Short-Term Oil Risk, Long-Term Market Strength

The market ended last week with a more cautious tone as rising oil and the widening Middle East conflict bring a fresh layer of uncertainty. I could see the markets experiencing a 10% correction from the recent highs. We are not anticipating a major decline for the S&P 500, but the mood has clearly changed.

The key issue is not simply crude oil itself. It is gasoline, the most visible price in the economy for consumers, and when that price jumps it hits psychology immediately. That matters, even if the broader economic effect is more balanced than the headlines. Imports are getting cheaper with a stronger dollar, and higher oil is also boosting profits in the energy sector. That is the practical benefit of energy self-sufficiency. The consumer feels the pain first, but the economy has offsets that did not exist to nearly the same degree in earlier oil shocks.

On the encouraging data front, inflation data did not worsen the picture. There was real concern the core PCE rate would come in a tenth hotter, and it did not. That was good news. Durable goods were somewhat soft, and the downward revision to fourth-quarter GDP was noticeable, but that headline likely overstated the slowdown. If the government shutdown took roughly 1.5 percentage points off growth, then a reported 0.7% pace is much closer to something around 2% once that distortion is considered. The economy did not finish the quarter with the same strength many expected, but it is a far cry from recession. It is a softer backdrop, not a broken one.

What concerns me more in the near term is the accumulation of friction across the system. Travel is being rerouted, shipping remains at risk, the Red Sea is still unsettled, and the Strait of Hormuz remains an obvious pressure point. These disruptions put sand in the gears of the global economy. They do not necessarily end the expansion, but they can weigh on sentiment, delay activity, and create a generally sourer mood in markets. That is exactly what we are seeing now. Real oil prices are still close to their long-term average, so this is not yet a historic energy spike, but it is no longer the tailwind it was when crude was sitting in the $55 to $60 range just a few months ago.

The labor market, at least so far, is not confirming a serious downturn. Jobless claims remain firm, and despite all the discussion about AI-driven labor disruption, that is not yet showing up in the high-frequency data. So, the macro message remains mixed: softer growth, decent labor conditions, better-than-feared core inflation, and a geopolitical shock that is pushing visible prices higher. That combination argues for caution in the short run, but not for abandoning the longer-run bullish case. I remain very bullish about AI and on the productivity gains that will come from it. The long-term support for equities is still there. The problem is that geopolitics can overwhelm that story for stretches of time, and that is where we are right now.

On the Fed meeting this week, I do not think this oil move should make policymakers more hawkish. This is a supply-side shock and a relative price shock. It is not being driven by excess demand or excessive credit creation, and it would be inappropriate to respond to it as if it were. The Fed is almost certainly on hold at this week’s meeting. Beyond that, the path depends on two things: whether labor weakens materially and whether the oil shock intensifies or fades. Currently, I don’t see any cuts in rates before Warsh comes in as Fed chair this June.

The investment takeaway is straightforward. I am more cautious in the short run because higher oil, geopolitical uncertainty, and visible-price psychology can absolutely pressure stocks after a strong advance. But I am not bearish on the larger outlook. The economy is still growing, labor has not cracked, inflation was better than feared, and the secular AI story remains intact. This is a market facing a near-term shock, not one losing its long-term foundation.