The world seemed to pull back from taking undue economic risks as tensions in the Middle East eased a bit last week. Deteriorating supply conditions for energy and other materials have raised the risk of a global recession. While there is still considerable uncertainty about how events will play out, it appears that the U.S. wants to negotiate a deal and get the Strait of Hormuz re-opened shortly.
MRB has stood pat during the war in the expectation that the global stock/bond (S/B) ratio would eventually recover in due course and hit new highs. As noted in last Friday’s report “Already Returning To Complacency?” the S/B ratio has already fully recovered without the war actually reaching a resolution. This reflects strong corporate earnings and the ongoing accommodative monetary and fiscal policy backdrop. Moreover, the speed of the rebound reflects the entrenched bullishness amongst the investment community which is now betting that the energy shock will soon dissipate.
Contrarily, bullish sentiment is a long-term concern, albeit only once a negative economic catalyst develops. To this end, an escalation in the war and another oil price surge would likely qualify as such a catalyst. For now, we are staying invested, but also are prepared to de-risk if current elevated expectations regarding lower energy prices and an improved supply outlook look to be dashed. Stay tuned.
