The S&P 500 is staging a V-shaped recovery, giving the impression that everything from geopolitics to U.S. fiscal issues has been magically resolved. In reality, however, the situation is far from clear.
Starting with the biggest pressure point for the global economy right now, the Strait of Hormuz: since Saturday night, traffic through it has ground to a halt again after the U.S. refused to lift restrictions on Iranian ports.
The good news is that a new round of talks is set for this week, so de-escalation is still on the table. The bad news is that the gap between the two sides, especially on control of the strait and Iran’s nuclear program, is still pretty wide. On top of that, the United States is increasing its military presence in the region, which doesn’t exactly rule out the possibility of a ground operation.
If things do get worse, Tehran has ways to respond, including disrupting traffic through the Bab el-Mandeb Strait, which would add even more pressure on global supply chains. For now, markets seem happy to ignore that risk.
Investors don’t seem too worried about inflation picking up again in the U.S. either. And while March PPI did come in better than expected, expectations were already pretty high at 4.6 percent. The actual number came in at 4.0 percent year over year, up from 3.4 percent previously.
But if the energy situation worsens, it’s hard to see inflation improving from here. In that case, even a single rate cut from the Fed this year could be off the table. And even if Powell were replaced as Fed Chair, that wouldn’t really change the underlying picture.
Then there’s the U.S. fiscal situation. In March, national debt crossed 39 trillion dollars, up about 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 part is that, with last year’s “big, beautiful bill,” there’s still little sign we’ve hit a ceiling.
No wonder the Fed Chair has even called the trajectory unsustainable and warned about long-term risks.
If fiscal conditions don’t improve, another credit rating downgrade is very much on the table. And if big institutional investors start stepping away from U.S. Treasuries, in theory, that could escalate into a crisis way worse than 2008.
So, the overall picture is not exactly reassuring. But markets have become extremely optimistic, partly driven by a kind of gambling mentality or, more precisely, a fear of missing the next big rally.
