Alexander Leiken:

Hello and welcome to This Week in Review. This weekly segment is designed to highlight a few important developments you may have missed this week, what they may mean for markets, and most importantly, the potential impact for investors. To stay up to date with our latest market insights, subscribe to our YouTube channel or visit FisherInvestments.com. Now, let’s review what happened this week.

First, the Fed’s interest rate decision.

Wednesday marked the Federal Reserve’s first policy meeting under new chairman Kevin Warsh. The Fed held rates steady, but what stood out was Warsh’s departure from norms established by his predecessors with respect to the Fed’s official communications and forward guidance. The statement came in at just 130 words, about 1/3 the length of the prior release under Chair Jerome Powell. And Warsh’s press conference offered little additional insight and guidance into the committee’s thinking. What was clear was the Fed’s renewed focus on price stability. Markets responded negatively to the hawkish tone. The S&P 500 fell more than 1.2% and the two year Treasury yield, the most sensitive to fed policy expectations, spiked 18 basis points intraday to 4.22% before settling at 4.17%. That kind of intraday move signals the markets were caught off guard by the results from the meeting. The environment Warsh inherits is genuinely difficult. Headline inflation remains above the Fed’s 2% target, and the committee must weigh the likely temporary effects of the oil price shock on inflation against the potentially more durable acceleration in US manufacturing activity and input prices. Based on Wednesday’s statement in the press conference, Warsh appears squarely focused on recent inflation data, a posture that puts him at odds with President Trump’s ongoing calls for rate cuts. Elsewhere, central banks are navigating the same oil shock with different approaches. The ECB raised its deposit rate from 2 to 2.25% last week, its first hike in nearly three years, while the Bank of England held steady on Wednesday. Hawkishness, in varying degrees, has become the more common global monetary policy stance. All that said, it’s worth remembering that monetary policy is just one of many forces shaping the global economy and capital markets. The bull market that began in October 2022 started even as the Fed was in the midst of a cycle of rate hikes, and it’s quite common for stocks to continue appreciating even as interest rates rise. Stocks don’t need rate cuts to move higher, and whether they move up or down, there’s a good chance stocks can keep rising.

Next, a note on the US-Iran deal.

This week, headlines focused on US  and Iran developments. The two sides signed a 14-point memorandum of understanding that, at least temporarily, ends the US war with Iran and provides a path to reopening the Strait of Hormuz. As part of the agreement, the US plans to lift its naval blockade on shipping through the Strait while Iran begins the process of de-mining to ensure safe, toll-free passage for commercial vessels. Plenty can still go wrong, and it’s important to emphasize that both sides need to make progress on additional details over the next 60 days before a final deal can be reached. Still, the development is a promising step toward resolution. In our view, whether the deal holds or not, what’s more important for investors to understand is that markets have had months to adjust to the Strait’s closure and have already been adapting. Earlier this spring, markets priced in the worst case scenarios surrounding the conflict. But once that fear was digested, investors began to recognize something powerful. The system’s ability to adapt. For example, Saudi Arabia and the UAE used spare pipeline capacity to route oil to ports outside of the Strait. Producers of fertilizer and other dry goods turned to truck convoys to move vital resources to the rest of the world. Japan and others found new oil and gas suppliers, and countries with strategic oil reserves released some of those barrels to cushion the supply disruption. There’s an important lesson here. Markets do not wait for clarity. They move first, pricing in likely outcomes 3 to 30 months out. As we noted in a recent MarketMinder article, the trend of rising stocks and falling oil prices did not begin with the deal, but back in April. Stocks then began moving gradually higher on the realization that the future somehow would be better than the headlines suggested at the time. If a deal holds, that’s certainly welcome news. But the bigger takeaway isn’t the deal itself. It’s the timeless investing lesson: Successful investors focus on where the world is headed, not today’s negative headlines.

Finally, eurozone and UK inflation.

On Wednesday, the eurozone reported May consumer inflation data, which accelerated to 3.2% year over year from 3% in April, while the UK inflation rate stood at 2.8%, unchanged from the prior month and below market expectations of 3%. Investors may be wondering what recent energy price volatility means for inflation going forward. Energy prices are among the most visible costs consumers face, which makes sudden spikes feel particularly alarming. But while those increases can sting in the short term, it’s important to remember that they’re often temporary. We like to remind investors that inflation is generally a function of too much money chasing too few goods. The 2021 and 2022 inflation spike came on the back of enormous fiscal stimulus, global money supply growth and Covid era supply chain disruptions. Today, global money supply growth looks pretty normal. An energy price spike without a commensurate rise in global money supply might mean higher prices at the pump, but not higher prices overall. Consumers spending a bit more on gasoline end up spending a bit less on other goods, often leaving the inflation picture unchanged. Looking ahead, we believe inflation reality likely turns out better than widely perceived, another potential tailwind for the ongoing bull market.

That’s it for this week.

Thanks for tuning in to This Week in Review. If you’re looking for more insights, then don’t miss our other series Three Things You Need to Know This Week, released every Monday. You can also visit FisherInvestments.com any time for our latest thoughts on markets. Thanks again for joining us, and don’t forget to hit like and subscribe.

Hi, this is Ken Fisher.

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