If you’ve been following the headlines, you know the last few weeks have been a whirlwind for investors. Geopolitical tensions in the Middle East continue to drive uncertainty, and oil prices remain a key focus for markets worldwide. It is clear that an off-ramp is needed, as from our perspective events are not unfolding as originally planned. Iran’s leadership is firmly entrenched, with a leader determined to assert power and a growing recognition of the strategic importance of the Strait of Hormuz. Most people have barely heard of it, but it is one of the world’s most critical shipping routes for energy, fertilizer, and natural gas. Iran is using this leverage to put pressure on the US and the rest of the world. Disruptions in oil, gas, and fertilizer are not catastrophic in the short term, but if this continues, it creates a domino effect, just as we cautioned earlier this month. Inflation is spreading beyond energy to materials, plastics, food, and other sectors. This sparks conversations about raising rates, not lowering them, which the market, especially technology, does not view as favourable. Higher rates mean future cash flows are discounted more heavily, leading to repricing. While this could be temporary and may resolve over time, the ongoing uncertainty is increasing the likelihood that these conditions will persist, which is turning market sentiment more negative.

Navigating a Complicated Backdrop

The market’s mood can shift on a dime as we saw earlier last week, but the underlying drivers of long-term returns don’t change nearly as quickly. Our focus remains on the fundamentals. We look at what’s truly changed, what’s likely temporary, and where opportunity may be hiding beneath the surface. We’re spending a lot of time reviewing portfolios, stress-testing our assumptions, and ensuring we’re positioned for a range of outcomes. While we’re not making wholesale changes based on short-term volatility, we’re ready to adjust as the facts evolve. The goal is always to protect and grow capital, not to chase the latest trend. The current market is feeling at this point a bit like 2022 in my opinion, so we’re reviewing where we think we can add some asymmetric exposure to our portfolios and looking back at what worked through that period.

Understanding the Chain Reaction

What’s weighing on markets right now is a classic domino effect. Higher oil prices are pushing up costs across the economy, from transportation to manufacturing to everyday goods. This, in turn, is keeping inflation elevated, something central banks can’t ignore. The Bank of Canada and the Federal Reserve have both made it clear that they’re not eager to cut rates if inflation remains sticky, and the market is recalibrating its expectations accordingly. This is where the chain reaction comes into play: higher oil prices, higher inflation, higher-for-longer interest rates. That combination can be a headwind for both stocks and bonds, and it’s a scenario we’re watching closely. It’s not just about the immediate impact, but the ripple effects that can move through the economy and markets over time.

Market Psychology: Why the Reaction Feels So Extreme

It’s worth remembering, as I said earlier this month, that markets are forward-looking. They react not so much to what’s happening today, but to what they fear might happen tomorrow. That’s why uncertainty, especially around issues like energy supply, inflation, and monetary policy, can lead to exaggerated moves in both directions. History is a valuable guide here. In past periods of conflict or economic uncertainty, markets have often overreacted in the short run, only to recover once the path forward becomes clearer. The data shows that, on average, markets bounce back more quickly than most investors expect. The initial shock fades, and the focus shifts back to fundamentals. You won’t time this accurately, so please don’t try, as it causes long term and permanent loss of capital. I can’t stress that enough. These periods, as much as they feel threatening, always turn into opportunity when you look back. Remember that volatility can be the price to pay when looking for superior returns.

The Importance of Staying Disciplined

Periods like this test everyone. It’s easy to feel like “this time is different,” but time and again, discipline and patience have proven to be the best response. We’re not ignoring the risks, far from it. We’re monitoring developments closely, reviewing our positioning, and making sure portfolios are resilient to a range of scenarios. One thing we’re particularly mindful of is the risk of a feedback loop. If higher energy costs keep inflation elevated and central banks keep rates high, that could slow growth more than expected. We’re watching for signs of stress in the economy, but we’re also looking for the opportunities that volatility can create. High-quality companies with strong balance sheets often get caught up in the selling, and that’s where long-term value can emerge.

What We’re Watching

Inflation and Central Banks: Recent inflation data has surprised to the upside, and central banks are signaling a cautious approach. The timing of any rate cuts is now less certain, which has contributed to recent market swings. Higher for longer oil is not helpful for this.

Corporate Earnings: As companies report results, we’re looking for signs of resilience or weakness. Strong earnings can help offset some of the macro concerns, while disappointing numbers may add to volatility. Last quarter these were very strong, hardly indicative to a weakening economy. Stocks follow earnings, we often say this. Not right away, but over time.

Global Developments: The situation in the Middle East remains fluid, and we’re mindful of the potential for more unexpected events. At the same time, we’re tracking opportunities in regions and sectors that may benefit from the current environment.

The Bottom Line

While volatility can be unsettling, it’s an inherent part of investing. With the rise of social media and easier access to information, the noise has become much more pronounced. I recognize how online platforms can reinforce certain viewpoints, creating a feedback loop that can limit perspective. It’s a very dangerous part of the world we live in. That’s why, in our research, we make a conscious effort to draw from a wide range of sources and viewpoints, ensuring we maintain a broad outlook.

Like the seasons, with time everything passes. Sometimes it can just take a bit longer than we’d like!