US markets brief: How much more uncertainty can the markets take?
Plus: Does private credit present a contagion risk? Fed decision on deck.
With the world now into week three of the war with Iran, the only thing that is clear about the conflict is the lack of clarity about its duration and course. Across Wall Street, there was a remarkable degree of certainty that the war would not last long and that the disruption to oil and natural gas shipping would be short-lived. While that could still be the case, analysts say the window is closing.
The US stock market has weathered the uncertainty with moderate losses so far. Since the war began, the Morningstar US Market Index is down over 4% but is still up just shy of 20% over the past 12 months. All this at a time when there are concerns not only about cracks in the private credit market, but also about artificial intelligence‘s effects on the business models of a wide range of industries. Not only that, but hiring is at a standstill and inflation is well above the Federal Reserve’s target.
For investors big and small, the current environment is one of significant uncertainty. “It is a very difficult situation, because whenever you have something that’s political or military, that’s a lot harder to analyze,” says Tim Murray, capital market strategist in the multi-asset division at T. Rowe Price. “We’re just trying to assess how close we are to a potential scenario.”
What’s next for oil prices?
As we noted at the outbreak of the war, all eyes are on one body of water on the world map. “It’s all about the Strait of Hormuz,” says Murray. The degree to which oil and natural gas shipments can go through the strait, which, in normal times, accounts for 20% of such shipments in the world, will determine how long oil prices stay high and the extent of any damage to economies.
On that front, the news doesn’t look good. Brent crude, the global benchmark for oil prices, ended last week north of $100 per barrel, an increase of nearly 40% since the start of the war. The US benchmark, West Texas Intermediate crude, is up even more—some 45%--to finish last week around $97.
“The main transmission channel from the war with Iran to the US economy is the price of oil,” analysts at Goldman Sachs wrote last week. “Our commodity strategists now expect Brent to average $98 in March and April—up 40% from the 2025 average—before falling back to $71 by [the fourth quarter]."
Watch consumer spending and jobless claims
At this stage, most analysts seem to still be in the camp that neither the stock market nor the US economy will take a significant hit, even with the outlook for oil and gas prices staying higher than was assumed two weeks ago.
Donald Rissmiller, chief economist at Strategas Research Partners, points out that in the post-covid era, the US economy has weathered several shocks without falling into recession. There was the jump in oil prices after Russia invaded Ukraine and the subsequent surge in inflation that led to sharply higher interest rates and regional bank failures in 2023. To Rissmiller, there has been one key throughout this time: “The consumer has been pretty steady throughout.”
“It doesn’t mean [consumers] feel good,” he says, noting declines in sentiment. “But if you look at inflation-adjusted consumer spending, it has been pretty steady since 2021, so we have survived shocks.”
For Rissmiller, any canary in the coal mine for an economic shock would likely start to show up in the weekly initial jobless claims data, which come out on Thursday mornings. Claims have been relatively stable for many months, averaging between 200,000 and 240,000 per week. “If we come in and get more than 260,000, then the economy story starts to fall apart,” he says.
Could there be contagion from private credit?
Meanwhile, financial headlines also continue to be full of news about the woes hitting private credit market lenders and money managers. There are two stories here. The first is the blowback around the so-called public/private convergence of asset managers looking to expand the world of private equity and debt investing to smaller investors. Investors have rushed to cash out of these funds only to find, in some instances, the doors blocked by the funds’ redemption rules.
The underlying issue, however, is concern about portfolios of private loans with heavy weightings of software companies whose futures suddenly look uncertain, thanks to the rapid rise of AI.
For T. Rowe’s Murray, despite the worries about valuations on private credit loans to software companies combined with investors rushing to pull money out of private credit funds, there aren’t signs that this dynamic could spread to other parts of the financial markets: aka contagion.
“It doesn’t look like a situation that will be contagious,” beyond the private credit lenders, in part, he says, because of the limits that funds put on withdrawals. However, for the companies involved, “while they do have agreements in place to make sure you don’t get a run-on-the-bank situation, there’s obviously going to be a backlash … and the companies are facing a headwind to their business that will probably last a significant period.”
No sparks expected at the Fed meeting
Outside of the Middle East, the big event in the markets this coming week will be the Fed’s two-day policy meeting that ends Wednesday. According to the CME FedWatch tool, which reflects bets placed by futures traders on the direction of interest rates, it’s essentially unanimous in the markets that the Fed will keep the federal-funds rate target unchanged at its current range of 3.50%-3.75%. This would make the third consecutive meeting with no change in policy, with the Fed having cut rates back at the end of October.
The big question is how Fed officials are viewing the spike in oil prices. For that, traders and analysts will be paying close attention to Fed Chair Jerome Powell’s postmeeting press conference. In the backdrop, with oil prices surging and inflation already above the Fed’s 2% target, expectations for future Fed rate cuts have been scaled way back this year. Before the war, traders were expecting a rate cut sometime this summer, but the market now thinks that the Fed policy will be on hold at least through September.
