By: Paul Morrone
When the news cycle is measured in seconds, rather than days, it is incredibly difficult to make timely commentary when a tweet or press conference can render everything you’ve worked so hard to put together meaningless. Such is the case in the era of social media and a Trump presidency. Since February 28th when the US launched operation Epic Fury (codename for the operation that President Trump defined as ‘major combat operations in Iran’ which was launched to ‘defend American people by eliminating imminent threats from the Iranian regime’) global commerce and financial markets have been in turmoil. As the powers in Washington continue to vacillate about whether we are going to end the war or launch a larger scale ground operation, financial markets are reacting accordingly when uncertainty is at a high. But, sadly, markets are not looking at the humanitarian impact of a full-scale assault, the physical and emotional toll on our troops and their families, or even the potential threat of future attacks on US assets either here or abroad. While these cannot be overlooked by us mere mortals sitting here watching the news, markets take a more objective view of the future and are mainly worried about one thing: oil.
The world’s oldest fossil fuel has a stranglehold on the world economy, and for those of you who remember your college macroeconomics class, a ‘supply shock’ to a commodity as important as oil can impact virtually every corner of financial markets. A supply shock is an event that means – all other things equal – that we will consume as much oil per day today as we would have if there wasn’t a war in the middle east. However, that war has prevented the distribution of oil (and many other things) meaning there is much less coming out of the ground and being shipped around the world for consumption. In short: same demand, less supply. The result: prices skyrocket, with oil nearly doubling in cost in the matter of 30 days.
Because oil is such a major direct (i.e. used in the manufacture of a good or used to provide a service) and indirect (to transport a product from point A to point B) cost to virtually everything we consume these days, the lasting impact of oil prices north of $100/barrel cannot be overstated. The same holds true, albeit to a slightly lesser extent for natural gas, which is also sourced and distributed heavily from the Middle East.
The war has affected distribution of these materials on three different fronts: damage to the infrastructure used to drill/source the raw materials from the ground, attacks on the massive refining facilities that create the products for commercial use and, some would say most critically, disruption of the distribution channels that transport these materials worldwide (oil and natural gas pipelines as well as the much discussed shipping route through the Strait of Hormuz). Shipping through the Strait of Hormuz – one of the busiest shipping routes in the world – has come to a virtual standstill. Hundreds of ships are essentially stranded and unable to pass through the narrow channel due to the threat of being attacked by the Iranian regime in power.
But the damage isn’t limited just to natural resources, other products (namely chemicals, fertilizers, pharmaceuticals and other raw materials – many used in the market-darling semiconductor industry) are subject to many of the same risks. And the supply shock described earlier will affect these industries, and many of the complimentary industries that work in lockstep with them, as well.
While Americans may be sweating $4 or $5 (gasp!) gas at the pump, the ripple effect goes so far beyond gas prices that it is almost incomprehensible. It is so impactful, in fact, that oil and energy prices are a top factor that the Fed is evaluates in its decision on future interest rate policy. Let that sink in for a minute. Energy prices are always a volatile component of inflation, and the Fed is keenly aware of this. There are even widely publicized metrics that calculate inflation with and without the impact of energy prices to help isolate the impact of wildly fluctuating oil, natural gas and electricity prices over time to make sure that the data can be analyzed correctly.
If we compound this with the effect of say, fertilizer shortages (which means the agriculture industry is going to have to pay more to generate the food items we buy at the grocery store – and pay more to ship them to your store!), you can see why the Fed is watching inflation numbers so closely.
Traders continue to recalculate their expectations on a minute-by-minute basis, which is why we’ve seen volatility elevated so much in the past 30 days. As recently as March 31st, President Trump has announced that the US was willing to end the US military campaign against Iran. Barely 24 hours later, the tone out of Washington was vastly different, with fresh threats of attacks to Iranian infrastructure if Tehran did not come to the negotiating table. Needless to say, there is no shortage of information for investors to digest. The news cycle continues to churn and can change materially at a moment’s notice. While this thesis may change by the time you read this, it further illustrates the fluid nature of the ongoing situation.
With probably more background than most needed on the topic, the question now is – where do we go from here? Underlying fundamentals are still supportive of higher stock prices, and it would not be without precedent to see a relief rally when there is some meaningful progression toward peace. Additionally, it could be argued that a market correction was already overdue and just needed a catalyst to materialize, a thesis that we’ve had after a strong run from 2023-2026. We’ve seen much of the excess stripped from US stock valuations, which are now much closer to historical norms than they were at the end of January. All positive signs that can give hope for the future.
That does not mean that financial markets are without both short and long-term risk. A sustained conflict and higher-for-longer oil prices can weigh not just on stock prices, but on consumers who now have to allocate more of their discretionary income to staples such as food and gas – which have increased materially in price since the end of the pandemic. This can also put the Fed between a rock and a hard place with respect to their mandate to maintain price stability as a supply shock to oil is definitely inflationary. Meanwhile, we’re seeing softer data in the labor market with February’s payroll numbers the lowest since 2022. As we’ve reiterated during our many calls with our Chief Market Strategist, Eric Parnell, we believe a sustained rise in inflation is one of the key risks to stock prices, so we aren’t out of the woods just yet.
What we’re doing: Going into 2026, we had made many portfolios (all but the most aggressive allocations) slightly more defensive and incorporated positions designed to reduce the volatility associated with stocks. At that time, we had seen elevated valuations as a risk factor, as well as stickier-than-we-had-hoped inflation. Obviously, no one saw the war coming so we won’t take credit for predicting the future, but there was a base case that volatility would be elevated coming into the year – we just weren’t sure what would cause it. With a fresh rebalance performed only a couple of months ago, we aren’t looking to make rash decisions regarding current positioning as we feel it remains appropriate for the short-term. We’ll continue to closely monitor the situation and will let logic and data, rather than emotion, dictate the path forward as we get more clarity about the significance and duration of the conflict in the Middle East.
Please reach out if you have any questions, we’d be happy to discuss any questions or concerns you may have.
Go Huskies!
The opinions voiced in this presentation are for general information only and are not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors or will yield positive outcomes. To determine which investment(s) may be appropriate for you, please consult your financial professional prior to investing. Investing involves risks including possible loss of principal. No investment strategy or risk management technique can guarantee return or eliminate risk. Any economic forecasts set forth may not develop as predicted and are subject to change. All indices are unmanaged and may not be invested into directly. Past performance is no guarantee of future results.
Investing in stock includes numerous specific risks including: the fluctuation of dividend, loss of principal and potential illiquidity of the investment in a falling market.
Eric Parnell is solely an investment advisor representative of Great Valley Advisor Group, Inc., and not affiliated with LPL Financial. Any opinions or views expressed by Eric Parnell are his own and are not those of LPL Financial. Advisors associated with Nexa Financial Group may be either (1) LPL Financial Registered Representatives offering securities through LPL Financial, Member FINRA and SIPC, and investment advisor representatives offering investment advice through Great Valley Advisor Group; or (2) solely investment advisor representatives offering investment advice through Great Valley Advisor Group and not affiliated with LPL Financial. Great Valley Advisor Group, and Nexa Financial Group are separate entities.
Tracking: 1086609-01-01
