well until it hit the fan due to the latest war in the Middle East. The US’s MSCI index has outperformed those of the rest of the world over the past week (chart). It is likely to continue doing so until the Strait is open for business.
As we've noted before, geopolitical crises tend to create buying opportunities in the stock market. Bearish sentiment is likely to soar in the coming days, which should work as a contrarian buy signal. We will keep you posted.
We asked Michael Brush to update the trading activity of company insiders: "Buying by actual insiders, as opposed to the less relevant investors deemed insiders because of large holdings, picked up considerably in the volatility last week. The buying happened mainly in cyclical sectors. This is a bullish statement on the economy at a time when recession fears are rising. Insiders bought substantial amounts of stock at companies in private credit lending, media, rail transport, real estate, auto sales, insurance, construction, and defense. There was a noticeable increase in large purchases worth $1 million or more." Thanks, Michael!
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