Overly bullish investors, especially those exposed to richly valued stocks in the technology sector, have two reasons to exercise caution.
First, the chances of the Fed cutting rates in the March policy meeting are very low. Markets no longer think that the Fed would cut rates in June, either. Doubts are high that the bank will cut rates at all.
Inflation rates are the primary reasons for the Fed to pause, wait, and observe the economy. The long-term bond market (TLT) indicates that the debt market expects yields to rise. The risk premium is rising, since investors demand a higher return for uncertainty.
After the Supreme Court reaffirmed the illegality of tariffs, the White House introduced new ones at a 10% - 15% rate. That increases costs for consumers and hurts trade.
Second, the war in Iran risks hurting shipping volumes through the Strait of Hormuz. Risks are also spreading that attacks among the Middle East countries would continue. That would prevent the U.S. from leaving the region.
Markets are not convinced that the U.S. would continue its aerial and drone attacks. RTX (RTX) and Lockheed Martin (LMT) shares stopped rallying. AeroVironment (AVAV) lost 19.5% in the past month, albeit after posting weak quarterly results. Still, firms like Kratos (KTOS) are lower, while L3Harris (LHX) could pull back after trading at a yearly high.
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