Rumble Or Peace?

Investors find themselves confused by all of the rhetoric from geopolitical figures and the legacy media. However, if one follows the facts, it is easier to come to a logical

conclusion about where markets may be headed. This week's musings are inspired by the 1983 movie "The Outsiders." Here is some trivia about the movie:

• The movie was released in March of 1983 and avoided going head-to-head with other movies released in the Summer of '83 - such as "Star Wars: Return of the Jedi," "War Games," and "National Lampoon's Vacation." However, given the film's meager budge of $10mil, it was fairly successful at the box office earning more than $25.8 million.

• What was more notable, was the future star talent in the film. This was Tom Cruise's 4th film before he hit it big with "Risky Business." One year later, Ralph Macchio would hit it big with "The Karate Kid." It was also a busy year for Patrick Swayze, who starred in "The Renegades" and "Uncommon Valor" in 1983. He would appear in "Red Dawn" with C. Thomas Howell one year later. Two other stars in the movie - Rob Lowe & Emilio Estevez - are considered members of the "Brat Pack" and appeared in other movies together. Matt Dillon temporarily peaked after this movie until re-emerging in the '90s with films such as "Wild Things" and "There's Something About Mary."

• While most of the actors were much older than their characters, Diane Lane, who played the part of teenager Cherry Valance was actually 17 at the time of filming, making her one of the few stars that shared the same age as their role.

• Speaking of low budgets, Francis Ford Coppola could not afford to pay author S.E. Hinton all of her movie rights fee up front, so he gave her a role as the nurse in the hospital that tells Dallas to put on his gown.

• During a group photo shoot where the cast was supposed to look tough, Leif Garrett (who played Bob) walked over to the craft services table for a snack. A crew member told him the food was "for the talent." Ralph Macchio immediately joked, "Hey Leif, that's for the talent!" The entire cast burst out laughing, and that spontaneous moment was captured and used as the official movie poster.

• It started pouring on the first day of shooting the rumble scene and Coppola loved the dramatic effect. When the weather cleared on later days, they used rain machines to keep the downpour consistent.

• During the filming, Lowe asked Hinton what happened to Sodapop after the events of the story. She revealed that Sodapop was drafted for the Vietnam War and died there. Lowe said this detail deeply affected how he played the character, adding an extra layer of hidden sadness.

Here's what we've seen so far this week...

Socs vs Greasers. In a battle between two sides, sometimes it's hard to know the good versus the bad. In "The Outsiders" one would expect the Greasers to be on the side of

evil and the Socials to be on the side of good, but that's not how the story unfolds. Investors are dealing with that to some degree during the Iran conflict. Who's in the right and who's in the wrong. The back-and-forth on ceasefires and peace deals has oil and equities in whipsaw mode. In fact, over the past 18 trading days since the conflict began, oil and equities have moved in nearly opposite directions on a daily basis. Just when investors think the worst is over with a ceasefire headline, tensions renew and losses in equities reaffirm the worst is not yet over.

If investors can look through some of the rhetoric and examine historical context, some clarity can be achieved. For example, just this past weekend, Iran launched a variant

of the Khorranshahr missile at the joint U.S.-U.K. military base of Diego Garcia in the Indian Ocean. Iran has long publicly claimed a self-imposed limit of around 1,240 miles for their missile capacity. And yet, Diego Garcia is roughly 2,500 miles away from the launch site. Why is that important? When Iran states publicly they are not seeking any ceasefire and are not negotiating with the U.S., it sends markets reeling in fears the conflict will drag out. When, in fact, Pakistan has confirmed they have taken the lead in negotiating behind the scenes between the U.S. and Iran. Other countries, including Oman and Qatar have been involved in the negotiations. The long and short is, there are likely to be more headlines regarding the conflict that will move markets up and down, so making drastic investment decisions is probably not ideal for the time being.

Ready For A Rumble?  Another side effect of the conflict in Iran is the shift in Fed expectations and a likely incoming inflation shock. The market has seen one of the

largest shifts in Fed rate expectations in the last twenty years. The market has completely priced out two Fed rate cuts that were a given just over a month ago and is now pricing in at least one rate hike in 2026. This has caused the yield on the 2-year Treasury to rise 62 basis points since the Iranian conflict started. This is based solely on the price of oil having risen 39% over the past few weeks and the prospect of a prolonged conflict that could spell even higher oil prices for an extended period of time. A rise in inflation due to high gas prices for the consumer is the reason for the change from expected Fed rate cuts to rate hikes.

However, the official stance from the White House Press Secretary to other officials is that a military operation would last 4 to 6 six weeks, which would put an expected end

date of mid-April in play. The President has gone as far to say that there's "practically nothing left" to target from a military perspective. If there is indeed a realistic timeframe for the conflict to conclude by the 4 to 6 week period, it's likely that oil would fall down close to it's pre-conflict level, helping equities to return on a path toward pre-conflict levels. Waiting in the wings are pension funds, who will begin their quarterly rebalance soon. Equities are down 5% year-to-date, while bonds are flat. That would mean pension funds would be considerable buyers of equities near or around quarter-end. A drop in oil could also take Fed fears off the table as any inflation shock could be limited to one or two months.

Stay Gold, Ponyboy.  Despite continued worries over Private Credit, we haven't seen that bleed over into public credit spreads yet. Spreads have not risen above 3.3 and

have not neared the level of 4.14 that was seen after the tariff fallout last year. The economic picture not only looks solid, but certain areas that have been struggling are looking better. Both national and regional manufacturing indices are showing year-over-year growth. The S&P and ISM manufacturing indices, which were showing slight contraction one year ago, are now at expansionary levels. Regional indices that were in negative territory are now flat or positive.

The customary economic metrics that we continue to monitor - such as, Jobless Claims, Redbook Sales, and the National Financial Conditions Index - perpetually show solid

economic numbers. A metric that is often overlooked, however, is the NFIB Small Business Optimism Index. When "main street" starts to feel the economic pinch, the NFIB index starts to waiver. However, the index has risen over the last 12 months and remains above it's historical average, indicating that main street feels relatively stable despite the uncertainty around private credit and the Iranian conflict. That being said, remaining diversified, keeping a cool head, and not making drastic portfolio changes is the best course of action until a clear resolution in the Middle East is apparent.

Here's the famous rumble scene that has almost all the main actors...

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