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The most important charts and themes in markets and investing…
1) Record Oil Surge
Crude Oil Futures began trading in 1983. Last week’s 36% jump was the largest weekly percentage increase we’ve ever seen.
What caused the move?
Huge supply shock. About 20% of global oil supplies pass through the Strait of Hormuz, which was effectively closed to most commercial traffic after the outbreak of the Iran war.
2) The Market Does Not Follow a Normal Distribution
The Crude Oil ETF ($USO) jumped 33% over the past week, the biggest weekly gain in its history.
This is a 6-sigma event, which (assuming a normal distribution) only occurs once every 4,039,906 years.
So we won’t see a move like this again until 4041932?
No. We’ll probably see it long before then.
Why? Because the market does not follow a normal distribution – it follows a fat-tailed distribution.
What does that mean? Extreme events (such as crashes or surges) occur much more frequently than the bell curve predicts.
3) From Backwind to Headwind
Over the past nearly three years, falling energy prices have helped lower the US inflation rate (CPI). But these obstacles will soon become obstacles, with Oil and Gas prices soaring every year.
Gas prices in the US have risen to $3.63 per gallon, an increase of more than 70 cents since the low point in January to the highest level since June 2024.
The Fed is unlikely to cut interest rates next week before a spike higher, but currently the chance of a rate cut at its March 18 meeting is less than 1%.
4) Volatility Spikes and First 5% Correction of the Year
The $VIX rose 48% last week, its 21st biggest weekly spike ever.
What happened in the past after the biggest $VIX spike?
Stocks tend to bounce back with above-average returns.
Does this always happen?
No. There are no certainties in the market, only probabilities.
At Monday’s low, the S&P 500 was down 5.2% from its January 28 peak, the 32nd >5% pullback since its March 2009 bottom.
How long will this correction last and how deep will the maximum drawdown be?
This is an impossible question to answer. It could end this week or last for months or years. This high level of uncertainty is the reason why stocks perform better than bonds and cash over the long term. Without higher risk and greater uncertainty, there will be no higher reward.
5) War and Stock Market Returns
Investors are asking what usually happens in the stock market after the start of a US military conflict.
The answer: there is no typical result. Every time is different.
And this makes sense because there are so many variables affecting the stock market and so many unknowns regarding war.
Just a few of today’s many questions:
- How long will the war last?
- Will this develop into a regional war?
- How long will the Strait of Hormuz be closed and what impact will it have on oil/gas prices?
- Will the US send ground troops?
- Will Russia or China intervene?
- What is the end game?
- What are the economic consequences?
No answers to these questions are known at this time.
The best conclusion we can come to when looking at past military conflicts is that as time goes by, the stock market tends to rise, and the more time that passes, the more the stock market rises.
This happens for two reasons: a) all wars eventually end, and b) the economy and income, even though they experience declines in the short term, still tend to grow in the long term despite these conflicts.
This means the world always looks chaotic in real-time and equity markets always look resilient in hindsight.
6) Some Interesting Statistics
a) The US murder rate falls to 4 per 100 thousand people by 2025, the lowest since 1900.
b) In 2020-2021, PayPal traded at 109x earnings and 17x sales. And this year, after a -87% drawdown? 7x revenue and 1x sales. Lots of lessons for investors here…
c) US National Debt as % of GDP…
- 1975: 33%
- 1985: 40%
- 1995: 65%
- 2005: 61%
- 2015: 101%
- 2025: 122%
d) US Federal Budget Deficit as % of GDP…
- 1950s: -0.4%
- 1960s: -0.7%
- 1970s: -1.9%
- 1980s: -3.8%
- 1990s: -2.1%
- 2000s: -2.3%
- 2010s: -4.8%
- 2020s: -8.3%
And that’s all for this week. Thanks for reading!
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Disclaimer: All information provided is for educational purposes only and does not constitute investment, legal or tax advice, or an offer to buy or sell any security. Read our full disclosure here.
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