“It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so.” - Mark Twain
If I'm producing a new blog entry, it's probably a safe bet that capital markets are uneasy. Admittedly, I am more prone to publish when I get the sense that clients and followers would benefit from some insight by an increasingly aged veteran of past market turmoil. The hair may be graying, but I'll take solace that I still have some left.
As I often reference, my framework for allocating capital includes standing on the shoulders of research providers who specialize. One of my favorites, Darius Dale of 42 Macro, systematically tracks the six key macro cycles that influence the momentum and dispersion within and across asset markets, on a trend basis: Growth, Inflation, Monetary Policy, Fiscal Policy, Liquidity, and Positioning.
In "normal" market environments, the trending nature of these six macro cycles informs decision-making as we continually attempt to put the odds in our favor. However, in the current Oil Shock environment in which we find ourselves, where the Gulf Cooperation Countries (GCC) have their main source of funding impeded by the chokepoint that is the Strait of Hormuz, the markets have become a one-variable machine: Oil Up = Rates Up = Stocks & Bonds Down.
Typically, we would welcome a short-term correction from news headlines, as those are usually buying opportunities. But, for now, I'll lean on Dale's take from Thursday afternoon: "None of these themes matter much as long as the current global liquidity crisis persists. ...Investors should continue to beware of temporary reprieves in this conflict because the left tail of the distribution of probable outcomes has yet to be seriously entertained by equity and credit markets."
That left tail Darius refers to is basic Statistics; the bell curve and the portion of any sample that skews to the negative. Our job as risk managers is to attempt to cut off the far left of that bell curve. In short, we play defense when the conditions warrant.
From a Positioning standpoint (one of the six macro cycles), investors came into the year as lopsidedly bullish as they've ever been over the last four decades. The majority seemed to know that the positive economic conditions (slowing inflation, solid jobs numbers, Fed policy pivoting dovish, etc.) would persist and provide for another banner year in Risk Assets.
Enter a liquidity crisis where sovereign nations in the Gulf region, with massive reserves of Gold, Bonds and Stocks, would see their cash flow constricted in short order with the closing of the Strait of Hormuz. These countries rely on the continuous flow of their oil to foreign markets to fund their societies. Shut that down and they have no choice but to start selling those reserves. This explains why Gold, a typically reliable safe haven in times of war, has been selling off since the Iran conflict began earlier this month.
I'm no war prognosticator, but seeding control of global energy markets to the world's largest state sponsor of terrorism is never going to be acceptable to the G-20 nations and the GCC. At the same time, the adversary here has one important facet to their leadership that cannot be underestimated: religious fanaticism. The concept of martyrdom in the Shia denomination is paramount, and Iran is still run by the most extreme wing of this sect. That equation sounds a lot like an unstoppable force colliding with an immovable object.
In the absence of confidence that this conflict wraps up in short order, combined with the knowledge that storage of oil in the Gulf has run out (forcing the capping of wells that cannot easily be restarted), I am prone to further reduce Risk.
Additionally, today's S&P 500 open violated the bottom of the support range in place for the last 6+ months.
Client portfolios have already had their Equity exposure reduced by approximately 15% since the start of 2026. My intent is to reduce this further because we can always buy it back...and we will when the Strait reopens in earnest.
Questions? Give me a ring. You know I'm always happy to get into the weeds.
Best regards,
Sean
All information contained herein is derived from sources deemed to be reliable but cannot be guaranteed. All economic and performance data is historical and not indicative of future results. All views/opinions expressed in this article are solely those of the author and do not reflect the views/opinions held by Advisory Services Network, LLC.
Standard & Poor’s 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general. Indexes are unmanaged and do not incur management fees, costs, or expenses. It is not possible to invest directly in an index.
