The Great Rotation: Valuations Matter
The S&P 500 Index was up 3.6% last week, marking back-to-back strong weeks for U.S. stocks and making the year-to-date return for the index nearly flat. Bonds were unchanged on the week. The commodities sector was down—largely on lower oil prices which are back on the rise today. Gold was up and Bitcoin had a strong rally.
U.S.-Iran cease-fire talks end quickly; U.S. blockades the Strait of Hormuz
Cease-fire talks between the U.S. and Iran broke-off yesterday, after just 21 hours of negotiations. Robert Malley, a U.S. representative in previous nuclear talks with Iran, said, “Twenty-one hours was 20 hours too many if the goal was to reiterate a demand Iran had already rejected. And it was many hours too few if the goal was to negotiate.”
The Korean Armistice Agreement—which ended the Korean War—was negotiated over 158 formal meetings spanning two years. The Paris Peace Talks—the negotiations that ended the Vietnam war—dragged on for five years. And the Doha Agreement—which ended the U.S. occupation of Afghanistan in 2020—lasted for 18 months.
Neither side seems ready to end this war. Iran has the upper hand from a strategic perspective, so there’s no reason for them to make any major concessions. For the U.S., a negotiated settlement at this point would mean they’re the big loser because they haven’t achieved any of their primary objectives. The two-week cease-fire is set to expire in 9 days, on April 22nd. In the meantime, all sides are re-arming their military assets. The Chinese are providing Iran with additional air defence systems and intelligence.
According to the Wall Street Journal, the U.S. military blockade of the Strait of Hormuz “sets up a risky new showdown that could draw American forces into a prolonged struggle to control the strategic chokepoint while compounding the global economic damage caused by the conflict.”
A major risk being largely ignored: supply chain disruptions
The closure and now blockade of the Strait of Hormuz presents a major risk to the global economy and financial markets—and I think it’s mistakenly being discounted by investors.
The global economy functions like an inverted pyramid. A relatively small foundational layer of raw materials and energy supports a massive, complex economic structure. If a critical geopolitical chokepoint is closed for an extended period, it doesn’t just cause a proportional dip in economic output—it triggers non-linear, cascading failures across global supply chains.
Modern manufacturing is intensely interconnected and fragile. Missing a single tertiary component—whether it is a specialized semiconductor or a basic plastic—can indefinitely halt the production of complex goods worldwide.
Because these manufacturing hubs rely on deep, specialized network effects that cannot be quickly reshored or re-engineered, localized energy disruptions can rapidly force factory shutdowns across Asia, Europe, and the Americas. An energy deficit can spill over into agricultural inputs, threatening food shortages and economic rationing, particularly in third world and emerging markets.
The biggest risk to financial markets in developed nations, besides a major decline in their stock markets, is that an economic recession would reduce tax receipts forcing governments into an inflationary debt spiral where they must print money to cover their already massive interest expenses and entitlement benefits.
Inflation spiked last month, driven by higher gas prices… and tariffs.
The Labor Department reported on Friday that consumer prices increased at a 3.3% annual rate last month—a huge increase from 2.4% in February. Impacts from the war with Iran and continued effects of high tariffs continue to push prices higher. Energy prices were over 12% higher in March from a year earlier; gas prices were up 19% and fuel oil was up 44%. Even core CPI, which excludes food and energy, rose at an annual rate of 2.6% last month.
The one-month increase in CPI was the 8th largest spike in the last 40 years. If energy prices remain high—and it looks like they will—prices for food and other goods will be increasing too. Oil is used to make everything from sneakers to toothpaste and high energy prices pushes both manufacturing and transportation costs higher, which are ultimately paid by consumers.
Wall Street analysts have been saying inflation will moderate for months. They’ve been wrong—and at some point they’ll catch on. Inflation has been moving steadily higher and there’s no end in sight…for now. Eventually, the credit and liquidity squeeze will offset higher energy costs—that’s stagflation or maybe a recession—but that’s probably data we will get later this year or next. Slower economic growth and structurally higher inflation are here to stay, unfortunately.
The Great Rotation: Opportunities Outside U.S. Large Cap Technology Stocks
We are officially seeing the start of “the great rotation." For over a decade, US mega-cap tech stocks have dominated market leadership, but the cycle is undeniably changing. The opportunity we see is in more global, capital-intensive industries.
At Alpha Rock, we’ve implemented a relative value trade where our short position in U.S. stocks is balanced by an allocation to foreign small-cap stocks and positions in infrastructure, energy security, and natural resources. Earnings growth is moving to companies with tangible assets and pricing power.
Even the AI boom supports this, driving massive demand for the physical components of tech, like electrical equipment and advanced manufacturing, which heavily favors international companies and utilities.
Ultimately, the most compelling part of this case comes down to valuations. Tech-heavy US equities are trading near the very top of their historical ranges, leaving them highly vulnerable to sudden business model disruptions. According to GMO—the company co-founded by one of the greatest investors of our time, Jeremy Grantham, foreign stocks are under-owned and trading at much more attractive, reasonable levels. Foreign stocks offer much more attractive valuations and are likely to outperform U.S. large cap stocks over the next 7 years. In our view, it’s time to step away from the crowded US tech trade. By investing outside the United States, we may be able to add much-needed resilience and value to our portfolios by seeking to capture the upside of this ongoing economic transition.
To see how we’re invested and why, download our Q2 Investment Outlook: The End of Easy Money.
THE ALPHA ROCK DIFFERENCE - Our investment strategies are a compelling alternative to traditional buy-and-hold investing. By focusing on liquid alternative investments and active risk-management, we target absolute returns, not benchmarks. To see how we’re invested and why, download our most recent Quarterly Investment Outlook, The End of Easy Money.
REVIEW YOUR INVESTMENTS - When market volatility increases, it’s a good time to review your investments, especially if you’re using a passive, buy-and-hold strategy. Please schedule a call or meeting)
We’d love to hear from you!
Your thoughts are important to me, so don’t hesitate to share them. They give me great motivation and encouragement.
IMPORTANT DISCLOSURE INFORMATION
This commentary reflects the personal opinions, viewpoints and analyses of the Alpha Rock Investments, LLC employees providing such comments, and should not be regarded as a description of advisory services provided by Alpha Rock Investments, LLC or performance returns of any Alpha Rock Investments, LLC client. The views reflected in the commentary are subject to change at any time without notice. Nothing in this commentary constitutes investment advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Alpha Rock Investments, LLC manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.
The S&P 500 Index or the Standard & Poor's 500 Index is a market-capitalization-weighted index of the 500 largest U.S. publicly traded companies. The S&P 500 is a float-weighted index, meaning company market capitalizations are adjusted by the number of shares available for public trading. Note: Investors cannot invest directly in an index. These unmanaged indices do not reflect management fees and transaction costs that are associated with most investments.
Alpha Rock Investments, LLC provides links for your convenience to websites produced by other providers of industry related material. Accessing websites through links directs you away from our website. Alpha Rock Investments, LLC is not responsible for errors or omissions in the material on third party websites, and does not necessarily approve of or endorse the information provided. Users who gain access to third party websites may be subject to the copyright and other restrictions on use imposed by those providers and assume responsibility and risk from use of those websites.
