Markets have reacted sharply over the past three weeks to the war in Iran, especially to the effective shutdown of the Strait of Hormuz.
Here are some of the biggest moves from peak to trough or vice versa since the war started, as of Friday, March 20th’s close:
Roughly 20% of global oil supply flows through the Strait of Hormuz. Oil has risen sharply in response, with refined products like jet fuel moving even more. What has long been discussed as a hypothetical supply shock in oil trader job interviews is now playing out in real time. Initially, the consensus was that this would be a short-term disruption rather than a prolonged closure that results in persistently higher oil prices. However, the longer the Strait stays closed, and oil prices elevated, the bigger the downstream economic impacts.
After the most recent Federal Reserve meeting, Chair Jerome Powell said that even before the attacks on Iran, inflation was lingering longer than the committee hoped. “The thing that’s really important that we see this year is progress on inflation,” Powell said. “If we don’t see that progress, then you won’t see the rate cut.”
The new concern is that if the war drags out and the Strait stays closed for a prolonged period, higher oil prices could push prices higher across the rest of the economy. Prior to the meeting, markets were pricing as many as three quarter point rate cuts by year end. Now, they are pricing one cut by year end, with a coin flip chance that the Fed actually hikes before October.
This dramatic repricing of oil and the path of interest rates has reverberated through gold, the dollar, and equities globally.
Traditionally, gold acts as a safe haven during crises like this. However, over the past year, gold has disconnected from its usual fundamentals, appreciating from approximately $2,655 per ounce at the beginning of 2025 to over $5,000/oz recently. Part of gold’s rally was driven by expectations of Federal Reserve rate cuts, and the sharp reversal toward potential rate hikes helps explain the recent decline.
Like gold’s move higher, international developed stocks were among the best performing markets over the past year, particularly in Asia. South Korea and Japan both saw strong gains, (+76% and +26%, respectively) driven by a weaker dollar and the AI boom. These economies are heavily dependent on imported energy, with over 90% of oil imports coming from the Middle East. The disruption of the Strait of Hormuz disproportionately impacts them, and this supply disruption is acutely reflected in the recent stock declines.
The Russell 2000, an index of smaller U.S. companies, had a strong start to 2026 driven by a broadening stock market and expectations of lower interest rates. These companies tend to rely more on floating rate debt than larger companies, making them particularly sensitive to changes in rate expectations, which helps explain the move.
One narrative circulating in both financial and policy circles is that the attacks on Iran are part of a broader strategy of applying pressure on China’s oil supply. The Center on Global Energy Policy estimates that 22% of China’s oil imports are sanctioned or “shadow” oil from Iran, Russia, and Venezuela. This estimate includes 1.38 million barrels per day (bpd) from Iran and 389,000 bpd from Venezuela, and at least 800,000 bpd of oil from Russia. The US has attacked every one of those countries that do not have nuclear weapons.
If energy flows remain constrained, that creates additional economic pressure on China at a time when trade and geopolitical negotiations are ongoing, especially ahead of the Trump-Xi summit that has been postponed from the end of this month. Perhaps Trump uses the summit as an opportunity to extract concessions from Xi then declares victory in Iran.
Although, as I am sending this email, Donald Trump is posting about “good” talks between the U.S. and Iran, while Iran denies any communication.
Could this be the return of TACO?
Most importantly, we must remember that a well-constructed financial plan and investment strategy is built to withstand unexpected times like these.
The market close could not come soon enough today. Trump’s sweeping tariffs, announced Wednesday afternoon, have dragged stocks lower over the past two trading days. The Nasdaq is now in a bear market, meaning it has declined more than 20% from its recent high. The Total World Stock Index is not far behind, down 15% from its high.
Although Trump’s so-called "Liberation Day" was widely anticipated, the level of tariffs was at the high end of market expectations, representing a trade-weighted average of 15% compared to the 8–9% some participants had expected, and is the clear culprit of the selloff.
That being said, after the tariffs were announced, Scott Bessent urged countries to take a deep breath, and if they avoided retaliation, that these would be the high end of the tariffs. I interpret this as a clear invitation to negotiate. On Thursday evening, Trump stated that he was willing to lower tariffs if countries presented him with something "phenomenal," also a clear invitation to negotiate.
In one scenario, countries make concessions, Trump takes his pound of flesh, claims victory, and reduces the tariffs. Markets would likely experience a relief rally in this scenario. In another scenario, Trump draws a hard line and continues to escalate the trade war that he started, and markets remain volatile.
Today, while China responded with retaliatory tariffs of its own, Vietnam indicated it could lower its tariffs on U.S. imports to zero if Trump reciprocates. The coming weeks will likely reveal a mix of these potential outcomes and everything in between. Only time will tell how markets respond in the near term.
One bright spot I'd like to highlight was March's better than expected job growth, with the US adding 228,000 jobs, nearly 100,000 more jobs than expected. Admittedly, this is backward looking economic indicator, but it does suggest that the US is entering this new tariff regime on firm economic footing.
Without sugarcoating, we are in the midst of the kind of selloff that we’ve likely talked about as a hypothetical, and it’s always painful and unsettling to see moves so deeply in the red. While we cannot control the markets, we can control how we react, how we stay diversified, and how we manage risk. If you are an existing client of mine, your plan was designed with the realities of both good times and bad times in mind.
Client or not, if the uncertainty of it all has you feeling anxious, I invite you to schedule a time with me to review your financial plan. Reminding ourselves of this concrete and certain strategy for the months and year ahead can provide peace of mind in the face of near term uncertainty. Especially in times like these, I’m here to support you however I can.
Markets experienced a volatile December, to say the least. Jerome Powell and the Fed effectively pulled the punchbowl on the Red Wave party at the December meeting by forecasting only 0.5% of rate cuts in 2025, down from a forecasted 1% just weeks earlier.
At the same time, long-end Treasuries (10+ years) have seen a significant increase in yields. Interestingly, this increase is entirely due to a rise in the "real rate" (the yield on the 10-year minus the market's expectations for inflation over the same period) and not due to heightened inflation expectations. This suggests that the market anticipates significant productivity gains in the U.S. economy, fiscal challenges, or a combination of both and is looking beyond the inflationary pressures of potential tariffs. I believe it will likely be a combination of productivity gains and fiscal challenges, although some of the fiscal problems might be mitigated by Musk, Vivek, and the Department of Government Efficiency. Time will tell.
I had hoped that the December sell-off in stocks was due to thin trading volume and year-end profit-taking, but the market seems to be struggling to start 2025 on the right foot. Stocks haven't responded well to higher rates in recent years, and this appears to be another period similar to October 2023 or April 2024, when stocks sold off following significant moves higher in 10-year Treasury yields. The market certainly didn’t welcome the blowout jobs report on Friday, January 10th, which showed 100,000 more jobs than expected, with unemployment dropping to 4.1% compared to the 4.3% estimate.
Usually, a robust job market is a positive sign! However, in this case, the market believes the jobs report was too strong, potentially reducing the Fed’s ability to cut interest rates further without risking higher inflation. The Consumer Price Index (CPI) released this morning, January 15th, came in slightly less than expected, and markets are responding positively. A strong economy and decelerating inflation is ideal because it means the Fed is fulfilling its dual mandate of price stability and full employment, even if it means the Fed can’t cut as much as the market was once hoping for.
I never recommend changing investment strategies or asset allocations based on short-term market movements. That said, I remain optimistic about the first round of legislation to be passed by Trump and the Republican Congress, as I believe it will be market-friendly by design, and could be especially supportive of US stocks, small cap stocks, and the dollar.
Stocks have enjoyed a strong run in 2023 and 2024, so some pullback is both healthy and expected, especially to shake out investors who are just chasing returns rather than investing for the long term.
As always, feel free to schedule a meeting to discuss your portfolio, the markets, or anything else on your mind.
Wishing you a happy, healthy, and prosperous 2025!
“Why should I hire a financial advisor when I can just buy the S&P?” If I only I received a dime every time I heard that question, I could quit writing this blog post and retire early. To be fair, it’s a good a question and one you should ask any financial advisor you are considering hiring. There are many acceptable answers, such as “I will help you save money on taxes”, “‘Buying the SP500’ is not a comprehensive financial plan”, and “There’s a lot more to invest in than just the SP500”.
For the purpose of this blog, though, I am going to focus on a particular situation that I encounter often. Ironically, the potential client most likely to ask this question is the one sitting on the biggest pile of cash. I encounter it all the time, hundreds of thousands of dollars in a high yield savings account, or, worse, checking, and they cannot fathom the idea of paying 1% of their investment to a financial advisor each year. My question is always, “If you can just buy the SP500, why haven’t you?”.
Inertia is a powerful force, and not doing anything and keeping the status quo can feel powerfully comfortable. They often know that cash loses purchasing power to inflation and that owning the SP500 over the long term builds wealth, but they don’t know how much or when to invest. Seeing the market go up and down creates both anxiety about losing money and FOMO (fear of missing out) on gains, so they just keep waiting for the right time. The word clients use most often to describe this feeling is “paralysis”.
A good financial advisor will help clarify the best path forward. Rarely that involves keeping the cash as cash, and most often it involves investing a portion of the cash and keeping the rest safe, and this balance will be different for everybody. For many, just buying the S&P makes sense in theory, but is in fact too overwhelming to execute. In this context, paying a 1% management fee is pennies compared to the wealth building power of a uniquely tailored financial plan and investment strategy. If this sounds like you, now is always the best time to do something about it!
I read an article that described structured notes as “Boomer Candy”. Retirees seem to eat up the idea that they can participate in positive market returns while still protecting principal. What are structured notes and are they something you should incorporate into your portfolio?
Structured notes are debt securities issued by financial institutions that combine traditional fixed-income instruments with derivatives. They are designed to meet specific investment strategies and can be linked to various underlying assets, such as stocks, indices, currencies, or commodities. Unlike traditional bonds, structured notes offer the potential for higher returns, but they also come with unique risks.
Structured notes typically have several key components. Most structured notes offer a degree of principal protection, meaning investors may receive at least part of their initial investment back at maturity, depending on the structure of the note. However, this is not guaranteed for all notes. The performance of a structured note is tied to an underlying asset, which can affect the return on investment. For example, a note linked to a stock index may provide returns based on the performance of that index over a specified period. Structured notes come with a defined maturity date, at which point investors may receive their initial investment plus any additional returns based on the performance of the underlying asset. The payout structure varies widely among notes, with some offering capped returns, while others may provide leveraged exposure to the underlying asset.
Structured notes have the potential for higher returns than traditional fixed income investments, and may offer additional diversification than holding just traditional stocks and bonds. However, they come with significant drawbacks. Structured notes can be complex financial instruments, and understanding their structure, features, and risks is crucial. Investors must carefully review the terms and conditions of each note. Also, because structured notes are issued by financial institutions, investors face credit risk. If the issuer defaults, investors may lose some or all of their investment (Lehman, anyone?). Most importantly, many structured notes are not traded on secondary markets, which can limit liquidity. Investors may have difficulty selling their notes before maturity without incurring steep losses.
Take for example an excerpt from the prospectus of a structure note issued by Goldman Sachs and distributed by Chase Private Client: “The estimated value of your notes at the time the terms of your notes are set on the trade date… is expected to be between $900 and $930 per $1,000 face amount, which is less than the original issue price.” $900 per $1000 face amount?! That is literally a 10% loss on day 1 of the investment. Why such a steep decline? Because Goldman Sachs and JP Morgan Chase have to get paid!
What most investors don’t realize is that these structured notes can often be replicated through simple options structures, at a fraction of the cost. The most popular structure is a note linked the SP500 with protected downside and capped upside. Before buying one of these notes, compare the upside potential on the structured note to the upside potential on an index collar strategy that Komich Capital could build for you. Let’s talk!
Did you take my advice and buy series I bonds between May of 2022 and November of 2022 and earn 9.62% for the first six months and then 6.48% for the second 6 months? Great trade! But itʼs time to reevaluate the fixed income landscape.
These Series I bonds purchased between May and November of 2022 now only yield 3.94%. This yield is made up of a 0% fixed rate plus an inflation rate of 3.94%. Compare that to a yield of 5.27% for newly issued Series I bonds made up of a fixed rate of 1.3% plus inflation of 3.97%. In other words, the old Series I bonds have a “real return”, or return adjusted for inflation, of 0% and the new ones have a real return of 1.3%. A plain vanilla 3 month Treasury bill without any liquidity restrictions is currently yielding between 5.3 and 5.4%.
Powell and the Fed seem confident they will be able to successfully bring inflation down to the 2% target without tipping the economy into recession, so holding a Series I bond that pays only inflation is essentially fighting the Fed, which typically doesnʼt bode well for investments. Depending on your unique situation, it may be time to cash in and move the money to more productive investments.
Saving for college or a disabled family member? You may be able to avoid paying income tax on the interest! Schedule a meeting to find out: calendly.com/komichcapital/30min
In Marvin Gaye’s cool jam, “Trouble Man”, he sings, “There are only three things for sure, taxes, death, and trouble, oh this I know.” Financial advisors help us avoid taxes, and life insurance policies protect our families’ finances from unexpected death, but how do we prepare for trouble? I start every financial plan with the Safety Net because it is the foundation upon which the rest of the plan is built, and it is also the foundation upon which we can confidently stand and take wealth-building risks in other parts of our portfolio. Let’s explore the appropriate size of the Safety Net and its potential components.
The general rule of thumb measures the size of a proper emergency fund as six to twelve months’ worth of expenses. For example, if your mortgage payment, car payment, utilities groceries, and miscellaneous spending add up to $10,000/month, your emergency fund should have somewhere between $60,000 and $120,000. Like all personal finance, determining the size of an emergency fund is a combination of mathematical formulas and personal reflection.
Risk-averse people may want twelve months or more whereas a risk seeker may only want six months. Investors should also consider how reliable and consistent their sources of income are. For example, a salesperson with little or no base salary and inconsistent commissions should opt for a much larger emergency fund. A federal employee with a steady paycheck and future pension may opt for a lower emergency fund.
Let’s assume you work with your financial advisor and together you determine that your emergency fund should be 10 months, or $100,000. That does not mean that you let $100,000 sit in your checking account earning zero interest. In fact, I recommend only keeping two, or three months at most, worth of expenses in a checking account to smooth out the variability in month-to-month spending. We would use the remaining $70,0000 to $80,000 to buy safe and easily accessible assets, such as short-term US treasuries and CDs, which, at the time of this writing yield over 5%.
Having sufficient safe, liquid assets in your Safety Net will cover unexpected expenses and losses of income when trouble inevitably comes. It will also give you the necessary cushion so you do not have to dip into your long-term investments, which will almost certainly be down when you face trouble personally. Now is a great time to get your Safety Net in order, and you may feel like Marvin Gaye at the end of the song, “Don't care what the weather. Don't care 'bout no trouble, got me together, I feel the kind of protection that's all around me.”
Tune in next month when we explore another component of the Safety Net, a HELOC!
In last month’s article, we explored the relationship between financial planning and investment management, and how any investment necessitates a well-defined financial plan to determine the investment time horizon. This time horizon dictates the ability to take risks, and this month we will talk about a saver’s willingness to take risks.
A person’s willingness to take risks is a personality trait just as much as agreeableness or openness. Although education and knowledge can demystify risky investments, a person’s willingness to take risks is deeply personal and often difficult to change. All people land on a spectrum from totally risk averse to totally risk seeking. Taking the time to determine where you land on this spectrum will help you build a portfolio that you can live with and will avoid unnecessary anxiety and sleepless nights in the future.
How do you know where you land on the willingness-to-take-risk spectrum? Some questions to ask yourself, what would you do and how would you feel if you woke up one day and your account value was cut in half due to a market crash? What would you do and how would you feel if the market was up 20% in a year and you were only up 11%? Given the choice between a sure $100 or the chance to win $0 or $250 in a coin flip, which do you choose? What if it were a sure $100 or the chance to win $0 or $195 in a coin flip? When you hear the word “risk”, what other words come to mind?
As a fiduciary, I would never recommend taking more risks than your time horizon would allow. However, if you are a more risk-averse person, then it makes sense to dial back your risk lower than what your time horizon would allow. The other thing to keep in mind is that if you do not have a lot of experience investing, you may be more risk-averse than you think if you’ve only experienced a bull market or more risk-seeking than you realize if you’ve only experienced a bear market. Given the multidimensional factors that determine a person’s willingness to take risks, it always helps to have an independent, unbiased, and experienced investment professional evaluate both your ability and willingness to take risks before making any investment.
Tune in next month when we talk about the foundation of every financial plan, the Safety Net!
In Sinatra’s classic pseudo-limerick, “Love and Marriage” he sings, “Love and marriage, Love and Marriage, Go together like a horse and carriage. This I tell you, brother, you can't have one without the other.” Maybe you can in 2023, but you definitely cannot have a sound investment strategy without a solid financial plan.
When choosing investments, savvy investors evaluate both their willingness AND ability to take risks. While an investor’s willingness to take risks is as much a personality trait as introversion and extroversion, an investor’s ability to take risks is a cold, calculated function of the expected time horizon for the investment. For example, is the investment meant to fund a child’s college education expense that starts in 3 years, or is it meant to grow wealth to fund a retirement that’s 20+ years away? Maybe it’s a mix of both short- and long-term goals, where you are deep in retirement, taking large RMDs from your IRA to fund your living expenses, but also investing a portion of the account to fund RMDs that are 10 years away. No matter what, prudent investors define their investment horizon before investing as part of a solid financial plan.
Why is this important? Some investors may have enjoyed years of double-digit returns in the stock market through 2021, only to be disappointed that their account was down 20% in 2022, right when they needed the money for tuition, the RMD, or to fund their life after being laid off. A fiduciary financial advisor can help clients avoid these major pitfalls.
Similarly, all solid financial plans involve some form of investment, no matter how risk-tolerant or risk-averse the client is. Piling money under the mattress or sheltering it in bank accounts has never been a winning long-term strategy.
Sinatra said it best, “Try, try, try to separate them, it's an illusion. Try, try, try and you will only come to this conclusion….You can’t have one without the other!”
Tune in next month when we’ll talk more about an investor’s willingness to take risks!
