A volatile, holiday-clipped week ended on a strong positive note. The markets wavered on Thursday, cutting short their two-day rally, after President Trump’s late Wednesday speech didn’t deliver on hopes for an immediate end to the Iran war. However, the earlier advance – driven in part by the return of dip buyers – still propelled stocks to their best week since November. The DJIA (DJIA) rose 1.18% for the week, the Nasdaq-100 (NDX) jumped by 1.94%, and the S&P 500 (SPX) added 1.63%, pulling back from the brink of correction.
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Still, futures are in the shallow red for Monday’s open, despite some positive macro news, as investors remain highly sensitive to headlines around the Middle East conflict. The Strait of Hormuz reopening remains a key focus, although the immediate reaction in crude prices appears less acute, with equities showing limited follow-through from the pre-weekend surge in futures. That said, uncertainty around the duration of supply disruptions continues to cap risk appetite and keep volatility elevated.
Importantly, the U.S. is the world’s top crude producer and remains largely energy-independent, while it imports very little through the Strait. Despite that, a shutdown still drives up WTI prices, which are set by the global supply and demand – the equilibrium that has been upended by the closure of the narrow waterway carrying about 20% of the world’s oil and LNG trade, lifting the U.S. crude benchmark above $110.
The U.S. energy producers are now watching their cash flows swell, giving them more capital to deploy. That’s coming particularly handy for the oil majors like Chevron (CVX), adding dry powder for development of the long-shot projects like the recently reopened for business Venezuela with its largest proven reserves globally. In addition, expensive crude makes U.S. domestic shale in higher-cost basins a viable and attractive investment. The Energy Select Sector SPDR Fund (XLE) remains the only sector ETF in positive territory over the past month and continues to lead year-to-date performance.
Context also matters. In 2011-2013, WTI prices held a sustained “high plateau” of $100-110, which in today’s dollars would equate to crude staying above $150 for more than two years. Prices are still well below that level. At the same time, the U.S. economy has become structurally less energy-intensive, with energy use per unit of GDP down roughly 25% since then, reducing the pass-through from oil prices to inflation.
The U.S. economy is a lot more resilient than many people realize – and we have just received data supporting this view. Initial jobless claims fell to one of the lowest levels in the last two years. Friday’s labor-market report showed a surge in hiring, with job growth well ahead of estimates and the unemployment rate unexpectedly edging down to 4.3%. This seems to be the outcome of the return to job growth in the healthcare sector, which was hit by strikes in February.
However, the employment rebound failed to lift investor spirits, with the mood across the market remaining far from panic, but not bullish either. Stocks may have found some support last week, only to realize that macro still weighs. Higher oil prices introduce upside risks to inflation, while continued labor-market strength reinforces the Fed’s ability to stay on hold. Together, those factors anchor the current “wait and see” policy stance – and limit the scope for a sustained equity breakout in the near term.