May Economic Update

Market Summary

We concluded in last month’s newsletter hours before President Trump’s deadline that threatened to bomb Iran’s civil infrastructure. The stock market reaction was going to be binary – more volatility if those threats were realized, or a fast and furious rally to the upside if Trump backed down. The answer was the latter with the S&P 500 gaining 10.43%, the Nasdaq 100 rallying 15.63%, and the Russell 2000 rising 12.18%. The bond market as a whole struggled last month due to the correlation between interest rates and rising oil prices. (1)

Iran War

At this point in time, the war itself has to be a separate topic from the stock market’s reaction. Afterall, the April ceasefire led to more Trump-imposed deadline threat which he once again backed down. As of this week, the ceasefire was broken as both sides attacked one another. So the elephant in the room is if there has been zero progress with this war and the Strait of Hormuz remains closed causing oil prices to surge, then why is the stock market not only higher than when this war first started, but has continued to rally into May while the war is escalating once again?

We can offer a few reasons. For one, the market (and much of the rest of the world) no longer takes President Trump’s threats seriously. He has repeatedly backed down at the last moment when it was clear that Iran was not going to accept any of the terms proposed by the US. This situation was first proposed last year as the “TACO Theory” by Financial Times journalist Robert Armstrong who pointed out that the President repeatedly made strong tariff threats only to back down right before important deadlines. This pattern has continued with Iran, so the stock market no longer views these threats as credible. (2)

The second reason we can point to is the market is settling in for a prolonged game of chicken in the Strait of Hormuz. Both sides have imposed blockades of the shipping lane. The risk to the US is inflationary, which would take some amount of time to show up in economic data due to the lag effect of price shocks. For Iran, the situation is much more urgent due to the nature of pumping oil out of the ground.

When an oil well’s output is either significantly reduced or shut off entirely, it is very difficult to restart that pumping process due to oil and soil sediment settling into the drilled pipe. Sometimes the oil well is lost forever when these forces completely block the pipe and pressure is reduced. Currently, without being able to move oil out of the Strait of Hormuz, Iran is in a very difficult situation because they no longer have returning empty oil tankers to move oil out of their country; hence they are beginning to be forced to shut down oil wells. This could have significant long-term financial losses totaling into the billions of dollars and would be a tremendous hit to Iran’s economy.

The Federal Reserve

Shifting back domestically, the Federal Reserve announced that they would keep interest rates unchanged and maintained a cautious, measured tone in light of the recent surge in gas prices. Several Fed officials suggested that if labor market softness continues and inflation trends lower, rate cuts later in 2026 remain possible. However, policymakers also expressed concern that geopolitical risks and elevated energy prices could slow the disinflation process.

Looking Forward…

At some point either this month or in June, we would expect some type of breather pullback with the markets as this rally from a valuation standpoint is very extended to the upside, in addition to legitimate geopolitical and inflationary concerns which will continue to linger.

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Monthly Financial Tip:

Review your estate planning documents periodically — including wills, powers of attorney, and healthcare directives — especially after major life events. Keeping these documents current can help avoid unnecessary complications for loved ones in the future.

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Citations:

1. Schwab, April 01, 2026

2. Financial Times, May 02, 2025

3. The Maritime Executive, May 06, 2026

Disclaimers:

This post has been derived from sources believed to be accurate. Please note - investing involves risk, and past performance is no guarantee of future results. Bob Lawson is not engaged in rendering legal or accounting services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.