War, Warsh, and what to do now

The war in the Middle East has pushed Brent crude oil prices back above USD 100 per barrel. Inflation is proving sticky. And the artificial intelligence (AI) investment boom is colliding with tight memory supply and a debate around safety. Both the European Central Bank and the Federal Reserve have also increased interest rates by 25 basis points at their September meetings. Fed Chair Kevin Warsh said that the central bank had removed a “dose of accommodation,” as “the plain fact is that inflation is too high and has been for too long.“

Despite all this, we believe the equity rally will continue over the next six to 12 months. Of course, rate hikes will not produce more oil or chips, and rising government debt will complicate the outlook.

But we have learned over the years that investors should not automatically assume that geopolitical shocks will cause lasting market weakness or that debt challenges will affect every asset negatively. With earnings growth still strong and lower inference costs stimulating AI adoption, we believe the fundamental supports for the rally remain intact.

Indeed, for many investors, we see a bigger problem than oil, chips, or the Fed: An excessive fear of investing, leading too many to hold far more cash than they need while waiting for a better time to invest. This is understandable: Cash feels safe over short horizons. But over time, inflation, taxes, withdrawals, and missed compounding can make waiting the riskier choice for long-term investors.

In this letter, we explain why we believe the rally will continue in the months ahead. We also address four pressing concerns: all-time highs and valuations, the AI investment cycle, government debt and interest rates, and the war in Iran and its impact on oil prices. Finally, we remind investors with heavy cash balances about the imperative to invest.