Our clients and their advisers ask us a lot of questions, and we thought it would be a good idea to share some of the more topical ones…
Client Question:
Why haven’t investment markets fallen?
Casterbridge Answer:
With the Strait of Hormuz closed and oil prices surging, many investors are asking a reasonable question: why aren’t markets falling? To borrow a metaphor, investment markets have currents running through them, some visible on the surface, others running far deeper. Right now, it is the deeper currents that are keeping equities afloat.
The world simply uses less oil per unit of economic output than it used to, and equity markets have reflected this by largely decoupling from crude prices since late March
First, the scale of the shock matters. While energy prices are elevated, it may take oil at $200 a barrel to genuinely threaten a global recession. The world simply uses less oil per unit of economic output than it used to, and equity markets have reflected this by largely decoupling from crude prices since late March. Since then, a series of stop-start announcements from Washington, ranging from ceasefire signals to renewed escalation, have made it almost impossible to trade on the news. Markets have, to a large degree, stopped trying.
Second, not all economies are equally exposed to an energy shock. The US, as a net energy exporter with a services-dominated economy, is much less vulnerable than Europe or China. Third, the current earnings season has been fairly positive: AI-driven companies and the broader technology sector have beaten expectations, reinforcing the fundamental case for equities. Retail investors, sensing momentum, have bought into the recovery, fearful of missing out on a rebound.
And finally, beneath the surface, central banks are responding. The Federal Reserve has injected emergency liquidity into the system, and in our experience, any quantitative easing behaviour from the Fed tends to drive asset values higher.
A note of caution: markets have a short memory. As earnings season momentum fades, sentiment could shift quickly if oil cannot get back below $100 per barrel, and supply chain pressures begin feeding through into real inflation data. For now though, any meaningful market pullback could be an opportunity to add to equity exposure rather than a reason to retreat.