Markets, Oil, and Risk

Economic Backdrop

The United States and Israel launched coordinated strikes across Iran, targeting military and government infrastructure, with Tehran responding across the region. The conflict immediately broadened beyond a limited tactical episode into a broader regional confrontation with uncertain duration.

The economic lens is still mostly an energy and logistics story. The key factors are whether energy infrastructure stays functional and shipping lanes are open. The Strait of Hormuz is the epicenter from an energy perspective because roughly 20% of oil moves through that corridor. Additionally, Iran’s supply is important, as its crude production is roughly 3.4 million barrels per day in 2025, representing 4.2% of the global 79 million output.

Paths We’re Watching

While there are infinite paths this conflict can take, there are three broad ones we can group them into from an energy perspective:

1. Contained conflict: In this scenario, strikes remain focused, infrastructure is largely undamaged, and Hormuz remains passable after the first week or so since the start of the attack. Oil could still gap higher on fear and logistics friction, but the premium could fade as flows prove resilient. The US economy feels it mostly through gasoline prices, and through inflation expectations at the margin, not through an immediate hit to GDP.

2. Infrastructure impairment: If Iran’s export chain is degraded or other countries have material infrastructure damage, the market will price a real supply loss. Higher crude prices would lift headline inflation and squeeze real consumer purchasing power. That would not necessarily cause the US to fall into recession on its own, but it would reduce the economy’s cushion and complicate the Fed’s path if inflation is already running sticky.

3. Shipping disruption: Anything that credibly constrains Hormuz for much more than a week is the scenario that changes the macro conversation. To be fair, even partial disruption can have an impact through higher freight and insurance costs, as well as inflation psychology. The US is less energy-vulnerable than in prior decades, but oil remains a global commodity with a global impact. Sustained price spikes work like a tax on consumption and can slow global demand, which would create the biggest drag on our economy of all three scenarios.

Historical Market Reaction

Markets tend to treat geopolitics as a volatility catalyst first and a trend changer only if it alters the economic trajectory. The common pattern is an initial risk-off move, a flight to liquidity and defensives, and then a reassessment that separates fear from fundamentals. There are exceptions, though. If the attacks result in a sustained oil spike, the market reaction can last longer.

In most cases, geopolitics alone are rarely sufficient to create a durable bear market without a concurrent earnings recession or a meaningful tightening in financial conditions. The checklist is simple: energy, rates, credit spreads, and corporate profit expectations. While nothing is ever guaranteed, if those stay contained, equity weakness can be temporary.

The table below highlights stock and bond market reactions following some of the more well-known international episodes over the past 40 years. While some of them resulted in near-term weakness, both equities and bonds performed well over the intermediate term, with positive returns at least 75% of the time in the 3-12 months following major geopolitical events.

Portfolio Planning

Portfolios are built for shocks because market volatility is a normal part of investing. The objective is not to predict every headline. It is to own a mix of assets that can absorb multiple regimes, with enough liquidity to act rather than react.

In events like this, discipline is key. Headlines can push investors toward concentrated, single-factor bets at exactly the wrong time. A more durable approach is to keep the portfolio anchored to its long-term plan and make sure investment solutions align with investment needs.

If the conflict remains contained, the market’s initial move may look worse than the lasting economic impact. If it escalates into sustained energy disruption, diversification and quality balance sheets become more valuable. Either way, stay diversified, and let the plan drive the decisions.

All data unless otherwise noted is from Bloomberg. Past performance does not guarantee future results. Any stock market transaction can result in either profit or loss. Additionally, the commentary should also be viewed in the context of the broad market and general economic conditions prevailing during the periods covered by the provided information. Market and economic conditions could change in the future, producing materially different returns. Investment strategies may be subject to various types of risk of loss including, but not limited to, market risk, credit risk, interest rate risk, inflation risk, currency risk and political risk.

Large-cap stocks are represented by the S&P 500® Index; small-cap stocks are represented by the Russell 2000® Index; international stocks are represented by the MSCI ACWI ex USA Index; bonds are represented by the Bloomberg U.S. Aggregate Bond Index; and longer-term interest rates are represented by the yield on the 10-Year U.S. Treasury Note.

These indices are unmanaged, are not available for direct investment, and do not reflect the deduction of advisory fees, transaction costs, or other expenses. Index performance is shown for illustrative purposes only and is not intended to represent the performance of any specific investment or portfolio.

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