Markets have reacted sharply over the past three weeks to the war in Iran, especially to the effective shutdown of the Strait of Hormuz.
Here are some of the biggest moves from peak to trough or vice versa since the war started, as of Friday, March 20th’s close:
Roughly 20% of global oil supply flows through the Strait of Hormuz. Oil has risen sharply in response, with refined products like jet fuel moving even more. What has long been discussed as a hypothetical supply shock in oil trader job interviews is now playing out in real time. Initially, the consensus was that this would be a short-term disruption rather than a prolonged closure that results in persistently higher oil prices. However, the longer the Strait stays closed, and oil prices elevated, the bigger the downstream economic impacts.
After the most recent Federal Reserve meeting, Chair Jerome Powell said that even before the attacks on Iran, inflation was lingering longer than the committee hoped. “The thing that’s really important that we see this year is progress on inflation,” Powell said. “If we don’t see that progress, then you won’t see the rate cut.”
The new concern is that if the war drags out and the Strait stays closed for a prolonged period, higher oil prices could push prices higher across the rest of the economy. Prior to the meeting, markets were pricing as many as three quarter point rate cuts by year end. Now, they are pricing one cut by year end, with a coin flip chance that the Fed actually hikes before October.
This dramatic repricing of oil and the path of interest rates has reverberated through gold, the dollar, and equities globally.
Traditionally, gold acts as a safe haven during crises like this. However, over the past year, gold has disconnected from its usual fundamentals, appreciating from approximately $2,655 per ounce at the beginning of 2025 to over $5,000/oz recently. Part of gold’s rally was driven by expectations of Federal Reserve rate cuts, and the sharp reversal toward potential rate hikes helps explain the recent decline.
Like gold’s move higher, international developed stocks were among the best performing markets over the past year, particularly in Asia. South Korea and Japan both saw strong gains, (+76% and +26%, respectively) driven by a weaker dollar and the AI boom. These economies are heavily dependent on imported energy, with over 90% of oil imports coming from the Middle East. The disruption of the Strait of Hormuz disproportionately impacts them, and this supply disruption is acutely reflected in the recent stock declines.
The Russell 2000, an index of smaller U.S. companies, had a strong start to 2026 driven by a broadening stock market and expectations of lower interest rates. These companies tend to rely more on floating rate debt than larger companies, making them particularly sensitive to changes in rate expectations, which helps explain the move.
One narrative circulating in both financial and policy circles is that the attacks on Iran are part of a broader strategy of applying pressure on China’s oil supply. The Center on Global Energy Policy estimates that 22% of China’s oil imports are sanctioned or “shadow” oil from Iran, Russia, and Venezuela. This estimate includes 1.38 million barrels per day (bpd) from Iran and 389,000 bpd from Venezuela, and at least 800,000 bpd of oil from Russia. The US has attacked every one of those countries that do not have nuclear weapons.
If energy flows remain constrained, that creates additional economic pressure on China at a time when trade and geopolitical negotiations are ongoing, especially ahead of the Trump-Xi summit that has been postponed from the end of this month. Perhaps Trump uses the summit as an opportunity to extract concessions from Xi then declares victory in Iran.
Although, as I am sending this email, Donald Trump is posting about “good” talks between the U.S. and Iran, while Iran denies any communication.
Could this be the return of TACO?
Most importantly, we must remember that a well-constructed financial plan and investment strategy is built to withstand unexpected times like these.
The market close could not come soon enough today. Trump’s sweeping tariffs, announced Wednesday afternoon, have dragged stocks lower over the past two trading days. The Nasdaq is now in a bear market, meaning it has declined more than 20% from its recent high. The Total World Stock Index is not far behind, down 15% from its high.
Although Trump’s so-called "Liberation Day" was widely anticipated, the level of tariffs was at the high end of market expectations, representing a trade-weighted average of 15% compared to the 8–9% some participants had expected, and is the clear culprit of the selloff.
That being said, after the tariffs were announced, Scott Bessent urged countries to take a deep breath, and if they avoided retaliation, that these would be the high end of the tariffs. I interpret this as a clear invitation to negotiate. On Thursday evening, Trump stated that he was willing to lower tariffs if countries presented him with something "phenomenal," also a clear invitation to negotiate.
In one scenario, countries make concessions, Trump takes his pound of flesh, claims victory, and reduces the tariffs. Markets would likely experience a relief rally in this scenario. In another scenario, Trump draws a hard line and continues to escalate the trade war that he started, and markets remain volatile.
Today, while China responded with retaliatory tariffs of its own, Vietnam indicated it could lower its tariffs on U.S. imports to zero if Trump reciprocates. The coming weeks will likely reveal a mix of these potential outcomes and everything in between. Only time will tell how markets respond in the near term.
One bright spot I'd like to highlight was March's better than expected job growth, with the US adding 228,000 jobs, nearly 100,000 more jobs than expected. Admittedly, this is backward looking economic indicator, but it does suggest that the US is entering this new tariff regime on firm economic footing.
Without sugarcoating, we are in the midst of the kind of selloff that we’ve likely talked about as a hypothetical, and it’s always painful and unsettling to see moves so deeply in the red. While we cannot control the markets, we can control how we react, how we stay diversified, and how we manage risk. If you are an existing client of mine, your plan was designed with the realities of both good times and bad times in mind.
Client or not, if the uncertainty of it all has you feeling anxious, I invite you to schedule a time with me to review your financial plan. Reminding ourselves of this concrete and certain strategy for the months and year ahead can provide peace of mind in the face of near term uncertainty. Especially in times like these, I’m here to support you however I can.
Markets experienced a volatile December, to say the least. Jerome Powell and the Fed effectively pulled the punchbowl on the Red Wave party at the December meeting by forecasting only 0.5% of rate cuts in 2025, down from a forecasted 1% just weeks earlier.
At the same time, long-end Treasuries (10+ years) have seen a significant increase in yields. Interestingly, this increase is entirely due to a rise in the "real rate" (the yield on the 10-year minus the market's expectations for inflation over the same period) and not due to heightened inflation expectations. This suggests that the market anticipates significant productivity gains in the U.S. economy, fiscal challenges, or a combination of both and is looking beyond the inflationary pressures of potential tariffs. I believe it will likely be a combination of productivity gains and fiscal challenges, although some of the fiscal problems might be mitigated by Musk, Vivek, and the Department of Government Efficiency. Time will tell.
I had hoped that the December sell-off in stocks was due to thin trading volume and year-end profit-taking, but the market seems to be struggling to start 2025 on the right foot. Stocks haven't responded well to higher rates in recent years, and this appears to be another period similar to October 2023 or April 2024, when stocks sold off following significant moves higher in 10-year Treasury yields. The market certainly didn’t welcome the blowout jobs report on Friday, January 10th, which showed 100,000 more jobs than expected, with unemployment dropping to 4.1% compared to the 4.3% estimate.
Usually, a robust job market is a positive sign! However, in this case, the market believes the jobs report was too strong, potentially reducing the Fed’s ability to cut interest rates further without risking higher inflation. The Consumer Price Index (CPI) released this morning, January 15th, came in slightly less than expected, and markets are responding positively. A strong economy and decelerating inflation is ideal because it means the Fed is fulfilling its dual mandate of price stability and full employment, even if it means the Fed can’t cut as much as the market was once hoping for.
I never recommend changing investment strategies or asset allocations based on short-term market movements. That said, I remain optimistic about the first round of legislation to be passed by Trump and the Republican Congress, as I believe it will be market-friendly by design, and could be especially supportive of US stocks, small cap stocks, and the dollar.
Stocks have enjoyed a strong run in 2023 and 2024, so some pullback is both healthy and expected, especially to shake out investors who are just chasing returns rather than investing for the long term.
As always, feel free to schedule a meeting to discuss your portfolio, the markets, or anything else on your mind.
Wishing you a happy, healthy, and prosperous 2025!
