Oil Above $80, Weak Jobs Data & Nvidia Swings — What Investors Need to Know

Hello and welcome back to another episode of blue Chip Now! you have Daniel Dusina, chief investment officer, and Matt Mondoux, senior financial advisor. So we usually record these on Mondays. I wish I could say we’re recording this on a Friday because of all that’s happening in the markets, but it’s actually just because, myself and one of our esteemed producers will be out on Monday, so, it is timely, however, so recording this Friday, March 6th.

So the items we’re going to cover today are very much well publicized, but I think it’s important to provide some color context and overall commentary on kind of our thoughts on a few different topics. So we’ll start with Middle East tensions and what’s going on in the oil market. We got a U.S jobs report this morning, so we’ll be talking about just the general state of affairs in the labor market and what that means for potentially the Federal Reserve and interest rates.

And then we’ll kind of close out with, artificial intelligence trade hitting volatility on an ongoing basis. So Daniel, this all sounds great, but you just need March Madness. I thought we were talking college basketball not markets. It’s you know, just never, never say never. So even though we will get the tournament starting up here soon, not to be outdone, is financial markets as always.

So, all right, let’s start with Middle East tensions and the oil shock that we’re seeing so very clearly, the biggest geopolitical driver for markets recently has been escalating tensions specifically with Iran, but more specifically around the Strait of Hormuz, which is one of the world’s most prominent oil shipping routes. Roughly 20% or so of the global oil supply passes through this narrow channel.

So when markets have started to price in the possibility of disruption involving Iran, energy prices are of course, moving very quickly. So right now we’ve got oil prices that are surging above $80 per barrel. And that is triggering a chain reaction across financial markets. What do higher oil prices mean? It mean higher transportation costs, higher inflation risk and all that points to potentially fewer interest rate cuts from the Federal Reserve.

So the immediate response that you’ve seen has very much been focused on energy to the upside. So you’ve seen energy stocks rally higher while sectors like airlines travel, consumer discretionary, all of which do rely on on big oil in some capacity have sold off. The volatility then kind of has hit the broad market index indexes at scale.

So you’ve seen a couple of sharp down days throughout this week. Even if you have seen some recovery there’s clearly volatility evident. And for investors right now I think this is, you know, continuing to be about inflation risk. And, specifically as it pertains to energy markets. It’s amazing. I, I did a double take this morning reading about oils and oils up, you know, pretty sizable today.

And it’s, you know, the price of barrel of oil is actually up over 50% year to date. Yeah. It’s shocked me. You know I, we follow these things but you know you see a 50% move. It was, was pretty surprising. Yeah. And you know I think it’s interesting too because like if you remember back to let’s say two weeks ago, there was still the potential threat of disruption in Iran, but you did not get investors pricing like it was going to happen.

And that really didn’t happen until, you truly saw the the event start to unfold over the last weekend. And what I think is interesting now is that it’s obvious that disruption on the supply side is going to impact prices and move related stocks higher. But one thing that I found interesting, a friend of mine who I’m not going to name, but he works in foreign exchange, sent me a bit of a contrarian take on some of this stuff, which I found interesting.

And it’s it’s specifically related to one of the other knock on impacts of this. He sent me this tweet from a guy that said the Hormuz closure is not a six week oil price shock. It’s an 18 month stress test for the global food system. Most allocators are trading the obvious oil up, defense up, gold up. They’re missing the connective tissue.

And what he followed on with that by saying was that one third of globally traded furs fertilizer transits through Hormuz. So basically what he’s implying is that if you were to get this fertilizer disruption that could cut places like African food production by 20%. So and this is not to specifically call out that as a, as a, as an example.

It’s more conceptually, I think investors over the next week are going to start to think about what are the true knock on impacts of this that are not just one for one oil prices up, energy stocks higher? Way of what? Has it not been priced in yet. Right. So I think that, you know, obviously continues to be front and center, especially as you know, I think our our administration has been very, very, very front and center on social media putting out content and all that sort of stuff.

So what that says to me, you know, we mentioned inflation in the energy markets, but could this be inflation elsewhere? And then if so, you know, I think our next point is going to talk about how complicated the path forward is with rates. Yeah Bruce have to paint that picture. Well yeah. And I think you already had it challenging.

The Federal Reserve already had a challenging job. And it just continues to get more complicated. So this morning we got a surprisingly weak US jobs report. Instead of adding jobs as expected, the US economy per this report, lost roughly 90,000 jobs in the month of February, while unemployment ticked up to about 4.4%. So if you’ll think back, the last two months were actually surprisingly good job.

Job numbers that kind of got released. And so I think coming into this year, I did have a little bit of fear around higher unemployment rate, relatively stagnant jobs market. And the last two months serve to quell some of those fears. But realistically, we’re kind of back where we were in the fourth quarter of last year, which is generally softer and starting to be a little bit concerning.

So for markets, of course, that’s creating this complicated narrative where, you know, you’ve got markets trying to answer one question. Is this truly a start of an economic slowdown, or is this a temporary soft patch? And the Federal Reserve’s trying to figure out the same thing? Because of the push and pull of inflation right now? So, you know, I think coming into this year, rate cut expectations were around two.

But if you get inflation running hotter, it’s a lot harder to, to reduce interest rates by 50 basis points to, to counteract some labor market weakness if prices are charging higher. Yeah. I mean, this is, the definition of between a rock and a hard place. So, so, yeah, I mean, I think I think the path forward for the fed is it’s going to be challenging.

I think the markets are going to have a tougher time digesting what the path of the fed could take. Yeah. This is this is no longer the kind of the environment of old where know inflation, low unemployment. You know, just trying to get to full employment. You could arguably have two fires going in. The fed has to figure out which one they want to put out.

Yeah, well, if I can give one, piece of positive insight to push back on the surprisingly weak jobs report, it is worth noting that, there was a meaningful degree of weakness in, in the leisure and hospitality portion of the economy. And keep in mind, there were 30,000 workers at Kaiser Permanente in California that were on strike last month.

So there is always going to be some artificial pull down or push up in these jobs figures, so you can’t necessarily take them explicitly at face value. And instead, I think you have to kind of ascertain where is the structural weakness. And is this to be expected for the foreseeable future? Yeah, I just think the market movement more just illustrates or starts to paint a picture of what you could expect should this start to play out in a more meaningful way.

Like. But by no means are we saying we have a weak economy. I think we feel the opposite of that. But, you know, should this be the start of a trend? You can see that the fed, you know, could potentially between the, conflict in Iran and, you know, weakening economy or weakening employment could work out for us.

Yeah, 100%. So switching gears back to the equity market, you know, we’ve talked a lot about geopolitics today. And economic impacts today. But realistically you’re having this I trade arguably the biggest market theme over the last 2 to 3 years has gotten a lot more volatile. And you’ve seen that not just, you know, in recent trading days on the back of the geopolitical disruption, but really year to date, starting in the end of last year, actually, the poster child here remains Nvidia, which has been the key bellwether for AI spending across the tech sector.

But over the last several weeks, we’ve seen some large swings in semiconductor stocks as investors debate. What I see is three questions. Number one, is AI spending still accelerating? Number two, are valuations getting too stretched. And then finally, number three are big tech companies starting to slow infrastructure investments. So because companies like Nvidia, along with other Mega-Cap tech names, make up such a large share of indexes like the Nasdaq and the S&P 500, these moves are going to essentially amplify the impact at the index level.

And in many recent sessions, AI stocks alone have determine whether the overall market finishes up or down. So continues to be that theme that we see. And again, like we’ve we’ve highlighted the fact that you’ve seen equal weighted indexes and value in small cap. Be meaningful out performers of your call it traditional poster child of performance. That trade has kind of continued.

And it does remain to be seen when investor scrutiny on some of this capital capital expenditure program and profitability is going to cease. Yeah. You know, I think, the comps get really tough to beat. You know, if you are predicting revenue increases and sales the way that these companies are, you know, eventually that that bar gets really tough to clear.

The other thing I found very fascinating this week, you know, we we get some heightened volatility is is you know within the market some of the stock moves. And I’ve been talking about you know generally speaking you know and traders will borrow on margin borrow in addition to what their portfolio value might be worth. And they’ll leverage that and buy more stocks.

Now that this happens during periods of strong bull bull markets. And and I feel like you’re we’re seeing evidence of maybe that margin unwinding this week. And I’ll point to a couple things. Know the stocks have been up the most. So in theory, the ones that traders are going to leverage and buy more of, we’re down the most, whether that be memory chips, semiconductors, I, I infrastructure stocks.

But then also what’s been more interesting is or what what I mean a couple with that is software stocks U.S., some U.S. software stocks have actually been positive in some cases, you know, largely so. So the market could be down 2%. Software might be up, too. And what that tells me is, you know, that that is also traders may be covering short positions.

So as we know, U.S. software companies have been under pressure to the AI, artificial intelligence, potentially being able to cannibalize their markets. And we’re seeing those stocks go up. So I, I feel like so far this week we may be seeing like a lot of trader movement. Yeah. Without a doubt. And it’s still tough to decipher kind of what that, you know, if, if this is more economic or more traders looking into the rest of the portfolios do due to some uncertainty.

Yeah. No, I think that’s a great point, because what you are seeing right now is a very technically driven market. Almost. Right. So I mean, great example of this into it, which came dramatically under fire under the whole artificial intelligence is going to replace their business, up 30% off of February 24th. Bottom right. So you are seeing that, that that kind of call it positional rotation trade happening?

I would argue that that has nothing to do really with fundamentals. It’s more either sentiment or quite frankly, position unwinding. Right. You do see big moves like that with short covering. Yeah. You know, the short short covering for people who don’t know people are betting against the stock. They’ve actually betting it to go down. And when the stock starts to go up, you know, that that hurts the short seller and they end up closing their positions out.

Yeah. Do you want to talk about this tariff stuff or not? I feel like yeah. No, let’s we should skip it. Okay. So we covered a lot of ground today. I’ll recap briefly, but Middle East tensions and rising oil prices very front and center. A weak US jobs report and rising inflation continuing to make the Federal Reserve’s job challenging and then closed out with some volatility in the artificial intelligence and related spaces.

You know, I do think I I’ll close by saying this, you alluded to March Madness. And you know, volatility can come at any time and it can come off of any catalyst. And sometimes there isn’t a catalyst. We know what the catalyst for the volatility has been this time. And even though it’s not like you can point to an explicit end in sight or easy resolution, this is nothing new for financial markets.

There will always be a soup to your. There will always be cause for concern. Positioning is important, but staying the course is arguably more important. So we’re here to talk if you have any questions. Agreed. All right. That’s all for now. Thanks for listening to another episode of blue Chip. Now. We look forward to speaking with you again soon.