At various points in market history, investors are confronted with moments that feel decisive – events that appear to change the trajectory of markets overnight. Military conflict in the Middle East often sits near the top of that list. The recent U.S. military strikes on Iran, and the sharp reaction we’ve seen in global energy markets in their wake, certainly qualifies as one of those moments.
What we do know is that geopolitical events tend to arrive suddenly, dominate headlines immediately, and generate fear disproportionately larger than their long-term economic impact. That does not necessarily mean these events are inconsequential – but it does mean they require context, restraint, and a steady hand.
The Strait of Hormuz remains the decisive terrain of this conflict – not Tehran or potential regime change. Roughly 20% of global oil supply normally transits this narrow waterway. Estimates suggest flows have been reduced by more than 90% from normal levels, making this the largest oil supply disruption in modern history. While some redirection through pipelines and alternate ports is occurring, the available capacity is limited and cannot replace all the lost volumes.
What matters for markets is not just that Hormuz is constrained, but how it is being contested. Iran’s strategy appears not to permanently close the Strait – it relies on it for its own exports – but rather to control it. Through missile coverage, fast-attack craft, drones, surveillance platforms, and a de facto “toll booth” system, Iran has attempted to turn a global chokepoint into a mechanism for economic coercion.
The United States and its allies possess a broad range of options that stop well short of a ground invasion. These include systematically dismantling Iran’s naval and missile infrastructure, neutralizing key islands that enable maritime coercion, and escorting shipping in a limited but increasingly secure fashion. The critical distinction for investors is that reopening Hormuz is not binary. Even successful military control restores flows only gradually, as insurers, shippers, and traders regain confidence. Continued damage to key Middle East oil and gas infrastructure only elongates any recovery achieved by military success in the Strait.
By nearly every metric, the current disruption ranks as the largest oil supply shock on record – greater than the Arab Oil Embargo, the Iran-Iraq War, or Russia’s invasion of Ukraine.
And yet, the economic response so far has been more restrained than those earlier episodes. The reason is structural. Global energy intensity – the amount of energy required per unit of economic output – has declined dramatically over the past four decades. The U.S. economy in particular, is far less exposed than in prior decades due to domestic shale production and a services-oriented growth mix. As a result, energy price shocks can produce sharp moves in headline prices without automatically triggering recessions. In short, prices still move quickly, but growth damage tends to lag and is far more dependent on duration.
Militarily, the United States has not exhausted its options – it has largely avoided the most escalatory ones. The stated objective is not occupation, nation-building, or forced regime change. It is behavior change and global risk reduction, achieved through sustained pressure that targets both Iran’s means of fighting and its ability to govern.
Several military-economic paths matter most for markets. In a first scenario, continued degradation of Iran’s missile, naval, and command infrastructure gradually weakens its ability to impact shipping, allowing limited flows to resume over several weeks. In a second scenario, containment persists into late spring, keeping energy prices elevated as inventories continue to draw down. A third, more adverse scenario would involve expanded attacks on critical infrastructure or export capacity, leading to prolonged supply loss and higher long-term prices.
Markets today appear to be pricing something between the first two scenarios, acknowledging meaningful risk but stopping short of assuming permanent damage to the global energy system. The most significant downside risk is not the size of the shock, but its persistence. Sustained higher energy prices act as a tax on consumers and businesses, particularly in Europe and parts of Asia. Estimates suggest that extended disruptions could subtract between 0.5% and 1.0% from global GDP, with secondary effects on corporate margins and consumer confidence.
Inflation risks are real, but likely concentrated in headlines. Unlike the inflationary cycle of 2021–2022, this shock is not accompanied by broad supply-chain breakdowns or excessive demand. Core inflation effects, while present, appear much more limited than in the post-pandemic cycle, but they are affecting key input prices outside of oil – including gas, fertilizer, and key chemicals like helium that also move through the Strait.
While the odds of downside economic scenarios have increased in recent weeks, upside scenarios deserve equal attention. If sustained military pressure succeeds in breaking Iran’s ability to control maritime traffic – without full-scale escalation – markets could reprice quickly. Energy prices would begin their descent, risk premiums would compress, and financial conditions would ease.
Historically, energy-driven geopolitical shocks tend to overshoot on fear and then mean-revert once clarity improves. A credible path toward de-escalation would likely bring relief across both commodity and financial markets. In the past 11 oil price shocks since 1974 where oil has spiked 50% or more, the median market return 6 months and 12 months later were up 7% and 14% respectively.
The somewhat binary nature of this environment does not call for bold market timing or dramatic reactionary moves – it calls for discipline. It’s worth noting that the traditional hedges typically associated with geo-political uncertainty like gold, treasuries, and even defense stocks have all traded down since these attacks started, which speaks of the short-term unpredictability of the environment. Diversification, quality, and a long-term orientation remain the most reliable anchors during periods of elevated uncertainty. While the paths forward look increasingly complex and daunting, what we do know is that wars end, oil shocks fade, and markets adapt. Investors who resist the urge to react emotionally to each headline historically fare far better than those who do.
Strait Shooting
by Jonathan McAdams, CFA
At various points in market history, investors are confronted with moments that feel decisive – events that appear to change the trajectory of markets overnight. Military conflict in the Middle East often sits near the top of that list. The recent U.S. military strikes on Iran, and the sharp reaction we’ve seen in global energy markets in their wake, certainly qualifies as one of those moments.
What we do know is that geopolitical events tend to arrive suddenly, dominate headlines immediately, and generate fear disproportionately larger than their long-term economic impact. That does not necessarily mean these events are inconsequential – but it does mean they require context, restraint, and a steady hand.
The Strait of Hormuz remains the decisive terrain of this conflict – not Tehran or potential regime change. Roughly 20% of global oil supply normally transits this narrow waterway. Estimates suggest flows have been reduced by more than 90% from normal levels, making this the largest oil supply disruption in modern history. While some redirection through pipelines and alternate ports is occurring, the available capacity is limited and cannot replace all the lost volumes.
What matters for markets is not just that Hormuz is constrained, but how it is being contested. Iran’s strategy appears not to permanently close the Strait – it relies on it for its own exports – but rather to control it. Through missile coverage, fast-attack craft, drones, surveillance platforms, and a de facto “toll booth” system, Iran has attempted to turn a global chokepoint into a mechanism for economic coercion.
The United States and its allies possess a broad range of options that stop well short of a ground invasion. These include systematically dismantling Iran’s naval and missile infrastructure, neutralizing key islands that enable maritime coercion, and escorting shipping in a limited but increasingly secure fashion. The critical distinction for investors is that reopening Hormuz is not binary. Even successful military control restores flows only gradually, as insurers, shippers, and traders regain confidence. Continued damage to key Middle East oil and gas infrastructure only elongates any recovery achieved by military success in the Strait.
By nearly every metric, the current disruption ranks as the largest oil supply shock on record – greater than the Arab Oil Embargo, the Iran-Iraq War, or Russia’s invasion of Ukraine.
And yet, the economic response so far has been more restrained than those earlier episodes. The reason is structural. Global energy intensity – the amount of energy required per unit of economic output – has declined dramatically over the past four decades. The U.S. economy in particular, is far less exposed than in prior decades due to domestic shale production and a services-oriented growth mix. As a result, energy price shocks can produce sharp moves in headline prices without automatically triggering recessions. In short, prices still move quickly, but growth damage tends to lag and is far more dependent on duration.
Militarily, the United States has not exhausted its options – it has largely avoided the most escalatory ones. The stated objective is not occupation, nation-building, or forced regime change. It is behavior change and global risk reduction, achieved through sustained pressure that targets both Iran’s means of fighting and its ability to govern.
Several military-economic paths matter most for markets. In a first scenario, continued degradation of Iran’s missile, naval, and command infrastructure gradually weakens its ability to impact shipping, allowing limited flows to resume over several weeks. In a second scenario, containment persists into late spring, keeping energy prices elevated as inventories continue to draw down. A third, more adverse scenario would involve expanded attacks on critical infrastructure or export capacity, leading to prolonged supply loss and higher long-term prices.
Markets today appear to be pricing something between the first two scenarios, acknowledging meaningful risk but stopping short of assuming permanent damage to the global energy system. The most significant downside risk is not the size of the shock, but its persistence. Sustained higher energy prices act as a tax on consumers and businesses, particularly in Europe and parts of Asia. Estimates suggest that extended disruptions could subtract between 0.5% and 1.0% from global GDP, with secondary effects on corporate margins and consumer confidence.
Inflation risks are real, but likely concentrated in headlines. Unlike the inflationary cycle of 2021–2022, this shock is not accompanied by broad supply-chain breakdowns or excessive demand. Core inflation effects, while present, appear much more limited than in the post-pandemic cycle, but they are affecting key input prices outside of oil – including gas, fertilizer, and key chemicals like helium that also move through the Strait.
While the odds of downside economic scenarios have increased in recent weeks, upside scenarios deserve equal attention. If sustained military pressure succeeds in breaking Iran’s ability to control maritime traffic – without full-scale escalation – markets could reprice quickly. Energy prices would begin their descent, risk premiums would compress, and financial conditions would ease.
Historically, energy-driven geopolitical shocks tend to overshoot on fear and then mean-revert once clarity improves. A credible path toward de-escalation would likely bring relief across both commodity and financial markets. In the past 11 oil price shocks since 1974 where oil has spiked 50% or more, the median market return 6 months and 12 months later were up 7% and 14% respectively.
The somewhat binary nature of this environment does not call for bold market timing or dramatic reactionary moves – it calls for discipline. It’s worth noting that the traditional hedges typically associated with geo-political uncertainty like gold, treasuries, and even defense stocks have all traded down since these attacks started, which speaks of the short-term unpredictability of the environment. Diversification, quality, and a long-term orientation remain the most reliable anchors during periods of elevated uncertainty. While the paths forward look increasingly complex and daunting, what we do know is that wars end, oil shocks fade, and markets adapt. Investors who resist the urge to react emotionally to each headline historically fare far better than those who do.
Protect Your Paycheck: Disability Insurance Basics
I Have Insurance Through Work, Why Do I Need More?
Featured Recipe: Brown Butter, Sage, Butternut Squash & Sausage Pasta
Employee Spotlight: Lydia Neuhaus
The World is Your Oyster
Earnings Resilience is the Headline