Dow 100,000

Dow 100,000

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We appeared to be very close to a total win over Iran on Friday, but Iran fired on a ship in the Strait of Hormuz on Saturday, suggesting the conflict may be far from over. In truth, I was never optimistic that a quick win was even possible while Iran’s leadership holds a fanatical Islamic view of the West that seeks a global conflagration. I was shocked by what seemed to be an imminent end to the war. So, Saturday’s setback was not a surprise to me. This is how Iran operates, agreeing at one moment and denying in the next, to maintain its revolutionary fervor.

Outlook for a Potential Resolution and Long-Term Market Sentiment

Nonetheless, recent events give me some confidence that a satisfactory settlement should eventually occur, which makes me quite bullish for the longer-term. In my opinion, Iran was unable to maintain its dogmatic approach and it caved. But as usual, it continues to negotiate even after caving to try to obtain better terms and it resumed closing the Strait. After all, the hardliners remain in charge. But whatever pressures forced them to cave the first time is likely, again in my opinion, to lead to another agreement in which they largely accept Trump’s terms. So, I think a favorable end to the conflict will occur.

Investment Strategy Considerations: Oil, Inflation, and Asset Allocation

For investors, it is critical to look beyond the day-to-day news cycle and developments to imagine the environment after a deal is done. But the nature of the eventual deal matters. What you expect as the outcome will determine how to invest. If you think Iran will gain control over the Strait of Hormuz and will be able to dictate who goes through and how much they have to pay for passage implies an investment allocation dramatically different from one in which Iran gives up control over the Strait and surrenders its nuclear material. The latter environment would entail more oil availability sooner, lower crude prices, lower inflation globally and a strong rebound in global growth, so a generally strong economic outlook. The latter outcome also implies a larger allocation to equities. The former outcome, which is far less benign, favors a larger allocation to government bonds, notably to shorter maturities, to protect against somewhat higher inflation. As should be well understood, forecasting is difficult, especially when you try to forecast the future.

Market Reactions to Conflict and the Cost of Waiting for Clarity

The market surge after it appeared that a favorable deal had come together was a good indication of how investors would behave if the initial deal remained intact. But any conflict inevitably raises uncertainty. Ukraine has been fighting the Russian invasion for four years and that conflict has produced a multitude of surprises, besides changing the way wars will be fought in the future. The market surge also demonstrates that if investors wait until they have clarity, they will miss a good part of any move. There is no payoff if you wait to bet until the horse race is over.

“There is no payoff if you wait to bet until the horse race is over.”

CIO & Co-founder, Dr. Charles Lieberman

Economic Outlook: Credit Conditions, AI Investment, and Productivity Trends

Still thinking longer-term, if any version of the favorable outcome comes to pass, there is plenty of reason to be quite positive. Current concerns about credit deterioration seem vastly overblown. Banks reported last week and the credit news was benign right across the board without exception. Moreover, disclosures of the amounts at risk were small relative to bank capital. While this data doesn’t guarantee losses won’t be incurred in the future, the magnitude of the exposures makes systemic problems highly unlikely. Capital investment, driven by AI, is likely to remain strong, with significant gains in productivity and living standards likely to emerge over time. This won’t be painless. Job losses will certainly occur in many industries, but new jobs will appear in others and workers will be forced to adapt, if they can. Over time, the labor force will adapt, just as they have in prior periods of dramatic technological change.

Long-Term Equity Market Outlook: Positioning for Dow 100,000

So, investors should look through the inevitable setbacks and market volatility in reaction to each event and position for DOW 100,000. Yes, Dow 100,000, you read that correctly. It isn’t a typo. Nor is it an outlandish forecast. Now that we have breached 50,000, DOW 100,000 is a reasonable target. Just don’t think it is coming by next week, even if the Iran war ends very favorably in the coming days. But not only is DOW 100,000 a reasonable target, it is almost inevitable. A 7% annual rate of stock appreciation would enable the market to get there by 2036. You just need to hang on for the ride. As everyone observed over the last few weeks, it is sure to be a roller coaster.