4-27-26 Why is the Market Ignoring the Strait?
The discussion frames the Strait of Hormuz disruption as a manageable near-term shock that markets have largely shrugged off, while warning a prolonged closure would lift inflation, damage demand and ultimately reverse into oversupply risks when flows resume. Central banks are reallocating reserve custody rather than selling Treasuries, and Fed dollar swap lines supply dollar liquidity without forcing asset sales. AI data centers are entering a multi-year, capital-intensive build phase that benefits infrastructure suppliers, and strong earnings—driven by semiconductors and energy—are keeping equities elevated even as chip indexes show extreme breadth risk and seasonality/technical factors constrain near-term upside. The tactical recommendation is to trim winners, hold cash, and keep 5–10 year bond duration as a hedge.
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Markets treated the Strait of Hormuz disruption as a routine, short-lived shock—a normal 5–10% correction—because practical mitigants (rerouting via Saudi/UAE pipelines, alternate-flagged tankers, and the largest coordinated reserve releases) limited the oil spike and kept Brent nearer $90–$100, supporting equities.
A prolonged Hormuz closure would flip the narrative: sustained higher oil would push inflation up, squeeze consumers and cause demand destruction and earnings downgrades, while resumption of flows could later create oversupply that pressures crude and spot-sensitive energy equities—so tactically favor midstream/upstream cash-flow exposure and trim long crude positions.
Central banks are reallocating reserves and shifting custody (e.g., to Luxembourg/Belgium) rather than selling U.S. Treasuries, and Federal Reserve dollar swap lines give them direct dollar liquidity to smooth payments and buy dollar-priced commodities without immediate reserve sales—meaning headline U.S. custody drops often reflect custody migration not forced selling.
The equity rally is principally driven by upward revisions to forward EPS for 2026–27, with semiconductors and energy stocks materially contributing to that earnings momentum—creating meaningful sector concentration risk even as aggregate earnings improve.
GEO-POLITICS
“look, it absolutely has restricted 20% of oil supplies. No doubt about that. It has certainly caused oil prices to rise.”—
“If this closure of the strait continues for two, three, four more months, we are certainly going to have a very different conversation because of the impact on the consumer…”—
TECHNOLOGY
“All the things that are involved in, you know, moving dirt and building buildings and, you know, building connectivity, all that type of stuff, that's where the play is right…”—
ECONOMY
“Scott Besson, this is one of the things going on right now, and we'll talk more about this on Thursday with Michael Leibowitz, is that Scott Besson is talking about…”—
“The dollar remains in a very, very strong uptrend since the 2008 financial crisis.”—
MARKETS
“Tom Lyles estimates that about five to six million barrels a day can flow through Saudi and UAE pipelines, terminating at the Red Sea and the Gulf of Oman…”—
“We are continuing to see estimate revisions for both 2026 and 2027 rising pretty strongly here on expectations of what's happening in the rest of the market, despite this closure…”—
“earnings growth right now has been very strong estimates are coming up and we do have a very strong move in the semiconductor sector and oil stocks as well has…”—
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