Chart of the Week

As shown in the chart above, oil prices surged following the outbreak of the Iran war, with West Texas Intermediate crude oil shooting up 30% over the span of eight trading days. Energy commodities followed, increasing 25% over the same time frame (held back by the smaller gain in natural gas). Meanwhile, commodities broadly saw more limited upside with a 9% gain, and U.S. large-cap stocks and U.S. bonds both declined slightly.

Looking ahead, we recognize the risk for elevated oil prices and volatility as the conflict persists. However, we also believe that the recent spike in prices is at odds with fundamentals, which point to ample supply growth and an easing of prices over the next 6 – 18 months (as explained in our March 16 Investment Strategy report). Ultimately, at current levels, we think downside risks to oil prices through year end outweigh upside risks.

Our base case remains that the conflict will wind down in the coming weeks and months and that the jump in oil prices will be temporary. We would therefore use the bounce in Energy and Commodities as an opportunity to trim allocations back to neutral weights in favor of equities, where see a stronger outlook for outperformance through year end. With respect to commodity sectors, we would rotate out of Energy into Precious and Industrial Metals.

Each asset class has its own risk and return characteristics. The level of risk associated with a particular investment or asset class generally correlates with the level of return the investment or asset class might achieve. Stock markets, especially foreign markets, are volatile. Stock values may fluctuate in response to general economic and market conditions, the prospects of individual companies, and industry sectors. The Energy sector may be adversely affected by changes in worldwide energy prices, exploration, production spending, government regulation, and changes in exchange rates, depletion of natural resources, and risks that arise from extreme weather conditions. Exposure to the commodities markets may subject an investment to greater share price volatility than an investment in traditional equity or debt securities. Investments in commodities may be affected by changes in overall market movements, commodity index volatility, changes in interest rates or factors affecting a particular industry or commodity. Products that invest in commodities may employ more complex strategies which may expose investors to additional risks. Investing in gold, silver or other precious metals involves special risk considerations such as severe price fluctuations and adverse economic and regulatory developments affecting the sector or industry. Investing in specialty metals involves special risk considerations such as severe price fluctuations and adverse economic and regulatory developments affecting the sector or industry.

An index is unmanaged and not available for direct investment.

Bloomberg U.S. Aggregate Bond Index is a broad-based measure of the investment grade, US dollar-denominated, fixed-rate taxable bond market.

Bloomberg Commodity Index is comprised of 22 exchange-traded futures on physical commodities and represents 20 commodities weighted to account for economic significance and market liquidity.

Bloomberg Sub Energy Index is a commodity group subindex of the Bloomberg CITR. The index is composed of futures contracts on crude oil, heating oil, unleaded gasoline and natural gas. It reflects the return on fully collateralized futures positions and is quoted in USD.

S&P 500 Index is a market capitalization-weighted index composed of 500 widely held common stocks that is generally considered representative of the US stock market.

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