What looked like it was going to be a brutal Tuesday for Wall Street turned out not to be as bad as feared. Undoubtedly, some individual stocks are being crushed, especially within the semiconductor industry and the broader artificial intelligence cohort. However, Tuesday’s overall behavior appears to be much more constructive than we thought just a few hours ago. Why were there concerns early this morning? There are two main reasons. First, the Kospi index, South Korea’s benchmark, fell sharply overnight. This market is dominated by two major memory chip manufacturers, Samsung and SK Hynix, and a heated competition continues. It makes some sense to see the disruption in South Korea spill over into AI trade names here at home. What didn’t make sense, and what was even more concerning, was that U.S. stock futures were falling even as oil prices and market interest rates fell. This one-two punch has generally been good news for the stock market since the Iran war began. In particular, the U.S. benchmark WTI crude oil has hit multi-month lows dating back to early March. That’s what worried us a little Tuesday morning. If the situation does not suit you, you may need to be careful. We began to wonder if there would ever be a day when promiscuous sales would go far beyond the name of AI momentum. Perhaps the changes in interest rates are due to safety trades, as bond markets become less concerned about oil-driven inflation? Remember: U.S. Treasuries are considered the ultimate safe-haven asset, and bond yields fluctuate inversely with their prices. Therefore, when bonds are purchased in large quantities, yields fall. The question is, why do people buy bonds? If Tuesday’s buyers were worried about something going wrong with the economy and wanted to be safe, that’s bad for stocks. If you’re seeing oil prices fall and you’re optimistic about the inflation outlook, that’s good for stocks because lower interest rates bode well for stock valuations. Given that the economy-sensitive Dow Jones Industrial Average was firmly in the positive as of around noon Eastern time, there is a greater tendency to bet interest rate movements on oil than on safe trades stemming from macroeconomic concerns. Yes, we see more safety-minded sectors leading the way on Tuesday, especially the essentials that are bought by investors concerned about the economy (people need toilet paper and toothpaste no matter what). However, we also see economically sensitive sectors working, such as real estate and finance. If you’re worried about an impending economic downturn, don’t consider buying these areas. Remember, even though inflation has skyrocketed in recent months, the data we have is always out of date. To get a more real-time picture of inflation trends, we need to think about the inputs that cause inflation. The most important thing is energy prices. Energy prices are used in almost everything, from manufacturing plastic bottles to powering data centers to transporting apparel to retail stores, all of which are tied to energy prices. Although the S&P 500 and Nasdaq are still down more than 1%, buyers have moved in well off their early morning lows, indicating that investors understand the disconnect and see no fundamental reason to bail out stocks. In other words, the only reason to be all for low oil prices and low interest rates is that despite these positives for stocks, we still think there’s reason to be concerned about the company’s profitability. After reviewing our portfolio on Tuesday, we do not see any new issues with our earnings potential. Unfortunately there are some issues, but nothing new since yesterday. Additionally, Federal Reserve Chairman Kevin Warsh did a good job in his first press conference after last week’s meeting, and the possibility of a final deal to end the war with Iran bodes well for the global economy. While markets are pricing in the possibility of one, or perhaps two rate hikes this year, it’s important to note that Warsh is setting up a task force to track data and better understand the root causes of inflation. As a result, if oil prices remain well away from their Iran war-era highs, and a firm deal guaranteeing the opening of the Strait of Hormuz could lead to further oil price declines, the idea of raising interest rates in 2026 would not be so readily accepted. Keep in mind: Oil isn’t just falling. WTI fell below the $73 level several times on Tuesday, returning to levels not seen since early March, a week after the war began. It has already fallen about 15% this month, well below worrying triple-digit levels. In fact, it is currently only about 10% above its pre-Iran war level of $67. Given the changing dynamics of price movements across the major asset classes (bonds, energy, stocks) since the pre-market session, we think Tuesday’s decline looks much more orderly than what was feared around 6 a.m. ET this morning. As a result, we believe that changes in interest rates are actually due to changes in energy prices and not broader concerns about economic conditions heading into the second half of the year. Overall, we saw this as an opportunity to make money, and we acquired Honeywell early Tuesday. This stock should definitely benefit from lower interest rates, lower oil prices, and peace in the Middle East. At the same time, we do not feel the need for large-scale purchases. In other words, you’re not “backing up your truck.” We’re just scratching the surface of names that we think will benefit from the aforementioned dynamics. When reviewing your holdings, consider these trends and consider whether there are trades in your portfolio that probably don’t make sense given positive developments in energy, interest rates, and possibly Iran. If so, it’s an opportunity worth seizing. (Jim Cramer’s Charitable Trust is a long HON. See here for a complete list of stocks.) As a subscriber to Jim Cramer’s CNBC Investing Club, you will receive trade alerts before Jim Cramer makes a trade. After Jim sends a trade alert, he waits 45 minutes before buying or selling stocks in his charitable trust’s portfolio. If Jim talks about a stock on CNBC TV, he will issue a trade alert and then wait 72 hours before executing the trade. The above investment club information is subject to our Terms of Use and Privacy Policy, along with our disclaimer. No fiduciary duties or obligations exist or arise from your receipt of information provided in connection with the Investment Club. No specific results or benefits are guaranteed.
