Moneybeat: Oil shocks, rate watch

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MARY REICHARD, HOST: Coming up next on The World and Everything in It: The Monday Moneybeat.

NICK EICHER, HOST: Time now to talk business, markets, and the economy with financial analyst and adviser David Bahnsen. David heads up the wealth management firm The Bahnsen Group. He is here now. Good morning to you, David.

DAVID BAHNSEN: Good morning, Nick, Good to be with you.

EICHER: We’ll start with something fast-moving: Israel’s strikes on Iran’s nuclear sites. I’m curious at this early stage, with limited data, do you see this as a temporary disruption economically, or might markets take it as a welcome check on Iran’s nuclear ambitions?

BAHNSEN: Yeah, well, it’s really going to depend on how it goes, Nick. I think that the most obviously relevant economic impact is in commodities—specifically oil prices, which spiked about 10% on Friday.

The reason that matters is concern over supply. You might say, “Wait, Iran wasn’t supplying anyways. They weren’t supposed to be.” But on the margin, they were supplying because OPEC+ was cheating on the sanctions. More important still, if this escalates, even countries not under sanctions could see their ability to transport oil threatened. That’s a very obvious potential impact economically, and it’s always the case with Middle East flare-ups: markets ask, “What’s happening to oil?”

I would also note that oil had been trading between $70 and $75 for quite a while, and just before the spike it had dipped into the low $60s—briefly falling below $60 during the height of the trade war, then settling back in the mid-$60s. Because this rally started from a lower base, I think the economy can absorb oil holding in the $70–$75 range. It closed Friday around $73. So for now, markets are focused on that energy shock and the added uncertainty.

And while Thursday night’s strike and Friday’s escalation were major geopolitical events, Friday’s market reaction was relatively muted. Yes, the Dow fell about 800 points, but the S&P 500 was only down roughly 1%—a move we’ve seen many times before. That tells me investors aren’t yet pricing in a full-blown crisis. Of course, that can change if Iran retaliates in force or the conflict spreads—say, with strikes on Tehran or ground operations—so we’ll have to watch how this plays out in the coming days.

EICHER: David, the Fed meets this week. Are you looking for something new from Chairman Powell, in light of these current geopolitical events, or is the Fed’s plan baked in and they just stay the course on interest rates?

BAHNSEN: Well, we most certainly know what the Fed is going to do this week, which is nothing.

But to your point about listening to what they say, I think that Chairman Powell is a big believer in forward guidance, where he uses signals to the market of what they’ll do in the future as a policy tool in the present. If the Fed intends to start cutting rates sooner than what markets currently expect, he will use language that will make that clear.

Right now, going into this week, there’s a 0% chance the Fed touches rates. Markets expect two to three cuts by year-end, but maybe not until September. After this week, those odds could shift toward July or August. We’ll have to wait and see.

EICHER: All right, one more. David, Last week, the White House back-pedaled on those ICE raids at farms and hotels after pushback from the agriculture and hospitality sectors. What can we read into that reversal—political pressure, economic necessity, or both?

BAHNSEN: This is a controversial issue for a lot of people, so I’ll tread carefully. You’re absolutely right that he has reversed, at least rhetorically, on some of that. There’s a lot of people who would prefer our deportation policies not distinguish between those who came here illegally and have been working at a restaurant for 20 years and not committed any crimes, and then those that are full-blown MS-13 members and criminals.

My own view is that prioritizing your deportation efforts on the really, really bad folks makes a lot more sense politically—and it makes a heck of a lot more sense economically. The president—I don’t know if it’s just pressure—I think he’s also seeing empirical information that indicates, both in agriculture and hospitality, that there’s a labor void. We learned in the Biden years, post-COVID, that labor voids are inflationary.

So to me, I’m very grateful to see the president go in this direction. I know that there’s some folks who feel differently, but we’ll see—it’s going to help his agenda overall. There’s just a really broad popularity for deporting folks who have committed crimes once they were here, and there’s a public resistance to deporting people that have been here, not committing crimes, working and often known in their communities for a long period of time. We’ll see how that plays out for the president.

EICHER: All right, David Bahnsen is founder, managing partner, and chief investment officer at The Bahnsen Group. He writes regularly for WORLD Opinions, and at dividend-cafe.com. David, thank you so much. We’ll see you next week.

BAHNSEN: Thanks so much, Nick.

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