It’s a bird! It’s a plane! No, it’s not Superman, either! It’s the benchmark S&P 500 (SNPINDEX: ^GSPC) and tech stock-driven Nasdaq Composite (NASDAQINDEX: ^IXIC) ascending to fresh record-closing highs, with the iconic Dow Jones Industrial Average (DJINDICES: ^DJI) one modest up day from joining the club.
Better-than-expected corporate earnings, coupled with the evolution of artificial intelligence, have created a launch pad scenario for the stock market. But this historic run-up is about to be put to the test, based on the latest inflation update from America’s foremost financial institution, the Federal Reserve.
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Fed Chair Jerome Powell and the Federal Open Market Committee are navigating an unprecedented energy supply shock. Image source: Official Federal Reserve Photo. The Iran war is roiling Wall Street
More than two months ago, on Feb. 28, President Donald Trump gave the order for U.S. military forces to begin attacks (along with Israel) against Iran. This led Iran to close the Strait of Hormuz to virtually all commercial shipping vessels, thereby choking off about 20% of the world’s crude oil demand.
The law of supply and demand is straightforward: when an in-demand good is constrained, its price will rise until demand tapers off. Since the Iran war began, crude oil prices have soared to nearly four-year highs. As of this writing in the evening of April 30, West Texas Intermediate crude oil sits at almost $106 per barrel, up from $67/barrel when the war began.
The impact on energy prices has been swift. Gas prices rose at their fastest pace in over 30 years, while diesel prices have climbed by a larger percentage than gasoline. The Iran war is undeniably pinching consumers’ pocketbooks.
But this is just the first wave of a historic energy supply shock. Eventually, higher transportation and production costs will force businesses to act — and that’s where things can get dicey for the U.S. economy and stock market.
Image source: Getty Images. The central bank just updated its inflation forecast
Before the start of the Iran war, trailing 12-month (TTM) U.S. inflation was 2.4% and moving toward the Federal Reserve’s long-term inflation target of 2%. In March, factoring in the aforementioned energy supply disruption, U.S. TTM inflation soared 90 basis points to 3.3%.
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