U.S., Israeli, Iran Conflict

Stocks ended the holiday shortened week mixed, as investors monitored the Middle East conflict and contemplated the commentary about interest rates by the Federal Reserve.

For the week, the S&P 500 slipped 0.12%, the blue-chip Dow Jones Industrials ended flat, while the tech-heavy Nasdaq added 0.2%. International markets were also mixed, with developed down 0.2% and emerging up 0.05%.

The Middle East concerns were intensified as Israel and Iran targeted waves of missile strikes at each other. As expected, U.S. crude oil prices are trading around $73 per barrel up nearly 7% for the week. Oil prices remain high due to doubled tanker rates and ships avoiding the straight of Hormuz, as reported by Reuters. Gold prices also rose to $3,450 per ounce up from $3,320 the previous week. On the economic front, inflation remained somewhat stable with the Consumer Price Index (CPI) rising 0.1% in May, less than forecasted. The annualized inflation was 2.4%, close to a four-year low recorded in April.

The Fed Chair Jerome Powell commented on monetary policy stating that they were in no hurry to reduce benchmark interest rates and will remain data independent. Christopher Waller, one of the Federal Reserve Governors, remarked that the central bank could cut rates as early as next month. Of course, as he admitted, the committee would need to go along. The issue remains whether the trade tariffs will increase inflationary pressures. As expected, President Trump criticized Powell’s decision claiming that not lowering rates is costing the U.S. “hundreds of billions of dollars.” The yield on the benchmark 10-year U.S. Treasury fell to 4.41% down 11bps from the previous week.

Investors have a lot on their plate this week as they will watch closely the U.S. involvement in the Israeli and Iran conflict. The Fed chair will be reporting on his semiannual monetary policy to the U.S. House and Senate. The Fed’s preferred inflation gauge, the core personal consumption expenditures price index, will also be reported.

With the U.S. bombing of Iran’s nuclear facilities over the weekend, caution is more than warranted. The S&P 500 is up significantly from the tariff scares of early April and is trading around 3% below its recent 52-week high. We recommend that investors stay calm and maintain a well-diversified portfolio.

Last week, U.S. Treasury yields declined as a result of the encouraging inflation data and a flight to safety.

“Summer means happy times and good sunshine.” -Brian Wilson