I wrote last week about the apparent disconnect between Main Street (the real economy) and Wall Street (the stock market), this week the disconnect in US markets continued as both the NASDAQ and the S&P 500 hit all-time highs. Especially strong were US technology stocks - what happened to the AI bubble worries of last year? Over the week there was no progress on a lasting Middle East peace or opening the Straits of Hormuz and instead more evidence that the impact of high oil prices not only on energy costs, but oil derived products, will go much longer than many economists current thinking.

Nevertheless, US indices ended the week higher and despite a mixed sector performance, gains in Consumer Staples, Energy and especially Technology shares meant an overall weekly gain. The rational by numerous strategists for the US markets continuing up move is that there is more growth potential in US equities, amongst the drivers being the US administration economic stimulation by lower taxes and hopefully lower interest rates (new FED chair), the ongoing AI infrastructure spend and that overall US companies are less impacted by oil prices. I think the strategists seem to be forgetting that the other half the economy is the consumer and especially middle to lower income, who will be very much impacted by higher energy and inflated prices across a wide spectrum of expenditures.

One of my investment idioms, which I've used before, is that it doesn't matter until it matters and then it matters a lot, in other words an obvious issue that should impact investors decisions seems to be largely ignored, until all of a sudden, it comes into focus and often followed by a sharp and vigorous finance markets reaction.

For non-US markets perhaps the challenges of the Middle East are beginning to matter as European and Asian markets were significantly lower for the week, even Canada was not immune with the TSX dropping 1 ½%,

Consider: 

1. The Iranian leadership had made the lifting of the US blockade a precondition for the resumption of negotiations, President Trump for his part has indicated that the ceasefire will remain in place, leaving the conflict in a no airstrike, minimal movement of ships – an unsustainable equilibrium.
2. At last week's commodities global Summit in Switzerland there was consensus that there was no imminent end in sight to the conflict and that financial market participants were vastly underestimating the scale of the disruption,
3. A number of participants also suggested that even in a perfect reopening scenario, it would take months to unblock the waterway due in part to freight constraints. Restart timelines will vary by country due to the degree of damage to fields and infrastructure—with Iraq expected to take the longest to come back online.
4. The looming fertilizer crisis was also a key discussion point in Lausanne, with real problems expected to emerge in 2027, already however US farmers are feeling the pinch, ammonia before the conflict was $800 a ton. Now it’s $1,050. As one farmer commented “Everything’s going up, while at the same time you’re getting the same prices for your commodities. A survey this month by the American Farm Bureau Federation (AFBF) found about 70 per cent of respondents reported being unable to afford all the fertilizer they need.
5. Aviation fuel is now some 70% higher and numerous airlines are cutting back on routes while at the same time substantially increasing travel costs. I've just booked a short visit to New York City in June. The return tickets over $900 each!!
6. Job layoffs with Meta (Facebook) announced last week 8000 redundancies. In previous The Week That Was, I have highlighted several major US companies from UPS to Amazon, laying off staff, often the reason  given because of AI efficiencies. Higher inflation across a wide range of household needs, higher borrowing costs, and ongoing job layoffs doesn't seem to me to be the recipe for consumer confidence or growth.
7. Rising cost of electricity, especially for consumers near data centers, a recent Bloomberg analysis reported that Americans who live near data centers are paying as much as 267% more a month for energy than five years ago.

Investment strategy, as I noted before when in a state of flux,  is not to make any dramatic moves but I think the ongoing rally provides an opportunity to reduce exposure in sectors where one finds one's portfolio overweighted.  A resolution to the conflict could well provide a substantial relief rally to the upside but then markets can settle down and especially for US investors focus on the upcoming midterm elections at a time where it appears the economy is slowing and the Republican incumbents are facing growing voter discontent.

Some good news which should tell why investors should not become too defensive was a recent Wall Street Journal article commenting that the US is in a stealth industrial boom especially focused, no surprise, on technology and related industries. The report stated that the manufacturing production of computers, semiconductors, and communication equipment is up 90% since 2017. This expenditure is bigger than the railroad expansion of the 1850s, the Apollo space program that put astronauts on the moon in the 1960s and the decades long build-out of the U.S. interstate highway system that ended in the 1970s. Note however the rest of manufacturing is down 4.3% for the same timeframe.  However, one should not rule out a boost from government driven infrastructure spending. We might even see the same phenomena in Canada as over the weekend Prime Minister Carney announced plans to create a sovereign wealth fund to assist building major projects throughout Canada in the years ahead.

To mull over with your morning coffee, consider this:

Investment strategists, governments, corporations all rely on some extent on the analysis and forecasts by economists for their long-term strategic planning. As readers well know I believe economists are there to make weatherman look good 😊 so here is a timely recent example:

The Federal Reserve Board in Washington, D.C., employs over 400 Ph.D. economists and over 500 researchers in total. This team conducts economic analysis, research, and forecasting for the Board of Governors and the Federal Open Market Committee. As recently as January 26th the Atlanta Federal Reserve based on input from their economists was predicting gross domestic product (GDP) for the US to be in the range of 5.4% for the 4QTR 2025. By February 2nd this estimate dropped to 4.2% and was further revised to 3.7% by February the 10^th . The estimate continued to be revised lower over the next few weeks before the actual report came out.

On April 9^th the actual GDP fourth-quarter spending numbers were released and drumroll the actual increase was (gasp) only 0.5% !!

Keep that in mind next time you read a business article or optimistic government growth projections which contains economic forecasts.

Dennis