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On the latest edition of Market Week in Review, Michelle Batjargal, Equity Manager Research Analyst, and Paul Eitelman, North America's Chief Investment Strategist, had a quick Q&A about volatility in U.S. markets, U.S. Federal Reserve (Fed) outlooks, and recession risk. And Paul provided an insightful look back at the 1970s U.S. oil crisis to better understand Mideast and U.S. oil economics today.

U.S. market volatility and economic resiliency

What were the main drivers of this week's market volatility in the U.S.? Eitelman said, "I think the main message…is U.S. economic resilience, at least in the short-term. On Monday morning, where most of the yield increase happened, that morning, we had the release of the Institute for Supply Management's manufacturing survey for the month of March. And that important survey showed economic growth for the manufacturing sector moved back into positive territory again for the first time in a year-and-a-half." Eitelman opined that a lot of investors are getting a little more confident that the U.S. can avoid a recession this year. He explained that investor confidence is starting to allow some demand into the important cyclical industry of manufacturing, allowing it to start to recover.

Eitelman continued: "That economic resilience is causing fixed income investors to question whether or not the Fed can actually start cutting interest rates in June. We think they still can, but there is obviously a little bit of uncertainty there, the longer this strong growth continues."

Fed chair Jerome Powell held an interview this past Wednesday at Stanford University. Batjargal asked, "Is there anything that stood out to you from his commentary?"

"Not particularly, actually," said Eitelman. "And I think in this case, no news is good news for fixed income markets because there have been questions about this strong growth and a couple of hotter inflation data points and sort of whether or not the Fed will start pivoting or backing away from its baseline of rate cuts in 2024." In that interview at Stanford University, Powell still held a baseline forecast that U.S. inflation would keep moderating gradually down toward their 2% inflation target. Eitelman said, "[Powell] thought that the Fed could still cut interest rates later this year. And so I think that provided a little bit of stability in terms of what had been a sort of more anxious fixed income market up until that point."

Batjargal switched the conversation to the Mideast, where a potentially escalating military conflict may impact markets. Eitelman said: "Equity markets in the United States flipped from green to red late in the Thursday trading session. And it seems like part of that, at least, was driven by concerns that the conflict in the Middle East is maybe ratcheting up a little bit."

Eitelman mentioned the news that Iran was threatening retaliatory actions against Israel in response to a bombing of their embassy in Damascus, Syria, on Monday that killed some top military commanders of Iran. "This is obviously a risk factor and a watchpoint that we will have to stay on top of in the coming period. It did pressure markets a bit lower on Thursday. On top of that, the energy markets are also starting to rally. Brent crude oil—sort of a proxy of global energy markets—now has moved back above $90 a barrel. And so I think this does bear watching, particularly into a market that had gotten quite optimistic about the fundamental trajectory going into the latter parts of 2024."

Eitelman then provided some historical perspectives on the U.S. energy sector. "I think, from our perspective, so far, this doesn't look like a major crisis event. Importantly, today's United States economy is much more balanced around its energy sensitivities. Consumers don't spend as much on energy goods as they did in the major shocks back in the 1970s. The U.S., which was a major net importer of oil back in the 1970s, is the biggest oil and gas producer in the world now and actually a net oil exporter. Given those changing dynamics in the United States, I don't think we've yet reached sort of a breaking point, if you will, for the business cycle, where these tensions look like they're going to cause major distress. But if this conflict were to continue escalating, that would certainly be a bit of a threat to financial markets that bears watching."

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