The S&P 500 closed at an all-time high last night, adding 20%—or $11.7 trillion—in market capitalization since March 30. If it continues this way, it will be positive for the 10th consecutive week, something that hasn’t happened since 1985. According to Bespoke Investment Group, the current bull market, which began on October 12, 2022, has a longer duration and roughly the same cumulative return as the average S&P 500 bull market from the 1930s to the present, i.e., 1,253 days versus 1,023 and 113% versus 114%, respectively.
In a sense, this is not a bull market. It is a wealth-creation machine on steroids, as some have characterized it.
However, it is explainable to some extent. Aside from better-than-expected first-quarter earnings per share, investors could point to the sharp decline in oil prices.
The price of Brent rose 4% to $94 a barrel yesterday but is still down more than 30% from its intraday high of $138 on April 7. And all because of expectations that an agreement will be reached between Washington and Tehran.
However, the Strait of Hormuz remains effectively closed, the Suez Canal is operating at reduced capacity, and traffic through the Bab-el-Mandeb Strait has dropped significantly. This is not what the stock market is pricing in.
A short while ago, we had the JPMorgan report sounding the alarm, predicting that oil reserves would reach their lowest levels ever in June and hit critical levels in September if nothing changes.
Yesterday, it was the turn of the head of the third-largest oil company, Mike Wirth of Chevron, to state: “Inventories and buffers are steadily declining. The market’s ability to absorb this imbalance is drastically reduced today compared to where we started...In the coming weeks, we are likely to see these pressures feed more directly into natural gas prices, with greater upward pressure in June and certainly in July.”
The physical market isn’t interested in the U.S.-Iran negotiations. It’s interested in barrels, he reportedly said.
But he wasn’t the only one. ExxonMobil’s senior vice president , Neil Chapman, also stated: “We are approaching unprecedented inventory levels. Really, very low levels. Once you reach that $150 mark, the collapse in demand at $160 brings it back into balance.”
However, even if the Strait of Hormuz were to open tomorrow, it would take four months for oil production to return to 80% of pre-war levels, according to industry insiders. Furthermore, a full restoration of flows is not expected before 2027.
There is no doubt that Trump and Iran are playing a waiting game to maximize pressure on their opponent. Trump is betting on the gradual shutdown of some of Iran’s oil producers as his stockpiles fill up, while Iran is betting on the political pressure exerted by high fuel prices in the U.S.
However, the wait means lower oil reserves and higher energy prices. The market has not priced in this possibility. And that makes it more dangerous.