Allocation and Investment Committee Meeting 03/17/26
Greetings all! This month’s letter is going to look a bit different than past letters as there is a lot going on that I wanted to address and the best way for me to do is to simply write it in narrative format as opposed to breaking down the economy, bond markets, stock markets, and crypto.
When the war with Iran begun on February the 28th, all of the “normal” data and figures we use to measure where we are as far as the markets are concerned changed as you would expect. I am going to use this brief paper to discuss what happened, how the markets reacted, and what we think could happen in the future. As always, future predicting is an impossible task, but we can do is look to the past to find similarities and do our best to position portfolios for what may occur.
The US Stock market hit a peak in January. We traded flattish but near the highs until February 28. Since the 28th, the markets have retreated by 5.4% from that January high. In addition, interest rates have spiked for the same reason. Remember that when rates go up, bond prices fall. So what we see happening is a regression in both bond and stock prices which is somewhat abnormal. Much of the increase in rates is on the back of energy prices increasing across the board with gasoline prices up 75% and crude up nearly 70%.
We can take a look back at something similar that happened in the markets back in 2022 where we had a bear market with the S&P 500 falling around 25%. That was when Russia invaded Ukraine. That drove oil to over $100 a barrel and gasoline to over $5 a gallon. Just like in 2022, energy stocks have surged and are up around 30% on the year. It does make sense as when prices of goods increase, the expectation of consumer spending decreases, which hits many stocks. As of today, gas prices are around $3.80 a gallon which is a 30% increase from where we were just a month ago. This just so happens to be the largest one-month spike in nearly 30 years.
For those who do not follow geopolitical events, much of this increase is directly tied to the region around Iran and specifically the Strait of Hormuz.
As you see on the above map, the Strait is really a bottleneck in the waterways that are responsible for delivering nearly 20% of the global oil supply. Iran has somewhat shut down or at the very least slowed the safe delivery of liquid energy through the Strate. So, this goes back to high school economics lessons on supply and demand. When there is less supply, the demand goes up. When this happens, the price goes up. When and if this situation is resolved or the Strait opens again for business, I would expect prices to drastically fall back down.
The question that comes to my mind is why is the drop in the markets so small? I honestly expected much more volatility, and I expected to see the markets down 10%. My guess is that many feel that this “war” will be very short lived. Following that line of thinking, many money managers are less likely to sell into this so that they don’t get caught uninvested when and if this war ends, and things get back to a more normal geopolitical environment. In addition, our economy and US business is really quite good. The earnings from the S&P 500 companies continue to grow with last year’s fourth quarter profits, showing an increase of over 13%. The outlook given to us through the guidance of these companies on conference calls has led us to believe that this increase should grow even more and possibly see a 16% increase in the current quarter. So business is really good.
Much of this correction in the S&P 500 has come from the stocks that have made up the biggest gains in the S&P 500 now being sold. This group of stocks has become known as the Magnificent 7. They are Nvidia, Google, Meta, Apple, Amazon, Tesla, and Microsoft. By looking at your statements, many of you will notice that we picked up a few more shares of some of these as the selloff has been quite dramatic, especially in Microsoft now down 18% on the year.
Look similar? It should. SO many people were scrambling to the exits because we had a new president. That was a mistake.
All market turmoil is hard on the stomach. It has been difficult for some but honestly not for most of our Redfish investors. This is simply because we remain properly allocated across all sectors and markets, and we have a long-term viewpoint. Trading in and out of markets based on what we think may happen or because of the headlines is generally a loser's way to invest. We simply do not do that. We maintain a healthy amount of money (in % terms) allocated to very safe investments, fixed income, and cash equivalents. It is not a very sexy way to invest however in times like these it does give us plenty of dry powder to deploy into names we like when they are down like the above-mentioned Microsoft.
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