The Big Picture

Briefing.com Summary:

*A 10-yr note yield and average gas prices with a 5-handle on them would be a problem for the stock market.

*Walmart suggested the consumer's spending tank isn't full anymore.

*A credible Iran peace deal could spark an “anti-war trade” favoring value stocks, long-duration bonds, small caps, and foreign markets.

Memorial Day is a federal holiday to honor the men and women who have lost their lives in the line of military duty defending the interests of the United States of America. With the Iran war, several more names have been added to that heroic roster.

Some have disputed that we are still at war with Iran given the tenuous ceasefire agreement that has been in place since April 7, something Vice President Vance called at the time a "fragile truce." President Trump has threatened on more than one occasion since then, however, that the U.S. is ready, willing, and able to resume its military strikes on Iran if it does not agree to a peace proposal outlined by the United States.

Those threats, though, have been tempered each time by a stroke of patience to see if Iran will acquiesce to terms that dictate, among other things, no development of nuclear weapons and adherence to the safe and free passage of ships through the Strait of Hormuz.

Pakistan has been acting as the primary mediator working to end the war. We'd like to thank Pakistan for its service, but its services are no longer needed. The market will take it from here.

Art Class

In early March, we drew several red lines to an off-ramp for the war with Iran. Briefly, they were $100/bbl oil, average gasoline prices with a 4-handle, a 10-yr note yield of 4.50%, and an S&P 500 that trades below 6,300.

It was some good artistry. The aforementioned ceasefire agreement was struck not long after all those red lines had been reached or were quite close to being reached. To be fair, the S&P 500 didn't go below 6,300, but it did hit 6,316, so we'll stake a claim on that being close enough.

What has unfolded in the capital markets since the ceasefire was struck has been remarkable, both in good and bad ways.

• The major indices all have soared to new record highs (good).

• Q1 EPS growth has been stellar at 28.4% and the forward 12-month EPS estimate has increased from $332.27 to $350.62 (good).

• The 2-yr note yield has risen above the fed funds rate, the 10-yr note yield has gone as high as 4.67%, and the 20-yr bond yield hit a 19-year high of 5.19% (bad).

• WTI crude prices have continued to hang around $100/bbl, as traffic through the Strait of Hormuz has remained mostly at a standstill and daily reports suggest oil stockpiles are facing depletion.

• CPI inflation is up 3.8% year-over-year, PCE inflation is up 3.5% year-over-year, and PPI inflation is up 6.0% year-over-year (bad).

These are items we have highlighted in recent columns, so there is no need to expound on how/why this has all come to pass. What we need to expound upon today are the newest red lines the market is painting for the Trump administration to get this peace deal signed, sealed, and delivered.

The Newest Red Lines

The featured artists this time include the Treasury market, gas prices, and Walmart (WMT). We'll begin with the Treasury market.

Treasury yields have risen appreciably since the start of the Iran war. The 2-yr note yield has moved from 3.38% to as high as 4.10%. It is currently at 4.08%. The 10-yr note yield has gone from 3.96% to as high as 4.67%. It is currently at 4.58%.

Those moves are an expression of inflation concerns and have been tinged with fiscal concerns. The direction of travel in Treasury yields hasn't undermined the stock market yet, but a 10-yr note yield with a 5-handle on it would. That is a red line starting to brighten, not only because the 10-yr flirted with 4.70% but also because it got there with some pace.

Notwithstanding talk of possibly suspending the federal gas tax, the national average for regular gasoline prices stands at $4.56, according to AAA, up from $4.02 a month ago and $3.18 a year ago. The current range of prices across the U.S. shows a low of $4.02 and a high of $6.14.

There is sticker shock around the country when the pump shuts off, and the longer it persists, the greater the risk becomes that there will be a broader slowdown in consumer spending and potentially a broader takedown of GOP candidates in closely contested midterm elections.

This is another area where a 5-handle won't fly for the market.

Walmart fired a warning shot about the higher gas prices when it released its fiscal Q1 results and provided fiscal Q2 guidance. The company's CFO asserted that tax refunds might have mitigated the effects of high gas prices in the first quarter before adding that those refunds are now waning, which will create more spending pressure for consumers in the second quarter.

He highlighted how the average number of gallons of gas customers are putting into their tanks at Walmart stations has fallen below ten for the first time since 2022. In other words, there is added budget stress for Walmart's customers, particularly its lower-income customers, many of whom are experiencing a decline in real earnings due to inflation rates exceeding nominal income growth.

Few companies have their finger on the pulse of the U.S. consumer more so than Walmart, so when it makes a point of calling attention to the struggles high gas prices are causing for many of its shoppers, it is a point not to be glossed over when it comes to forecasting economic and earnings growth prospects—at least not if gas prices stay where they are or, egads, move even higher.

Briefing.com Analyst Insight

These red lines all get drawn back to the consumer, who is the linchpin of the U.S. economy. The closer they get to being crossed, the worse off the economy will be. The stock market, then, will become a casualty of this war, and that is not something that will be tolerated—not for long, anyway—by President Trump.

The real wildcard in this is Iran. The Trump administration might market the equivalent of a "mission accomplished" message, but if Iran isn't fully buying into such a message, then the red lines might not fade from view so easily on a "peace deal."

A deal that is stamped with credibility on both fronts, however, should go a long way toward turning red lines into green figures on stock monitors. We'll call it the anti-war trade, as opposed to the peace trade, because the stock market has fared just fine with the U.S. on a wartime footing, thanks in large part to the mega-cap stocks, the semiconductor stocks, and the energy stocks.

The anti-war trade, then, should feature countertrend positioning that would reward value over growth; long-duration bonds over short-duration bonds as energy-driven inflation fears ease; foreign markets over the U.S.; small-cap over large-cap; consumer discretionary over energy; and the S&P 493 over the Magnificent 7. 

It doesn't have to be a zero-sum game in any of these instances, but the relative strength should accrue to areas that have exhibited relative weakness since the Iran war began. 

It would be a tactical and practical trade, which just might have some legs to it if the peace is real and the capital markets continue to celebrate V-E Day. That being victory in earnings.

--Patrick J. O'Hare, Briefing.com

 (Editor's note: The next installment of The Big Picture will be published the week of June 1.)