Dire Straits of Hormuz

The second week of April unfolded like a tightly wound drama for investors. For those following markets, it felt as though each headline, data point and diplomatic development seemed to push investor sentiment in a new direction. What began as a tense, energy-driven environment gradually shifted into a broad risk-on rally as geopolitical tensions eased and markets optimistically recalibrated.

Coming into the week, investors were still reeling from a volatile first quarter where soaring energy prices and myriad concerns tied to artificial intelligence sent stocks lower. President Trump’s warning that Iran could face significant consequences if the Strait of Hormuz remained closed didn’t help sentiment. Despite the feeling of unease, equity markets managed a slight gain on Monday as reports emerged that ceasefire discussions between the two sides were still ongoing. Oil prices experienced significant volatility throughout the day as investors speculated on the odds of a ceasefire materializing. Also on Monday, the Institute for Supply Management Services Purchasing Managers’ Index (PMI) came in weaker than expected but indicated that services activity remained in expansionary territory in March. Details of the report painted a mixed picture, with business activity and new orders sending positive signals, while employment and prices were notable negatives. Economists at the U.S. Federal Reserve (Fed) likely paid particular attention to the prices paid component, which rose to its highest reading since October 2022 and shows that inflationary pressures are still apparent in the economy. Similarly, the employment component declining into negative territory illustrates the impact that economic and geopolitical uncertainty has had on business hiring decisions.

Markets remained on edge Tuesday, as a de-escalation of tensions between the United States and Iran failed to emerge. The major domestic stock indices closed the day mixed with technology and utilities stocks outperforming. Stocks spent much of Tuesday’s session in negative territory before staging a recovery just before the market closed. President Trump had set an 8 p.m. deadline for Iran to agree to a deal with the United States while threatening to attack Iran’s energy infrastructure, a move that would be seen as a serious escalation with implications for global commodity prices. In energy markets, the price of West Texas Intermediate (WTI) oil remained elevated at nearly $120 per barrel, its highest price since 2022. Away from geopolitical news, orders for durable goods (nonconsumables like machinery, aircrafts, electrical equipment, etc.) excluding aircraft rose 6.0% from a year ago. The calculation for business investment that goes into gross domestic product excludes aircraft orders, so this is typically the datapoint that gets the most attention. An increase of 6.0% from a year ago is the largest annual gain since 2022 and indicates that business investment has continued at a fairly strong pace despite elevated trade and geopolitical uncertainty.

Wednesday finally delivered what many investors had been waiting for—late Tuesday, just two hours before President Trump’s deadline, the United States and Iran announced a two-week ceasefire. The agreement included provisions for a suspension of bombing by the United States and Israel in exchange for a commitment that Iran would reopen the Strait of Hormuz to shipping traffic. The ceasefire was the first piece of a broader plan where both sides would have to agree to a long list of concessions demanded by the other side. Stocks rallied sharply on Wednesday as investors hoped that the ceasefire would stick, clearing the way for energy prices to fall. The S&P 500 (S&P) gained 2.5% as the price of WTI fell 15% to under $100 per barrel. Although investors expect oil prices to fall further and for economic uncertainty to subside as a result of the ceasefire, some damage to the global economy has already been done. A normalization of the global oil supply will take time, especially for Asian countries that are particularly reliant on flows from the Strait of Hormuz. Measures of inflation are also not immune from the impact of higher energy prices. While headline energy costs are only one part of the inflation picture, oil and natural gas are still important inputs for most goods and services, and their impact will likely flow through into other prices.

Thursday saw another move higher for stocks despite simmering tensions over the details of the ceasefire as disruptions in the strait remained. The S&P gained 0.6% while the technology-heavy Nasdaq Composite gained 0.8%. Surprisingly, energy stocks fell despite crude oil prices inching back toward $100 per barrel. The Fed’s preferred measure of inflation was also released Thursday. Core personal consumption expenditures (PCE) inflation, which excludes volatile food and energy prices, was up 3.0% from a year earlier. While inflation remains above the Fed’s 2.0% target, the latest data was seen as encouraging, although the ultimate impact of higher energy prices remains uncertain. Thursday also brought an update on employment data—initial jobless claims came in slightly higher than expected but continuing claims came in at the lowest level since May 2024. Looking at the most recent employment data in aggregate indicates that the labor market remains stable despite what headlines might suggest. From the perspective of Fed policymakers, nothing in the latest inflation and employment data suggests that the Fed’s posture of patience on rate cuts is in the wrong.

Stocks ended mixed on Friday, capping a surprisingly strong week in the face of so much uncertainty. Investors remained optimistic that the weekend would bring more clarity on details of a permanent peace deal. The Consumer Price Index for March was released on Friday and reinforced much of what was revealed by PCE earlier in the week—energy prices are beginning to push headline inflation higher, but core inflation continues to trend in the right direction. For the full week the S&P gained 3.6% while the Nasdaq rose 4.8%, underscoring the strong performance of technology stocks. International markets also rallied on the ceasefire news—international developed markets gained 4.2% while emerging markets rose a staggering 7.0%.

Over the weekend, negotiations between the United States and Iran broke down. As of Monday morning, the United States intends to enact a blockade in the Strait of Hormuz with the hope that additional economic pressure will force Iran back to the negotiating table. Markets are trending lower while oil prices are surging. Looking ahead to this week, any developments in the Middle East will likely dominate headlines and drive market volatility. Elsewhere, the first quarter of 2026 earnings season will begin with large banks, while speakers from the Fed will make their rounds at various speaking engagements.

Links to previously published commentaries can be found at benjaminfedwards.com/Latest Investment Insights/Market Commentary/Market.