Through January 16, the stock market is flat year-to-date — technically, the S&P 500 is down 0.03%, but that is close enough to flat for me. The market ended 2023 on a very strong note, with the S&P rising about 14% over the final two months of the year. Now the market feels like it has lost its direction.  Perhaps traders are worried that 2023 ended a bit too hot and needed to pause. Meanwhile, in a market going sidewise, the “talking heads” are desperately searching for the first real market trading theme of 2024.  Inflation, interest rates, artificial intelligence, the election — there are plenty of storylines worth following, so let’s “eat the frog” and start with the most depressing ones.

“What is war good for? Absolutely nothing!”

Sadly, we have at least 3 separate theatres to discuss:

1. Ukraine has cooled to a relatively steady simmer in the headlines; however, the war is boiling over in the region. Ukraine launched a counteroffensive in June that has since failed to retake significant territory from the entrenched Russians. Putin has no credible exit strategy that preserves his life and position except to achieve victory. Ukraine has little chance of maintaining a stalemate and no chance of victory without significant support from the U.S. and Europe. Best case scenario, Putin is removed, and a kinder, gentler dictator takes his place — a man can dream, right?  Frankly, I have a hard time handicapping an end date to this catastrophe.  Our baseline assumption is Putin’s tragic mistake continues to consume billions of dollars, tons of lethal ordinance, and thousands of lives in 2024.
   
   
2. Israel will crush Hamas — it is going to be brutal, bloody, and full of suffering — but Israel is going to win. Despite the savagery of the Hamas attacks and the strong response from Israel, the impact to the U.S. market has been comparatively small so far. Over the last few days, several Iranian proxies have stepped up attacks in the region, leading to fears that an ever-widening conflict will derail shipping in the Red Sea and the 30-mile-wide Strait of Hormuz. Over 20% of the world’s oil supply passes through the chokepoint of the Strait of Hormuz, while about 15% of all worldwide trade passes through the Red Sea.  A serious disruption of this shipping flow on the other side of the world would manifest higher oil prices, more pain at the pump, and higher costs getting goods to consumers in the U.S.  If we see inflation kick back up again, the Fed will likely slow or even stall their expected 2024 easing, majorly altering the assumptions currently priced into the market. Although shipping prices have certainly increased and shipping times have increased as container ships are rerouted around the Cape of Good Hope, oil is up just over 1% the last month and traders are still betting on at least 1% of Fed cuts in 2024. In other words, the market is currently pricing that these shipping disruptions will not escalate massively.
   
   
3. China invading Taiwan would be an international nightmare on a scale the world hasn’t experienced since WWII — but I don’t see it happening in 2024. China officially considers Taiwan to be a rebel state. Historically, culturally, and legally, however, the truth is far more complicated. Taiwan has operated independently of the Peoples Republic of China for decades.  During much of this time, Taiwan has been one of the fastest-growing economies in the world.  Taiwan boasts 24 million people, the world’s 20^th largest economy, a GDP nearly 4 times that of Ukraine and a specialization in producing some of the world’s most essential components (i.e., microchips.) Despite increasingly urgent and hostile rhetoric from Xi Jinping, I don’t see a Chinese invasion of Taiwan soon. China will need to land hundreds of thousands of troops and millions of tons of weapons and ordinance to take the island. Very few massive amphibious invasions have succeeded throughout history. For every William the Conqueror (1066) or D-Day (1944) that did succeed, there is a Gallipoli (1916), a Sicilian Expedition (415-413 BC), a Divine Wind (1274 and 1281), a Spanish Armada (1588), and an Imjin War (1592 and 1597) that failed miserably. We can also look at amphibious invasions that were planned in detail but were then scrapped: Napoleon’s or Hitler’s aborted invasions of Britain (1803-1805 and 1940, respectively) or the planned U.S. invasion of Japan in 1945 that never happened come to mind.  While I don’t expect China to scrap their invasion plans or preparations, I see this as a very different situation from Ukraine.  Napoleon famously said, “Let us be masters of the (English) Channel for six hours and we are masters of the world.”  Of the many issues that would face China in conquering Taiwan, simply getting their army across the 80-mile-wide Strait of Taiwan and onto the shores in fighting condition might be the one that prevents the invasion from happening at all. 
   
   

Investment advisory products and services made available through AE Wealth Management, LLC (AEWM), a Registered Investment Adviser. Investing involves risk, including the potential loss of principal. Past performance is not indicative of future results. 2210783 – 3/24

https://www.cnbc.com/2024/02/19/stock-market-today-live-updates.html

https://www.eia.gov/todayinenergy/detail.php?id=61002#:~:text=the%20Arabian%20Sea.-,The%20Strait%20of%20Hormuz%20is%20the%20world’s%20most%20important%20oil,of%20global%20petroleum%20liquids%20consumption.

https://www.statista.com/statistics/319793/taiwan-population/

https://www.nasdaq.com/articles/an-overview-of-taiwans-economy

https://www.usni.org/magazines/proceedings/1938/june/three-naval-campaigns-study-disaster