As I write this newsletter, we are in week 4 of the US’ attempted ousting of the Iranian regime. Last month’s letter stated that an attack on Venezuela was not in any of my potential forecasts, but conflict with Iran was. This takes us back to a famous investing mantra (parentheses are mine): Hedge against the risk you know (job loss, inflation, etc.) and diversify against the risk you don’t know (war, pandemics, etc.). A diversified portfolio should be able to withstand volatility in the short term and if you’re not well diversified, it might be time to look at portfolio allocations. Thus far, we’ve had a pullback, but nothing that amounts to a bear market or signs that a recession is imminent. It probably isn't a good time to swing for the fences, given the wide range of potential outcomes. I probably sound like a broken record, but the past isn't necessarily a perfect guide to the future and previous experience shows that staying the course during times of heightened global risks is generally the right strategy.
This is especially true considering the economy today looks resilient if productivity gains continue and geopolitical tensions ease. If they ease even modestly, the market could be poised for a powerful rebound. Headlines over the past few weeks have been spectacular - and often focused on worst-case outcomes. History suggests equity markets would rapidly rebound when a ceasefire occurs. Investors must also continue to widen their lenses geographically. European equities, Japan, and several emerging markets we’re all outperforming until the onset of the war and once the conflict abates, I predict that the international markets will continue to surge higher.
All that said, I am more cautious in the short run because higher oil, geopolitical uncertainty, and visible-price psychology can absolutely pressure stocks. I am not bearish on the larger outlook. The economy is still growing; labor, although soft, has not cracked, inflation has held up better than feared, and the secular AI story remains intact. This is a market facing near-term shocks, not one losing its long-term foundation.
How big an impact on inflation will the spike in oil prices have? Less than you’d think. Obviously, prices at the pump have already started to move higher, but we’re still well off the highs from 4 years ago and the Strait of Hormuz only accounts for 20% of global energy.
AI continues to show us that it should bring productivity improvements, which could translate into the greatest increase in the standard of living since the Industrial Revolution. Some professions will clearly be impacted, but the AI future is not one to be feared, but one to be embraced. Rather than eliminating software, AI is amplifying the gap between businesses with real moats and those whose primary advantage was coding. As Nvidia CEO Jensen Huang noted in response to the recent software selloff, the idea that AI tools automatically replace specialized software “ignores how businesses actually use technology”.
Unfortunately it’s tax season which watching all of the government waste and fraud being exposed makes me really question paying what I owe. We could probably cut taxes in half and still cover legitimate government spending while reducing the deficit. That said, don’t forget to fund your IRAs, max out your HSAs and pay your property taxes.
I’ll leave you with a few links to get through spring break: Data centers in space is still science fiction to me, but not to a growing number of companies. Who will regulate them? Laser guns used to be a thing of science fiction movies…is that not the truth anymore? Last year there was a lot of talk about new nuclear power facilities – I guess it was a lot of talk. Finally, why are the lowest earning consumers wasting money on food delivery?
