The S&P 500 is making a V-shaped recovery, giving the impression that everything from geopolitics to US fiscal issues has been magically resolved. However, in reality the situation is still unclear.
Start with the Strait of Hormuz, the biggest pressure point for the global economy right now: Traffic through it has again halted since Saturday night after the US refused to lift sanctions on Iranian ports.
The good news is that a new round of talks is scheduled for this week, so talks about reducing tensions are still going on. The bad news is that there is still a wide gap between the two sides, particularly over control over the Straits and Iran’s nuclear program. In addition, the United States is increasing its military presence in the region, which does not at all rule out the possibility of ground action.
If things get worse, Tehran has ways to respond, including disrupting traffic through the Bab al-Mandeb strait, which would put even more pressure on global supply chains. For now, the market seems happy to ignore that risk.
Investors do not seem too worried about inflation rising again in America. And while March PPI came in better than expected, expectations were already quite high at 4.6 percent. The actual number stood at 4.0 percent year on year, up from 3.4 percent earlier.
But if the energy situation worsens, it is difficult to see an improvement in inflation from here. In that situation, not a single rate cut by the Fed will be possible this year. And even if Powell were replaced as Fed chair, it wouldn’t really change the underlying picture.
Then there is the US fiscal situation. In March, the national debt surpassed $39 trillion, up nearly 1 trillion in just five months and more than 2.3 trillion since Trump returned to the White House for a second term. The worrying thing is that, as with last year’s “big, beautiful bill”, there is still no sign that we have reached a limit.
Not surprisingly, the Fed Chairman has also called the trajectory unsustainable and warned about long-term risks.
If the fiscal situation does not improve, there is a possibility of a further downgrade in the credit rating. And if large institutional investors theoretically start moving away from US Treasuries, this could turn into a crisis worse than 2008.
Therefore, the overall picture is not at all reassuring. But markets have become extremely optimistic, partly driven by a kind of gambling mentality or, more accurately, a fear of missing the next big rally.
