Volatility gripped global markets on Tuesday as investors anxiously monitored escalating hostilities between Israel and Iran following Tehran’s missile attack on Israeli territory over the weekend. The geopolitical turmoil compounded concerns about persistently high inflation and rising interest rates, leading to choppy trading on Wall Street.
In the aftermath of the assault, which Iran claimed was retaliation for an Israeli strike on its embassy compound in Syria, Israeli Prime Minister Benjamin Netanyahu convened emergency cabinet meetings to coordinate a response. However, no official statement on Israel’s next move has been issued as of yet, leaving the world on edge.
“The Middle East is a tinderbox right now, and any further escalation could have severe economic consequences by disrupting oil supplies and rattling financial markets,” said Samantha Wilcox, a senior Middle East analyst at Stratfor, a leading geopolitical intelligence firm.
On Wall Street, the tech-heavy Nasdaq Composite slid 0.12% to 15,865.25 as traders favored less risky assets. The S&P 500 dipped 0.21% to 5,051.41, slipping below its 50-day moving average, a key technical indicator that often presages further selling pressure. The Dow Jones Industrial Average managed to eke out a 0.17% gain, closing at 37,798.97, thanks to a surge in shares of healthcare giant UnitedHealth.
Safe-haven assets like gold, the U.S. dollar, and Treasury bonds attracted elevated demand amid the rising geopolitical tensions. Gold prices momentarily breached a record high of $2,431.29 per ounce in Friday’s trading session before settling at $2,370.45 on Tuesday. The U.S. dollar index, which measures the greenback’s strength against a basket of major currencies, climbed 0.06% to 106.261, nearing a five-month peak.
The yield on the benchmark 10-year Treasury note, which moves inversely to price, rose to 4.649% as investors sold government bonds. Meanwhile, the more rate-sensitive 2-year Treasury yield flirted with the psychologically significant 5% level, reaching 4.949% before pulling back slightly.
Jamie Cox, managing partner at Harris Financial Group, suggested that the Federal Reserve’s recent communications regarding its rate policy have muddied the waters for investors. “The Fed picked a bad time to have a communication problem on the path of rates this year,” he said.
Cox argued that given the resilience of the labor market, robust consumer spending, and the lack of typical economic consequences from rapid rate hikes, “Markets need to focus on the fact that rates are sufficiently restrictive, instead of how many cuts are in the pipeline.”
Fed Chair Jerome Powell, speaking at an economic event in Washington, acknowledged that recent inflation data has shown “very little progress” in bringing price pressures back down to the central bank’s 2% target rate. “The recent data have clearly not given us greater confidence, and instead indicate that it’s likely to take longer than expected to achieve that confidence,” Powell stated, adding that it’s taking “longer than expected” to gain confidence in executing rate cuts.
Powell’s remarks exacerbated investor concerns about the Fed’s ability to engineer a soft landing for the economy, with persistently high interest rates raising the risks of a recession.
Amid the market turmoil, a few companies managed to shine with their latest quarterly earnings reports. UnitedHealth Group’s shares surged 7.5% in pre-market trading after the health insurance behemoth maintained its full-year profit forecasts despite taking a hit from a February cyberattack and grappling with elevated post-COVID medical costs.
In contrast, Tesla’s stock tumbled 3.75% to $155.44, extending its 2024 decline to around 37% and pushing its market capitalization below the $500 billion threshold for the first time in nearly a year. Analysts cited concerns over the electric vehicle maker’s recent large-scale layoffs amid a global slump in EV demand.
Meanwhile, shares of Trump Media & Technology Group, the company behind the Truth Social platform founded by former President Donald Trump, plunged another 14% to $22.91. The steep decline leaves the stock down 71% from its March peak when the company’s assets were valued at a staggering $9 billion. With just $4 million in sales last year, analysts have questioned the lofty valuation.
On the economic data front, the Commerce Department reported a disappointing 14.7% year-over-year decline in housing starts for March, with the annualized rate dropping to 1.321 million units. Permits for new construction also fell 4.3% from February to 1.458 million, underscoring the persistent challenges facing the housing market amid elevated mortgage rates and economic uncertainty.
As the earnings season kicks into high gear, analysts forecast that first-quarter profits for S&P 500 companies will rise 2.7% from a year earlier to a share-weighted $447.3 billion. However, they expect a more robust rebound in the second quarter, with earnings estimated to improve to $494.7 billion.
Looking ahead, market participants will closely monitor any developments in the Israel-Iran conflict, as further escalation could potentially disrupt oil supplies and exacerbate inflationary pressures. Additionally, the latest corporate earnings reports and economic data releases will continue to shape investor sentiment amid ongoing concerns about the Fed’s ability to tame inflation without triggering a severe economic downturn.
“The market is grappling with a perfect storm of geopolitical risks, persistent inflation, and the specter of overtightening by the Fed,” said Quincy Krosby, chief global strategist at LPL Financial. “Volatility is likely to remain elevated as investors navigate these challenging crosscurrents.”
