Review and Outlook for Markets & the Economy as Oil & Gas Prices Spike Higher

By the Curmudgeon with Victor Sperandeo

 

 

Week in Review for Markets and the Economy:

U.S. stock and bond markets moved decisively lower throughout the week as investors grappled with the potential fallout of the new war in the Middle East with the U.S. and Israel attacking Iran while Israel striking Lebanon.  The S&P closed down each of the five trading days, but only lost ~ 2% or 138.86 points to close at 6,739.07. It was the index’s largest decline in almost five months and erased 2026 year-to-date gains.

U.S. stock market volatility has increased sharply with the VIX closing at 29.49 or +24.17% on the day and up 48% from its closing level of the previous week. It was its highest VIX weekly close since last April’s “Trump Liberation Day” massacre.

Overseas stock indexes sustained far bigger weekly declines than their U.S. counterparts. An ex-U.S. developed-market benchmark, the MSCI EAFE Index, and an emerging-markets counterpart, the MSCI Emerging Markets Index, were both down nearly 7% for the week.

Oil was a big winner last week as the Middle East war accelerated.  Brent crude futures ripped +26.3% higher to close at $92.59 per barrel with WTI crude oil futures at $90.90 per barrel (+$9.89) on Friday for a gain of +36% on the week.

The February BLS employment situation report revealed considerable labor market deterioration, with non-farm payrolls contracting by 92,000 while the unemployment rate ticked up, rising from 4.3% to 4.4%. Payroll reductions extended beyond healthcare (which lost 28,000 jobs), with notable declines in manufacturing, transportation, and federal government employment, signaling broad-based weakening rather than just a transitory, strike-induced blip.  Importantly, the December and January jobs added were revised downward by a combined 69,000.

The combination of negative payrolls, material revisions, and a rising unemployment rate indicates the labor market is losing steam, with the three-month average moving towards zero growth.

The Institute for Supply Management (ISM) Manufacturing Purchasing Managers’ Index (PMI) and ISM Service PMI came in stronger than expected. The Manufacturing PMI ticked down slightly from 52.6% to 52.4% while the Services PMI moved up from 53.8% to 56.1%.  As tariff volatility continues, comments from the report indicate that buying activity could have been pulled forward in anticipation of higher costs later in the year. Additionally, the data for these reports was gathered prior to the escalation of the conflict with Iran.


Buy the Dip Mentality Remains Intact:

Retail remains the strongest hand in the entire market.  Individual investors’ enthusiasm for equities continues to set new records. Scott Rubner reports,


“Retail’s appetite to buy the dip has remained a dominant force in early-2026 flows. Year-to-date, average net notional traded on our platform has been 2.5x larger on S&P down days than on up days.  While overall average daily net notional moderated in February, the intensity of dip-buying actually increased: net notional on February S&P down days was 4.3x that of up days (vs. 2.1x in January).”


March Index Expiration is the Largest on Record:

Approximately 35% of U.S. stock options exposure (~$5 trillion in notional value) are set to roll off by March 20th. That is expected to shift market dynamics from a constrained, range-bound environment to one with greater directional flexibility. The market’s direction will ultimately be triggered by upcoming economic data, corporate earnings and guidance.



Charts Courtesy of Scott Rubner, Citadel Securities

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Impact of Middle East War on the Economy (Jim Stack, Investech Research):

There are three key considerations to keep in mind:

1.       No one knows how long this conflict will last, or the extent to which it may evolve.

2.       Disruptions to the energy market —whether it be production, distribution, or general flow— could significantly impact oil prices.

3.       The possibility of a prolonged military conflict or higher energy prices, when consumer confidence is already weak, would increase the probability of an economic recession.

For a more in depth analysis, please see our companion blog post “Impact of Rising Oil Prices on the Economy and Markets due to Middle East War.”

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Victor’s Comments:

1. The belief that the Trump administration will keep stocks up till the November mid-term elections and will do anything to keep the economy looking good is why retail investors continue to buy the dip.  That’s surely a strong positive for U.S. stock prices.  However, the risk in equities is very high.

2. The Fed won’t be helpful for financial markets until a new Chairman is confirmed by the Senate and takes office in May 2026 when Jerome Powell’s term expires. 

There are several unresolved issues with the Fed:

l  The Supreme Court has to rule on the legality of Trump’s firing of Lisa Cook.

l  The criminal investigation of Jerome Powell on the renovation of the Fed’s Washington DC headquarters.

l  Will Powell leave the Fed after his Chair period ends? He can remain on the FOMC and vote on policy till January 2028

3. The Fed is worried about inflation due to the rise in oil prices. But that concern may be outweighed if the economy falters (see February BLS Employment report comments above).

4. However, it should be noted that in June 2008, when Oil reached $147 a barrel, the Fed had been lowering rates from the beginning of the year:

On January 22, 2008, Fed Funds rate were lowered by 75 bps to 3.5%.  There were several rate cuts thereafter to 2.0% on April 30th, 1.50% on October 8th and 1.0% on October 29th after Lehman went bust. By December 16th, the Fed Funds rate was 0% as ZIRP began in earnest.

So even though the price of Oil soared, the Fed continued to lower rates due to a weakening economy which eventually led to the “Great Recession.”

5. Currently, there’s a lot of economic uncertainty which could keep the Fed on hold till a clearer picture emerges.  It’s much more productive to follow the real economy than to listen to Fed member comments about their future interest policy.

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End Quote:

“The duration of the (Middle East) conflict will fuel inflation, disrupt supply chains and undermine growth at a time when policy flexibility is limited, especially for the Federal Reserve."    Mohamed El-Erian CNBC interview - March 2, 2026.


Mohamed El-Erian is one of the most respected financial economists in the world with many supporting credentials.

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Wishing you good health, success, and good luck. Till next time.

The Curmudgeon
ajwdct@gmail.com

Follow the Curmudgeon on Twitter @ajwdct247

Curmudgeon is a retired investment professional.  He has been involved in financial markets since 1968 (yes, he cut his teeth on the 1968-1974 bear market), became an SEC Registered Investment Advisor in 1995, and received the Chartered Financial Analyst designation from AIMR (now CFA Institute) in 1996.  He managed hedged equity and alternative (non-correlated) investment accounts for clients from 1992-2005.

Victor Sperandeo is a historian, economist and financial innovator who has re-invented himself and the companies he's owned (since 1971) to profit in the ever-changing and arcane world of markets, economies, and government policies.  Victor started his Wall Street career in 1966 and began trading for a living in 1968. As President and CEO of Alpha Financial Technologies LLC, Sperandeo oversees the firm's research and development platform, which is used to create innovative solutions for different futures markets, risk parameters and other factors.

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