Interest Rates Are the Real Market Problem, Not Oil

When stocks and bonds drop together

Mark Sebastian

Hi Traders,

The S&P 500 has fallen every week since the war started.

From its peak at the end of January to Friday's low, it's down roughly 400 points.

The talk around the S&P is being driven by oil. And yes, oil is higher. But it's the effect oil is having on interest rates that's the real culprit.

Take a look at bonds since the war began:

It's been an absolute bloodbath for iShares 20+ Year Treasury Bond ETF (TLT) and iShares 7-10 Year Treasury Bond ETF (IEF). When stocks and bonds drop at the same time, something is seriously wrong with the market.

Tech was already struggling heading into the war. But the rest of the market: industrials, energy, consumer discretionary, just about every other sector besides tech and communications were actually doing well. Equal weight hit a new all-time high right before the war started.

Outside of energy, they've all rolled over. Yes, energy prices play a role. But the real story is the move in interest rates. We've gone from three rate cuts predicted in 2026 to zero in three weeks.

That's going to wreak havoc on all the main street companies that need to manage cash flows and borrow for capital needs.

If the war ends, we'll get a pop. Oil will drop. But if bonds don't recover, there might be much more to this story and the long-term health of the market than we realize.

One to Buy

iShares MSCI Brazil ETF (EWZ) is the Brazil ETF. Leading into the war, it was having a moment. It's an energy- and materials-rich country, and we were seeing new recent highs in some of its major companies like Petrobras (PBR). Like everything else, it's sold off:

I think this is an opportunity to start buying this ETF. I like materials and energy going forward regardless of the war, and even more once the Iran conflict ends.

One to Sell

Energy Select Sector SPDR ETF (XLE) has had a huge run. It's up over 30 percent since the beginning of the year. That's accelerated with the conflict raging on. The move is probably overdone. When oil finally sells off and this conflict ends, I think there's a quick trip back to 50 for this ETF.

Mark Sebastian

Pit Report

Mark Sebastian

Mark Sebastian is a former member of both the Chicago Board Options Exchange (CBOE) and the American Stock Exchange (AMEX), where he spent years mastering the art of options trading in the most competitive environment imaginable. As Chief Investment Officer at the hedge fund Karman Line Capital, Mark manages sophisticated options strategies for institutional clients. He is the author of two highly regarded books on options trading: ‘The Option Traders Hedge Fund’ and ‘Trading Options for Edge.’ Mark is a frequent guest on major financial networks including CNBC, Fox Business News, Bloomberg, and First Business News, where he provides expert commentary on market volatility and options strategies.