As kids, my friends and I rode our bikes from the local store to the pool hall. Usually, I’d go straight from the store to the pool hall unless the crazy guy was in my path. Our town’s crazy guy was mean, foul-mouthed, and really scary to kids. If I saw him, I’d do like the oil tankers are doing right now; I’d take the long way around to avoid a conflict.
As a wealth advisor, I’m watching a few scenarios that could mess up this potentially good election-year market: a recession, a major terrorist attack in the US, a large natural disaster in a major US city, and a rise in oil prices. Currently, the most significant market risk is the possibility of oil and gas shipment disruptions in the Red Sea.
Shipping routes in the Red Sea are being disrupted by the Houthi terrorist group’s drone and missile attacks on ships. To put pressure on Israel, the Houthis started attacking ships in November in support of the Hamas terrorists. In response, the US and others have begun launching counterattacks against the Houthi. If the attacks on shipping companies reach a point where there is a significant loss of life and cargo, the global economy could stumble.
These events affect the stock market because many international ships (especially oil) sail through the Red Sea and Egypt’s Suez Canal in the north to Europe. At the end of 2023, ship traffic in the Red Sea was down nearly 20% from 2022 because of the Houthi attacks, according to Lloyd’s List Intelligence. This is significant because over nine million barrels of oil per day (12% of the world’s oil) are usually shipped through this route, according to freight analytics firm Vortexa.
The Houthi attacks are starting to impact trade. Several large shipping companies, including oil giants Shell, BP, Qatar Energy, and container shippers Maersk and Mediterranean Shipping Company, have begun rerouting their ships to a much longer, more expensive, and more hazardous route around South Africa. For example, it takes a ship going through the Red Sea and Suez Canal about 25 days to sail from Taiwan to England, but it takes 34 days to make the trip if they must go around Africa. This extra time and expense cut into company profits.
Shockingly, oil prices are $10 per barrel lower today ($73 a barrel) than they were on October 7, 2023 ($83 a barrel) when Hamas attacked Israel. That could change if Middle East tensions become a regional conflict with other countries involved, not just terrorist organizations. The greatest risk I see is if something causes Iran, which produces about 4% of the world’s oil, to stop oil production, and the other Gulf countries can’t or won’t increase their oil production to fill the void. That’s a lot of ifs, but IF that were to happen, it could increase oil prices to over $100-$120 a barrel, leading to a 60% increase in fuel prices.
Many situations could harm the economy, and this is just the latest, which is why I am such a proponent of active investment management. Someone needs to be ready to make moves in your account in response to danger and opportunities.
Containers could also be sent from Taiwan to Europe by railroad across Russia, but that would mean trading one crazy for another. The seas off Cape Horn seem easier to deal with than Putin. The world seems full of crazies right now, and not just in my hometown.
Have a blessed week!
Dr. Richard Baker, AIF®, is the founder and executive wealth advisor at Fervent Wealth Management.
Securities and advisory services offered through LPL Financial, a registered investment advisor, Member FINRA/SIPC.
Opinions voiced above are for general information only & not intended as specific advice or recommendations for any person. All performance cited is historical & is no guarantee of future results. All indices are unmanaged and may not be invested directly.
The economic forecast outlined in this material may not develop as predicted & there can be no guarantee that strategies promoted will be successful.
Fervent Wealth Management is a financial management and services entity in Springfield, Missouri.
