I'm Playing Small Ball (and Hanging With Disney) Until Coast Is Clear

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Monday’s equity gains erased the S&P 500 losses suffered since the Iran war began. The index added more than 1% to that rally on Tuesday, as oil fell 7% on some encouraging words from the administration about Iran wanting to continue talks. No concrete details were provided.

The markets continue to be amazingly resilient -- or complacent, depending on your bent. Stocks have now completely clawed back their losses since the start of the latest conflict in the Middle East at the end of February. That is quite impressive, given no resolution to this regional war has been reached and the Strait of Hormuz remains effectively closed.

Oil, gasoline, diesel, and jet fuel prices remain far higher than they were seven weeks ago. The March producer price index reading did have a somewhat milder reading yesterday than the consensus was expecting. Inflation, however, is still significantly above the Fed’s official 2% target, and more inflation pressures are in the pipeline. This will continue to remain the case until normal traffic resumes into and out of the Middle East.

The major banks including Goldman Sachs (GS) and JPMorgan Chase & Co. (JPM) have kicked off first-quarter earnings season this week. Headline numbers have largely been solidly above expectations. Net interest income and net interest income forward guidance have been a bit light, but trading revenues have buoyed results. Goldman Sachs’ credit provision losses of $315 million in Q1 were significantly higher than expected. I am closely watching this metric at financial institutions this quarter given the growing worries in private credit, the struggling commercial real estate sector and worsening consumer loan environment.

I am also concerned about the ongoing war’s impact on the rest of the economy. Consumer sentiment just plunged to record lows, not helped by headline gasoline prices above four bucks a barrel.

The housing market is not off to an encouraging start to the all-important spring selling season. March existing home sales fell 3.6% from February to seasonally adjusted annual rate of 3.98 million units. This was significant below the consensus and the lowest levels on a seasonally adjusted annual level since June of last year. The month-over-month drop was the worst since late 2022, when sellers and buyers were adjusting to the initial rate hikes from the Fed earlier that year after the central bank’s forecast that inflation in 2021 was temporary and transitionary turned out to be far from accurate. My regular readers know I believe home prices need to fall substantially for the housing market to normalize.

On some brighter notes, Disney (DIS) does seem to have put in a bottom in late March. I highlighted Disney on March 29 as my covered-call trade of the week. Fellow TheStreet Pro contributor Ed Ponsi also recently gave the shares a shout out. I added to my stake in Disney Monday, one of the few trades I have made in recent trading sessions.

The bottom line: I am playing small ball right now in an unfavorable market environment. Based on the market’s recent trading action, investors are assuming the conflict choking off the Strait of Hormuz will soon be resolved, normal traffic will resume quickly, and there will be few, if any, longer-term impacts to the global economy. I am simply not in that camp and thus remain cautious.

At the time of publication, Jensen was long DIS.