Among the many stories filling our collective news feeds, there are two headlines with possible economic implications which investors are paying attention to this week: the announcement of a dockworkers’ strike spanning the East Coast and Gulf Coast, and an Iranian missile strike on Israel. Both stories carry with them the potential for inflationary pressures; that raises some concerns, coming immediately on the heels of a rate cut from the Federal Reserve while the market is expecting additional, consistent interest rate relief. Let’s take a closer look at both stories and try to understand the potential risks.
The Dockworkers’ Strike
On Tuesday of this week dockworkers of the International Longshoremen’s Association went on strike across the Gulf Coast and East Coast after failing to reach a deal with the United States Maritime Alliance. Although, just this morning, it was announced that the strike will be suspended until January 15, 2025, this story created a lot of buzz about problems it could create in the economy. Hopefully the labor dispute will be resolved in the interim, but we will examine the case nonetheless so we know the landscape should these headlines return in January, or another strike make the headlines.
The primary issue of the strike is that, without dockworkers at their post, cargo is not unloaded from ships. This strike was large and impacted dozens of ports and shipments of all kinds. Most news articles I have read on this topic mention that this kind of strike has not happened since the 1970s and focus on the potential for disruption of supply chains and inflationary pressures resulting from the strike. It is true that the strike could create inflationary pressures. If shipments do not reach stores, particularly as we head into the holiday season, and demand far outweighs supply or if retailers are forced to opt for more expensive shipping solutions, then we may see prices climb. As mentioned in the opening of the article, upward pressure on inflation could jeopardize further rate cuts from the Federal Reserve right as they just began a rate cutting cycle. However, there are other narratives I have not seen in these articles.
For one, there is a concern that sudden upward pressure on inflation or a skewing of labor numbers could throw off the Federal Reserve as they navigate rate cuts and attempt to stick the soft landing. In terms of monetary policy, which is reviewed on a monthly and quarterly time scale, January is not far away and a resumption of the strike at that time could still have a similar impact. While this skewing of data is an issue the Federal Reserve will have to contend with, this is not the first strike they have had to account for when considering economic data. The United Auto Workers strike of 2023 is a recent example. The Federal Reserve may have a harder job of interpreting data, and it may be muddled, but they are likely to view the data through the lens of a dockworkers’ strike and adjust accordingly.
Secondly, although an ILA strike of this magnitude may not have occurred since the 1970s, a protracted labor dispute occurred in July 2014 and lasted until February 2015 on the West Coast of the United States between the International Longshore and Warehouse Union (ILWU) and the Pacific Maritime Association (PMA). The ILWU and PMA are the West Coast equivalents of the groups currently in dispute on the other side of the country. The West Coast is where all the shipments from Asia arrive on our shores and disruptions on that coast can heavily impact retail goods. So, we do have a recent historical example of the impact of such disruptions. (MD Logistics) In the chart below you can see the period of July 2014 to February 2015 outlined by vertical red bars. There was not an immediate spike in inflation as measured by the year-over-year change of the Consumer Price Index (CPI) which makes sense as a supply chain shock would be expected to take a while to ripple through the economy and impact various prices. It is certainly possible that the strike and resulting supply chain disruptions contributed to the upward inflation pressures of the next couple of years, but, as always, there are many factors at play in a complex economy. (bls.gov)
US CPI YoY 2000 – 2024
The bottom line is that the three-day strike of this week is unlikely to have a lasting negative impact on the economy and investors will be happier if the labor dispute is resolved before the January deadline. Reports ahead of the strike indicated that price pressures would likely not flow through to the consumer for several weeks. Fortunately, many businesses have been aware of the potential for this strike and ordered ahead to build up inventory and have some cushion in the event of a strike. So, while the 3-day stop in work is certain to create a headache for those in the shipping logistics industry for the next few weeks, there may not be a substantial effect felt by the end consumer (i.e., you and me). Though quiet negotiations are less likely to garner flashy headlines, this is something to watch as the story develops, and you know what’s happening should the story emerge again in the new year.
In related news, there have been some reports of paper goods shortages in stores reminiscent of the toilet paper panic in the COVID-19 pandemic. However, this is not a result of shipping logistics, but rather of buying behavior. Most of the paper goods supply in America is produced domestically, not shipped in from overseas. (CNN Business) There’s a good chance those shelves will be restocked next week.
The Iranian Missile Strike on Israel
Before diving into this topic, I want to recognize that military conflicts come with human suffering and that human life and dignity are imminently more important than the stock market. This type of conflict, whether in the Middle East or Russia/Ukraine are scary for reasons that extend beyond finance. I am not a political commentator or a journalist of any sort, let alone one with expertise in geopolitics. As a financial professional, my goal in considering this topic is to help investors gain perspective on how geopolitics may affect financial markets with the hope that knowledge may allay fears.
On Tuesday of this week, Iran launched close to 200 ballistic missiles at Israel in what Iranian leadership described as a response to recent Israeli military operations. On Tuesday, the major stock market indices opened sharply lower and fell through the morning before slowly recovering some of those losses throughout the rest of the day. While some of the price action may have been the result of standard issue portfolio rebalancing at the beginning of a month and calendar quarter, the escalation of geopolitical tensions likely contributed to the risk averse mood of the day.
Some might be asking why or how rising geopolitical tensions might weigh on stock prices. The primary function by which geopolitical conflicts influence financial markets is through the price of commodities. You may recall that at the outset of the war in Ukraine, there were heghtened concerns about the supply of wheat globally and of liquified natural gas to the Eurozone as they headed into the winter months. In the case of the Middle East, the primary commodity of concern is oil since five of the top ten global oil-producing nations are located in the Middle East. A broadening conflict in the Middle East, particularly into Iran or Saudi Arabia, has the potential to damage oil infrastructure or cause other disruptions to global oil supply. Those disruptions could lead to increases in oil prices. It is a generally accepted economic principle that oil price shocks have knock-on effects which put inflationary pressure on all goods and services, in particular food prices. (FEDS Notes) The explanation for this effect is that higher oil prices result in increased costs to manufacture and deliver goods to end consumers, and those increased costs get passed along to the consumer. A global inflationary spike would be an unwelcome effect, which we all know since we have all just lived through one and are still feeling the effects of it. That’s the bad news.
The good news is that, so far, there has not been a broadening of the conflict. Although the prices of Brent and WTI crude oil futures have increased sharply throughout the week, they are still substantially lower than a year ago. The chart below shows data released weekly, so it does not include this week’s price action, but it does show the declines over the last twelve months. As of the time of writing, oil futures were trading in the range of late August / early September. Whether the outlook for oil prices is good or bad for other financial markets will depend on the response to the attack. A non-violent resolution would help calm the fears of commodities traders.
For context, this is not the first missile strike from Iran on Israel this year. In April, Iran launched a similar attack with a similar outcome; that is, Israel’s missile defense systems intercepting the majority of the missiles. Leaders from G7 countries have gathered to discuss potential non-military responses, including increased sanctions against Iranian leaders and have counseled against military escalation. Meanwhile, Israel has continued military operations in Gaza and Lebanon. Should the conflict escalate further, then there is the potential for oil prices to move sharply higher still, increasing inflationary pressures. Such inflationary pressures could threaten the outlook for interest rate cuts, or even stoke concerns of interest rate increases, which could in turn weigh on stock and bond prices. Currently those outcomes are still far from certain, but this is a rapidly developing story.
Brent and West Texas Intermediate Crude Oil Spot Prices
Conclusion
As can be seen from the stories getting top-line coverage in the financial press, inflation is still very much on the minds of investors. As we have seen a consistent downtrend in inflation and a modest loosening of labor markets, the Federal Reserve has finally ended a two and a half year tightening campaign. Investors breathed a collective sigh of relief when the first rate cut finally came and are on high alert for any threats to the rate cutting cycle. These recent headlines could certainly pose a threat to that path lower for rates. However, it is also not a foregone conclusion that these events will resolve negatively or lead to a rebound in inflation. As we saw in the case of the dockworkers’ strike this week, there are paths forward in which situations can be settled without adverse outcomes. Of course, the conflict in the Middle East is an entirely different issue from a labor dispute in America, but hope, optimism, and determination may yet lead to a resolution without further escalation. As Dylan pointed out just last week, the United States has weathered many storms and we have come out the other side stronger each and every time.
Disclosures: This material is intended to provide general information and is not intended to provide specific investment, financial, tax, or legal advice. The opinions expressed in this material are as of the publication date and may change without notice. While the information in this article has been obtained from sources deemed to be reliable, no guarantee is made as to its accuracy or completeness. This material may contain “forward-looking statements” within the meaning of the federal securities laws. Forward-looking statements include statements related to future developments and other matters that are not historical facts. Forward-looking statements are subject to risks, uncertainties, and assumptions that may cause actual results to differ materially from those expressed or implied by such statements. These risks and uncertainties include, but are not limited to, changes in economic, political, or market conditions, geopolitical risks, and shifts in government policies, including monetary and fiscal policies. Investments in financial markets involve risk, including the potential loss of principal. Economic, geopolitical, and market conditions can affect investment performance. Past performance does not guarantee future results, and investors should be aware of the potential for loss in a variety of market conditions. Specific risks related to geopolitical events, such as the Middle East conflicts or labor strikes, may lead to increased volatility, disruptions in supply chains, inflationary pressures, and other adverse economic impacts that could affect markets and investment portfolios. Inflationary pressures can erode the value of investments and reduce purchasing power. Likewise, changes in interest rates, particularly unexpected rate hikes or cuts, can have significant implications for financial markets, fixed-income securities, and general market sentiment. Investors should remain aware that monetary policy decisions made by central banks, including the Federal Reserve, are influenced by a variety of factors, including inflation, employment data, and geopolitical events, and these decisions can significantly impact investment portfolios. This communication is not intended to serve as a recommendation or endorsement of any particular investment strategy, product, or service. It is intended for educational purposes and may not be applicable to the financial situations or goals of individual investors. All investors should consult with their financial advisor or conduct their own research before making any investment decisions.