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July was a turbulent month for stocks.
Topping Wall Street’s worry list is the on-again, off-again war with Iran – driving oil prices above $4 a gallon and raising fears of higher inflation and interest rates.
Investors are fretting over these Middle East waterways:
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At the beginning of the month, prediction markets thought oil traffic through the Strait of Hormuz would return to normal. Please see A on the satellite view. Instead, the number of tankers making the perilous crossing has now ground to a virtual halt.
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Iranian-backed Houthis in Yemen attacked two Saudi tankers and threatened to open a second chokepoint at the Bab al-Mandeb Strait (B). This narrow passage controls the southern access to the Suez Canal. A blockade would force shipping between Europe and Asia to detour around the entire African continent.
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On Thursday, a drone attack set fire to two ships, including a U.S. tanker, at Damietta Port (C) which controls the northern entrance to the Suez. Egypt blamed Iran for attempting to expand the chokepoints.
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Meanwhile, Ukraine has joined the fray. On July 27, their drones struck Russian ships in the Caspian Sea (D) that were carrying Iranian drones to Russia.
Wall Street has a long history of recovering from geopolitical conflicts. The blue line climbing to the upper right in the chart below is the S&P 500 – the stock index of the country’s largest publicly traded companies. We think the Iranian hostilities will turn out to be another buying opportunity.
The other worry on Wall Street is the $7 trillion expected to be invested in AI data centers and models like Chat GPT over the next four years.
Will the spending spree ever pay off? It’s too early in the game to know. For now, however, we take comfort that Microsoft and others are generating fabulous profit margins and the demand for AI is ravenous. Total Chat Active Followers (TCAF) now exceed one billion according to WSJ.
August
The Middle East and AI worries whipsawed markets last month. As one strategist observed, “It’s like being on a whale-watching trip. Everybody rushes to the side of the boat where there’s a whale, then rushes back to the other side when the whale swims underneath.”
Earnings are the oxygen of the stock market and they are booming. Profit margins are not only high - they’re expanding. As the JPMorgan CEO Jamie Dimon put it, “It’s getting close to as good as it gets”.
The bull market of rising stock prices is about to enter its fourth year. We think it has plenty of runway.
Patience, a long time horizon, and diversification are your best friends.
-Ashley & George
Clients hear from us often. We communicate monthly via personalized letter to report on stock market activity, economy, geopolitics and anything that affects your portfolio.
We steer clear of political bias to cut right down the middle for your investment summary - a useful tool as we wade through the convoluted waters of daily news.