Lance Glinn:

Welcome in to another episode of our Markets in Focus series, in partnership with Opening Bell Daily. And as he is every month, joining me now is Phil Rosen. Phil, thanks so much for coming on again.

Phil Rosen:

Thank you for having me.

Lance Glinn:

So Phil, in a recent newsletter from Opening Bell Deli, you noted that the narrative around energy shifted rapidly, from an undervalued sector to a geopolitical hedge. To start this month's Markets in Focus, what does that kind of rapid shift in narrative really tell you about the thought process of an investor and how they're weighing a sector driven by AI growth on one hand, but also geopolitical uncertainty?

Phil Rosen:

So last year, energy was forgotten. It did very well, decently well, but it wasn't talked about as much as it's been this year already. I think in the first two months of the year, it's up 27% year to date, and it's totally crushing every other sector in the S&P 500. And that was initially because of the power demand from the data center build out, the AI trade. All these things were starting to compound very rapidly, and that's all very bullish for energy, because people are starting to realize AI is not just chips. You need infrastructure and that infrastructure needs a ton of energy that really, we're not prepared to build out just yet, which is why energy's done so well. However, in the last week with the Iran war, we have this new catalyst for energy. And geopolitics aside, the energy trade has suddenly gotten almost doubly compelling, because if you have new bottlenecks geopolitically on energy and oil and natural gas, that should be quite bullish for the companies that are trying to push through those headwinds.

So now, you have the AI catalyst, and then layered on top of that, you have this geopolitical catalyst. And energy, I think last I checked, it was up 28%, 27%, and the second place sector is up I think 16% or 17%. I think it's materials. So that double-digit lead, that's probably going to either expand or at least stay in the double-digit range because nothing is going to ... My guess is that nothing would be able to compete with those two double catalysts because they're so massive, and one is very structural and one is hopefully more near term, but together, it's very powerful for the sector as far as an investor perspective.

Lance Glinn:

Yeah. These two factors are certainly influencing energy stocks and sending them upward rather than downward, and one interesting point you made in that same newsletter is that energy offers something rare in this market, upside participation and downside protection. So how should investors think about positioning if they want to capture that upside, while also at the same time, keeping that hedge intact?

Phil Rosen:

I think generally, energy is a good bet right now. It's a very cyclical trade historically. However, in this period, it feels structural and something that's not going away, just because of that demand coming from data centers, and we're going to need a ton of energy. So the upside here is with the AI trade and with the geopolitical catalyst, but then the downside protection, there's only so low that energy stocks can fall, because it's not like the power demands are suddenly going away, and any restrictions that we get from the Middle East, that's like a floor to these equity prices.

Lance Glinn:

Sure.

Phil Rosen:

So it's this interesting dynamic in this moment that energy seems like a really good bet to make. And I've talked to investors generally. They're never going to sell energy no matter what year it is. It goes up and down, whatever, but it's one of these sectors that does always seem to come back very strong, even after periods that are a little weaker.

Lance Glinn:

So we just spoke to the energy market specifically, but what about the broader markets? As we sit here a couple of days before the release of this, on Tuesday, March 10th. We're obviously sitting here I believe on Friday, March 6th. I think today's the 6th. Yeah, Friday, March 6th. It's going to release on Tuesday, March 10th. How are investors just overall processing this geopolitical volatility in the Middle East, not just for energy, but for markets more broadly?

Phil Rosen:

It's been extremely volatile as expected, that's not too surprising, and I don't know if we have enough certainty for the market to pick one way or the other right now. That's why we're seeing so much up and down. The VIX is elevated above its historical average. So the thing that I've been looking at is really how stock prices are reacting historically to oil prices. So I've been writing about that, I've been doing a lot of work on that, and what I'm learning is that when oil prices peak, that tends to be the bottom for stocks.

So oil prices rising is usually going to send stocks lower historically, and we've seen patterns of that this week. But if we find out in retrospect that let's say on one date, oil prices hit 88 bucks a barrel or something, and we're close to that. I think we hit 84 this morning. Maybe we turn around and see the bottom of stocks was in right when that peak hit. That's happened historically in the early 90s. I don't know if ... There's obviously a very different global economy today than there was a few decades ago, but that pattern has held through multiple cycles.

So I think it's hard to trade on that or act on that in real time because it's mostly a historical tool. When oil prices peak, stocks bottom, and then they both reverse. But that's something that I think is useful as a lens to look at the market right now.

Lance Glinn:

And through this conflict, this geopolitical activity, through rising oil prices, there has been one stock market that has seen big returns. It's Israel's stock market. When you wrote a newsletter about it, I think on March 3rd or earlier this month, it had gained over 66% through the 12 months prior. What do you credit for such lofty results?

Phil Rosen:

I always like to think about what is the market saying right now, and over the last year, if you just look at the Israeli stock market, 66% gain, that's triple or quadruple what the S&P 500 did in that period. The global investors are saying that they're confident on stability in the region, and that coincided with President Trump's second term beginning, and he has been very vocal about siding with Israel and wanting to protect Israel. And we're seeing that this week with the Iran war, Israel's stock market is one of the only stock markets that's been going up. Korea has been down pretty big, the US has been pretty mixed, and other major countries haven't seen their markets perform as well as Israel.

So to me, the market is saying it's confident in, let's say, the next chapter. There's going to be near term chop certainly, and a lot of uncertainty geopolitically, but at least the signal from the market in Israel, the closest market to the conflict right now, is going up, and that's essentially betting on, let's say, greener pastures on the other side of this conflict.

Lance Glinn:

And so last Thursday's newsletter was titled Oil Prices Could Hold the Secret to the Next Stock Market Rally, and oil prices, among other things, are on the top of everyone's mind at this time. We've obviously been talking a little bit about it over the course of our conversation so far, but dive into that headline some more for us. How do markets end oil prices correlate? And you talked a little bit about that before, right? As oil prices rises, historically, stocks typically fall, but why do you think they correlate like that? Can you dive a little bit more into that?

Phil Rosen:

I would say I'm very recently studying these crude dynamics, but as far as that particular headline, this is what I was saying just a minute ago, the peak and the trough for oil and stocks, that pattern has held through multiple cycles. So we might be able to look back very quickly and say, "Hey, when oil hit whatever peak this week, that was the market at the bottom of the stock market, and it's coming back right now." So as far as that headline, it's more of a historical tool than a forecasting tool, I would say. So I'm not using it to predict where stocks are going by any means, and I think there's so much in the air right now and there's a lot of variables that we still don't know.

Something this morning, I think there's a lot of Middle East countries that are weighing the idea of stopping energy production as the war continues. And if we get that for a few weeks, let's say, if a bunch of major oil producers stop producing oil for even a month or two weeks, three weeks, it'll take weeks to months after that to fire them up again. Even if the conflict stops completely, getting all the oil back online takes a really long time. So-

Lance Glinn:

It's not like a press of the button and everything's [inaudible 00:09:31].

Phil Rosen:

No, it's pretty dynamic, I would say, and it's difficult. There's a lot of friction to doing that. So if we suddenly get a stoppage of oil production, and then we also have to price in the delay of getting it back online after the fact, that could be very, very disruptive to global economies. Generally, what I look at, if you get oil prices rising a lot because there's any issues with supply, then let's just talk about in the US, that shows up at prices in the pump, gas station. Consumers are suddenly paying more than they're accustomed to, and it happened almost overnight, so then they have less discretionary spending to spend on other parts of the economy. So then, suddenly you have this slowdown on the consumer side, and then when you have a slowdown on the consumer side in a consumer driven economy, that's how the economy can start to slow itself.

So all these things are very connected, but it's also quite linear to look at it. I think there's a very clear series of cause and event. I would say that is definitely something to watch at this moment.

Lance Glinn:

Yeah. The interconnectedness really of everything is something to watch and something to keep an eye on moving forward. I do want to end our conversation for this month talking about the Fed, because they do have their next meeting on the 17th and the 18th. Markets seem to be leaning towards rates being held steady this coming month, but with so much going on, what do you see as the biggest narrative shaping both this upcoming meeting, as well as your outlook for what's to come throughout the rest of 2026?

Phil Rosen:

It was only a few months ago that we were expecting multiple rate cuts to start the year, and that narrative has gone out the window at this point. The Iran conflict is an inflation threat, I would say. If oil prices go up and they stay up, gas prices go up, consumers get hurt, inflation could rise, and all of those variables are something that the Fed is going to look at and say, "Hey, we can't really cut interest rates right now because it doesn't make sense if inflation is suddenly the boogeyman that's back."

Then again, if the conflict ends very abruptly, and suddenly, the oil shock or the threat of an oil shock is gone, maybe the Fed says, "Okay, look, we can continue to focus on the labor market. The job market has been weakening. We just got a very bad print this week." And all of that could convince the Fed to say, "Look, if we just pay attention to the labor market, it has weakened to the point where we should be lowering rates to loosen things up and rejuvenate hiring and the economy." So I would say it's close to a coin toss at this point, and much of it hinges on how long the Middle East conflict will continue.

Lance Glinn:

Well, Phil, I always enjoy our conversations every single month. I always appreciate having you. Thanks so much for coming on as always.

Phil Rosen:

Thank you for having me.