Geopolitics, The Fed & Inflation Mean That Investors Need To Prepare For An Uneven Economy

With geopolitical unrest and a global trade war in the background, things are starting to feel a little uneasy in the global economy. From oil prices to inflation to tariffs to central bank activity, the mood has turned cautious. While it hasn't spiked volatility recently, there are a few signals to pay close attention to.

One of the bigger developments is rising energy prices. After a stretch of relative calm, oil has crept back above $70 a barrel, thanks in large part to the Israel/Iran conflict, but also due to OPEC+ sticking to its recent production cuts. For consumers, this hits home at the gas pump and on utility bills. For investors, it adds another layer of uncertainty to an already troubled inflation outlook.

That leads to questions about the path of interest rates. The Fed and other major central banks had been preparing for potential rate cuts later this year, but rising oil prices, tariffs and stubborn inflation have put that timeline in question. The Bank of Japan and its recent hot inflation reading could be forced to hike rates in the near future. All of this makes it harder for the Fed to justify easing, even if growth starts to slow.

On one hand, consumer spending is holding up better than many expected. On the other, credit card delinquency rates are rising and housing affordability remains particularly low. The question becomes how much longer the average household can keep pushing through higher prices and borrowing costs before their means suddenly run out?

From an investment perspective, we feel the bond market has begun reflecting a more cautious view. Yields have been slowly drifting higher, which can put some pressure on growth stocks and other risk assets. That’s one reason why we’ve seen a bit of volatility reenter the stock market after a more subdued past month. Sectors, including energy and financials, may benefit in the short run, but tech and real estate could feel a little more pressure.

Outside the United States, it’s a similar story. Europe appears to be slowly recovering, but growth is still tepid and could flirt with stagnating. China’s recovery remains uneven and emerging markets are trying to manage through currency volatility and unsteady inflation. The dollar has been weakening, but the Fed may not be able to lower rates immediately to help support it.

We feel that there are still reasons not to overreact. The labor market remains relatively strong, supply chains are in much better shape than they were a year ago (although that could be at risk depending on what happens in the Middle East) and corporate earnings are still rising. It may not be a booming economy, but it’s one that's been hanging on.

Overall, we feel that the macro picture has gotten more complicated in recent weeks. That means investors may want to consider being a bit more tactical. Keep an eye on energy prices, watch the Fed’s tone and stay flexible.

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