Stocks rallied on Monday because President Donald Trump postponed his 48-hour ultimatum on Saturday to "obliterate" Iran's power plants if the country doesn't fully open the Strait of Hormuz. Yesterday, he extended the deadline by five days, until Friday, while talks with Iran continue.
Investors and traders recall that stocks soared on April 9, 2025, an hour before the stock market closed after Trump postponed his Liberation Day tariffs. That morning before the stock market opened, Trump tweeted, "THIS IS A GREAT TIME TO BUY!!!DJT." It was great advice.
On Monday, Iran denied that any talks were underway. Trump responded: "I’m not sure what [the Iranian media] is talking about... we had discussions last night, and there could be a deal with Iran in five days or sooner... You're going to see those oil prices fall soon, they're already coming down, and they're going to keep falling." That could turn out to be timely advice again! Tonight, oil prices fell by about $5.00 a barrel after Trump reiterated this afternoon that Iran agreed that it will never have a nuclear weapon.
Meanwhile, the US and Israel didn't stop obliterating Iran today. In addition, the Pentagon announced that approximately 3,000 elite paratroopers from the 82nd Airborne Division are deploying to the war zone. These "Global Response" forces are designed for rapid entry and can be on the ground in under 24 hours. That's in addition to the 2,200 Marines who will arrive on Friday.
Interestingly, defense-related ETFs have been down slightly during the war (chart). That might imply that investors expect a short war. Or else, they figure that spending millions of dollars on weapons that can be destroyed by cheap drones isn't a good idea.
On the home front, the odds of a US recession remains around 35%, according to Polymarkets.com, despite the huge jump in gasoline prices, which might depress consumer spending (chart).
In any case, the Redbook Retail Sales weekly index rose solidly by 6.7% y/y during the week of March 20 (chart). So far, consumers are still spending in line with this index.
We are still counting on the resilience of the US economy. The war's impact is the latest stress test that the economy has passed since the start of the decade. Nevertheless, we did raise the odds of a 2026 recession from 20% to 35% on March 9. We did so because we recognized that the war is likely to slow economic growth, which could exacerbate problems in the private credit and equity markets, as evidenced by sector-wide stock price declines (charts).
If oil prices continue to fall because Iran folds and accepts the 15-point peace plan sent to it by the US, we will lower our recession odds back to 20%. We will still have some concerns about private credit. In any event, we are still targeting the S&P 500 at 7700 by the end of the year.
Most past recessions were caused by economy-wide credit crunches. We don't expect that to happen this time because the banks are lending (chart).
Yesterday, the Atlanta Fed's GDPNow projection for Q1 real GDP growth was lowered from 2.3% to 2.0% following January's weak construction report (chart).
While construction spending on data centers rose to another record high, private nonresidential construction spending continued to decline, especially spending on office buildings (chart).
Today's report on Q4 productivity revisions was also on the disappointing side, showing a 1.8% (saar) increase, down from 2.8% (chart). Hourly compensation was revised from 5.7% to 6.3%, raising unit labor cost inflation from 2.8% to 4.4%. Nevertheless, productivity rose 2.5% y/y, slightly exceeding its 2.1% average over time.
