As goes the Strait of Hormuz, so goes Wall Street

MANHATTAN (CN) — Largely ignoring other economic data, including key inflation reports, investors this week remained laser-focused on the Iran war and its effect on oil prices.

Oil remained the main issue for investors this week, as fluctuations in barrel prices and comments from world leaders on the conflict caused equities to fluctuate wildly.

On Monday, global markets initially plummeted as Brent crude oil topped $115 per barrel but then regained some ground after President Donald Trump said the conflict was close to an end. Later in the week, comments from Iranian officials saying “get ready for oil to be $200 a barrel” caused equities to fall again.

By the closing bell on Friday, the Dow Jones Industrial Average fell 942 points and the Nasdaq shed 282 points for the week. The S&P 500, which had its third straight down week, lost 108 points since last Friday.

Inflation reports this week barely made a dent, even though they were mostly positive. On Friday, the personal consumption expenditures from the U.S. Bureau of Economic Analysis showed a 0.3% increase, in line with expectations.

The PCE is the Federal Reserve’s preferred measure for inflation, and the latest print shows inflation still has not returned to the central bank’s 2% annualized target.

On Wednesday, the consumer price index, put out by the U.S. Bureau of Labor Statistics, showed inflation increased 0.3% last month, in line with expectations and only a bit more than the 0.2% increase seen in January. Core CPI, which excludes food and energy prices, remained at 2.5% for the past year.

Shelter prices continue to drop to its slowest pace since 2021, but gasoline prices increased by 0.8% while fuel oil jumped 11.1%. Crucially, the report was compiled before the start of the Iran war, and experts warn the March CPI could see a large spike in inflation if the conflict persists and oil prices remain high.

Stephen Brown, chief North America economist, wrote in an investor’s note that if oil prices remain at $85 per barrel for the rest of the month, “then it’s likely that the all-items CPI inflation rate will jump by 0.5% points this month to 2.9%.”

Investors also largely disregarded the first revision to the fourth quarter gross domestic product, which came in at a dismal 0.7% after the initial estimate of 1.4% already had frustrated investors.

Analysts advise not to read too much into the downward GDP revision, saying it is likely due to last year’s government shutdown, but they also caution the triple threat of the Iran aar, sticky inflation, and lower GDP could push the U.S. economy into stagflation,

“The concerns are that we are heading for stagflation, and though we think those fears are premature … if the length of the military conflict stretches out much longer than expected, we could see even more negative impacts on the markets,” said Chris Zaccarelli, chief investment officer at Northlight Asset Management.

Main Street remains cautious, too. On Tuesday, the National Federation of Independent Business’ monthly optimism index fell slightly, though it remained just barely above the survey’s 52-year-old average of 98 points.

While the usual suspects of complaints reared their head in the survey—filling positions and supply chain disruptions—8% of respondents reported competition from large businesses as the single biggest problem, the highest that issue has been since May 2021.

“High sales and increased profits made February a more positive month for many owners, but competition from large businesses is putting stress on Main Street firms as they navigate the current economic climate,” NFIB Chief Economist Bill Dunkelberg said in a statement.

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