The benefits of diversifying across asset classes as a risk‑management tool are widely accepted, but what’s easily overlooked is that the relative benefits wax and wane over time. That doesn’t invalidate global asset allocation, but it does serve as a reminder that your mileage will vary.

There are several ways to measure asset allocation’s value for portfolio design and management. A useful first step is tracking how return correlations vary through time. In contrast with the popular approach of looking at a single snapshot and calling it a day, reviewing rolling numbers offers a more realistic profile of the dynamic nature of correlations, which in turn helps manage expectations for how global asset allocation will perform.

Let’s start with a top‑down review of the median correlation for all major asset classes using a rolling 1‑year window of daily data. The current reading is 0.42 (see chart below). As a recap, correlations range from –1.0 (perfect negative correlation) to +1.0 (perfect positive correlation). The latest value indicates a moderately low degree of positive correlation, which has fallen substantially from above 0.65 a few years ago. In other words, the implied benefits of diversification across major asset classes have strengthened. One could say that investors are getting more bang for the asset‑allocation buck lately.

Keep in mind that a range of correlations is the basis for holding multiple asset classes. If everything was perfectly correlated, there would be no point in holding more than one asset.

Back in the real world, the next chart focuses on how correlations have changed from the viewpoint of a US stock fund—in this case, Vanguard’s Total Stock Market ETF (VTI). The three lines compare VTI with equities in developed markets ex‑U.S. (VEA), emerging markets (VWO), and U.S. bonds (BND).

Drilling down further, the table below summarizes how correlations stack up over the trailing 5‑year window for all major asset classes. At the extremes, the results range from 0.02 for commodities (DJP) and U.S. bonds (BND) to 0.85 for government bonds in developed markets ex‑U.S. (BWX) and global corporate bonds ex‑US (PICB).

This type of analysis is just one piece of the puzzle, of course. A real-world plan might also consider expected returns for asset classes. Even more important: customizing the portfolio for the investor or institution to factor in the specific time horizon, risk tolerance, etc.

Correlations are a useful first step in designing a portfolio strategy, highlighting what’s available for risk management. Although the numbers will change, the concept of global asset allocation endures. Because the future is always unknowable, investing across asset classes is consistently beneficial. What isn’t fixed is the degree of the benefits on offer in any given period.

Learn To Use R For Portfolio Analysis
Quantitative Investment Portfolio Analytics In R:
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By James Picerno

Inflation worries have convinced markets that the odds are low for a cut in interest rates this year by the Federal Reserve. Rate hikes are still considered unlikely, but the possibility is back on the table, if only on the margins. The change in sentiment, courtesy of the war in Iran, which has sent energy prices soaring, is weighing on the bond market. The hope is that the conflict will soon end, allowing Middle East oil and gas exports to resume, and thereby tame inflation worries.

At the moment, much of the fixed-income market is underwater this year, based on a set of ETFs through Tuesday’s close (Mar. 24). The upside outliers are limited to floating-rate investment-grade bonds (FLRN) and short-term Treasuries of the nominal and inflation-linked variety. The rest of the field has lost ground so far in 2026. The deepest year-to-date loss: long-term corporates (VCLT) via a 1.4% decline, substantially deeper than the 0.5% drop for the US investment-grade benchmark (BND).

Relief in the form of rate cuts is now considered unlikely for the near term. The Fed funds futures market is pricing in essentially zero odds for easing through the October policy meeting, shifting to a slight chance for a cut in December. A hike is also given low odds, but futures aren’t fully discounting the possibility.

For some analysts, the writing’s on the wall. “The market is saying that the Fed is done for the next year or two. We went from talking about how much the Fed is going to cut to how long the Fed is on hold for. The narrative has completely shifted in terms of what the Fed will do this year,” predicts Brij Khurana, a portfolio manager at Wellington Management.

A possible joker in the deck is the policy-sensitive 2-year Treasury yield, which has spiked higher in recent days. Trading just below 4.0% yesterday (Mar. 24), this proxy for rate expectations is now meaningfully above the median effective Fed funds rate (3.64%) for the first time in three years. That’s a sign that this corner of the bond market is anticipating tighter policy at some point.

A drop in energy costs could quickly change the calculus back to a neutral or disinflationary outlook, but a sentiment shift will require robust signs that inflation risk is tamer than the war-related risk implies. That will take time, given that formal inflation data arrives with a lag and it’s uncertain how, when or if the war will affect prices generally.

Reviewing breakeven rates in the Treasury market – a proxy for inflation expectations – paints a mixed picture. These estimates have surged on the short end of the curve. For example, the 1-year breakeven (nominal yield less its inflation-indexed counterpart) recently rose above 5%–a sign that investors are demanding a sharply higher inflation premium for the near term.

Longer-term inflation estimates are still modest and remain in a range that’s prevailed in recent history, which suggests that any inflation risk will be temporary. The 5-year breakeven, for example, has increased lately, but only modestly and is currently at 2.55%. That’s up from the recent low of 2.22%, but slightly below the roughly 2.60% high point for the last several years.

But confidence about the near-term future is still fluid. Until the war ends, and markets have time to assess how the macro outlook has changed, expectations for bonds, inflation, and interest rates will remain dependent on the duration of the conflict and the outlook for energy prices.

President Trump’s announcement of a halt in the strikes on Iranian infrastructure sparked a rise in risk assets on Monday (Mar. 23). It’s unclear if this is a temporary lull or a diplomatic opening that leads to a ceasefire, but risk assets found some breathing room yesterday. Commodities are still the strongest year-to-date performer for the major asset classes, but 2026 results are a bit less lopsided through yesterday’s close, based on a set of ETFs.

Raw materials continue to dominate this year, but the outperformance has become less extreme in recent days. WisdomTree Commodity ETF (GCC) is up 9.6% in 2026 – a strong run, although down sharply from the near-16% peak year-to-date performance set earlier this month.

After commodities, the best performer: foreign stocks in developed markets ex-US (VEA), posting a 2.1% gain, followed by US real estate investment trusts (VNQ), which are up 1.1%. US stocks (VTI), by contrast, are down 3.3% — the deepest year-to-loss for the major asset classes so far this year.

The path ahead is still fraught due to a truckload of uncertainty. The main item on the agenda: Will a diplomatic solution emerge to end the war in Iran? There’s a glimmer of optimism following Trump’s announcement, but the fighting continues and Iran has denied that any substantiative negotiations are happening. Fake or not, the news triggered a hefty decline in oil prices on Monday. The US benchmark fell below $90 a barrel, the lowest in nearly two weeks.

Even if the war ended today, energy infrastructure in the Persian Gulf region must be repaired to boost oil and natural gas exports from the Middle East to ease the supply crunch. “It will take some time to come back to the normal days we had before the war was started,” said Fatih Birol, the executive director of International Energy Agency.

Meanwhile, markets are on the lookout for signs that the energy shock unleashed by the war will lift inflation for an extended period. Although formal inflation data arrives with a lag, several real time benchmarks are hinting a elevated pricing pressure. The Economist reports:

Alternative Macro Signals, a consultancy, analyses millions of news articles. Their global inflation index, which has proved to be a useful predictor of official numbers, has recently risen sharply. If historical patterns hold, by July monthly global inflation could be above 0.6%. That is more than 7% on an annualized basis.

Alternative Macro Signals is not the only worrying datapoint. Truflation, a consultancy, analyses prices in real time from a wide variety of sources. Its figures suggest that this month American year-on-year goods inflation has jumped from less than 1% to nearly 3.5%. This was almost entirely the result of rising petrol prices.

Hotter inflation is a near-term risk, but the jump is still expected to be temporary, based on the Treasury market’s implied forecast via the yield spread for the nominal 5-year yield less its inflation-indexed counterpart. The current estimate is 2.53%, which is modestly below the peaks over the past year.

Despite the relative calm for the Treasury market’s outlook, it’s premature to dismiss the potential for an inflation shock of some duration. Despite Trump’s announcement, the war continues, which means that the further upside inflation pressure may be brewing — a risk that markets have yet to fully price in.

“What makes this a fraught but intense moment is nobody can tell us what is going to happen on the ground in the conflict in the Middle East, and how long that lasts,” Chicago Federal Reserve President Austan Goolsbee said on Monday.

Until there’s a strong case for arguing otherwise, the near-term outlook for risk assets still looks wobbly.

The Iran war is now in its fourth week, with no sign that the conflict is nearing an end. Conditions for a stalemate or ceasefire may be brewing, but for now no one is blinking. Without even a hint of de‑escalation, the stock market will continue searching for a bottom. When a turning point for the market arrives, it will likely coincide with a sense that geopolitical risk has finally peaked.

US equities fell for a fourth week through Friday (Mar. 20), but the decline has been orderly so far. The slide is also mild compared with last year’s tariff tantrum. By The Capital Spectator’s reckoning, the current correction is roughly one‑quarter as deep as the dive in the spring of 2025, based on our standard estimate of overbought-oversold conditions for the SPDR S&P 500 ETF (SPY).

No one knows where full capitulation and maximum drawdown ultimately lie, but the conditions that accompany selling exhaustion will likely align with recurring signs of relative improvement.

Financial markets are forward‑looking pricing systems, continually scanning for indications that the future may diverge—however slightly—from current conditions. Discounting expected future outcomes is a messy business in real time, and the market often misreads the tea leaves. But the constant process of revising the outlook as new information arrives provides a steady recalibration of expected risk and return.

One challenge for investors searching for opportunities to buy stocks on the cheap (to boost expected return) will be distinguishing the absolute state of the war and its long‑term implications from the crucial shift toward relative improvement in the outlook. That change may be obvious or subtle, but at some point the tide will turn and sentiment will move from a sense that the crisis is deepening to one that is becoming slightly less bad.

An additional complication is that this ebb and flow has a short‑term cycle that can be misleading. But as the chart above suggests, the point of maximum pain may become increasingly obvious, in which case there will be several clues indicating that the market has fully priced in the risk at hand.

No one can identify the bottom in real time, of course, but using a set of analytics can help provide useful context for judging when the odds appear to have shifted to a net‑favorable state for the near-term outlook. The task is arguably easier when the decline is sharp and rapid, as was the case during last year’s spring correction. By contrast, longer, slower downturns are more challenging to analyze.

For now, current conditions—analytically speaking and based on the news flow—suggest that the market has yet to reach maximum pessimism. But keep in mind that behavioral biases are sticky and will keep us focused on the negatives, primarily informed by the rear‑view mirror.

Eventuallly, the backward‑looking influence will become far less useful from an investment perspective. We should remain open to the fact that markets continually look past what just happened and stay focused on the possibilities for tomorrow and beyond.

When the backward‑looking fear finally gives way to forward‑looking recalibration, the market will have already begun its turn. That pivot, subtle at first, is where recoveries are born.

Learn To Use R For Portfolio Analysis
Quantitative Investment Portfolio Analytics In R:
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● Money Beyond Borders: Global Currencies from Croesus to Crypto
Barry Eichengreen
Review via Financial Times
The US dollar’s recent travails — it has fallen more than 10 per cent against other major currencies since the beginning of 2025 — have led to renewed questioning about its future. How long will it remain the world’s premier currency? What might it take to finally knock it off its perch? And, should it fall, what will replace it — a new dominant reserve currency, a basket of quasi-reserve currencies, perhaps even something from the cryptoverse? …
Eichengreen’s suspicion is that, if and when the US dollar in turn loses its mantle, the wounds will more likely be self-inflicted than exacted by a monetary foe. Among the possible fatal harms, he identifies heightened tariffs, America’s escalating fiscal woes, the undermining of Federal Reserve independence, more aggressive and widespread use of financial sanctions and a retreat from longstanding international alliances. The current US president has leaned — sometimes more than leaned — in all these directions.

● Ladder or Lottery: Economic Promises and the Reality of Who Gets Ahead
Gary A. Hoover
Summary via publisher (U. of California Press)
This book asks the reader a simple question: Is our economy a ladder or a lottery? Are people able to control their position on the economic spectrum by their actions? Some argue that, in our market-based economy, if you play by certain rules and make certain choices, you’ll achieve upward mobility no matter what economic position you were born into… Hoover shows how civil unrest is often directly related to broken society-level promises, exploring protest movements such as Occupy Wall Street, the Tea Party, the Arab Spring, and student debt forgiveness as case studies. He also predicts where future protests can be expected if results promised are not results delivered.

Please note that the links to books above are affiliate links with Amazon.com and James Picerno (a.k.a. The Capital Spectator) earns money if you buy one of the titles listed. Also note that you will not pay extra for a book even though it generates revenue for The Capital Spectator. By purchasing books through this site, you provide support for The Capital Spectator’s free content. Thank you!

The war in Iran is sending shockwaves across the globe, but the US economy has managed to stay remarkably steady so far. How long the relative calm lasts is unclear, and will likely be determined by the duration of the conflict.

Let’s start with the upcoming first-quarter GDP nowcast. The war’s effect on economic activity for the January-through-March period will be limited, but the economy’s momentum, or lack thereof, in the start of the year will be crucial because a tailwind of some degree will be helpful in minimizing the macro shock that may be brewing for Q2.

The good news: a moderate rebound is expected for Q1 growth following the weak increase in output in Q4. The Atlanta Fed’s current Q1 nowcast still reflects a 2.1% annualized rise in GDP. If correct, the economy will partially recover from Q4’s stall-speed 0.7% advance.

The Dallas Fed’s Weekly Economic Index (WEI) offers a more granular and current review, and on that score there’s no sign that the war has derailed the recent reacceleration of the trend. WEI’s current reading is 2.6% as of Mar. 14. Using this as a proxy for the year-over-year change in GDP suggests that economic activity is stable, and perhaps even strengthened through mid-March.

But these are still early days for assessing the war’s effects, for the US and the global economy. Three weeks into the conflict, the repercussions continue as the energy shock reverberates. Europe and Asia are more vulnerable, given their higher reliance on imported oil. The US, a net oil exporter, has a substantially higher level of immunity. But oil is priced globally. As I reported last week, “Oil is priced in a single worldwide marketplace, which means that shifts in supply, demand, and geopolitical risk spill across borders regardless of how much a country produces.”

Given the global aspect of pricing, it’s no surprise that the US crude oil benchmark (West Texas Intermediate) has risen sharply this year in line with the surge in the international benchmark (Brent).

Yet The Wall Street Journal’s new survey of economists highlights expectations for resiliency, at least so far: “Economists Don’t See a Recession Unless Oil Hits $138—and Stays There for Weeks.” WTI traded at roughly $95 a barrel on Thursday.

Predicting oil prices is challenging, to say the least, especially in the current environment. Presumably the war will end soon, but no one knows the timeline, except perhaps one man in the White House.

This much is obvious: the longer the attacks continue, the longer the energy infrastructure is degraded in the Gulf region, and the longer that oil and natural gas exports from the Middle East are blocked, the deeper the economic pain and the longer and slower the eventual recovery.

Surveying the disruption of exports through the Strait of Hormuz to date, Priyanka Sachdeva, senior market analyst at Phillip Nova, said: “The damage has been ​inflicted, and even if safe passage for tankers is somehow negotiated through Hormuz, reviving ​logistics fully fledged ⁠can take an awfully long time.”

Meantime, the risk of higher inflation and slower growth are likely creeping higher every day.

Writing on X yesterday, E.J. Antoni, chief economist at the Heritage Foundation, a conservative think-tank that’s closely aligned with President Trump, advised:

“If war is done in next few days, damage to energy infrastructure is minimal, and Iran lets ships transit strait unmolested, there’ll be minimal impact; but drag this on for months and destroy lots of infrastructure, then impact will be big; no one knows the future.”

The Federal Reserve has a deep pool of resources for analyzing the economy to support its mission to adjust monetary policy to match current and expected macro conditions. But sometimes a central bank’s vaunted research machine offers insights no sharper than whatever you’d get from chatting with a guy waiting at the bus stop. The present moment is one of those times, thanks to the uncertainty surrounding the ongoing war in Iraq.

Federal Reserve Chairman Powell admitted as much yesterday after the Fed announced that it left its key interest rate unchanged at a 4.50%-to-4.75% range.

“The thing I really want to emphasize is, nobody knows,” Powell said, citing the Iran war as the main source of indecision and uncertainty. “The economic effects could be bigger, they could be smaller, they could be much smaller, they could be much bigger. We just don’t know.”

No one does. One man in the White House holds the key for the war’s path, at least in terms of the US role. But with so many moving parts to the conflict, and an endless array of rapidly evolving economic and financial implications, the distribution of outcomes could hardly be much wider, or more shrouded in a fog of unknowing.

The main concerns from a macro perspective: the war could raise inflation, slow growth, or some degree of both – the dreaded stagflation scenario. The arrival of those twin challenges would be uniquely difficult for a central bank because the monetary toolbox tends to only work effectively on one problem or the other. That raises the difficult calculus that any decision could push one problem in the right direction while worsening the other. Tightening policy cools inflation but deepens unemployment, while easing policy supports hiring but fuels inflation.

The business of central banking goes on, of course, even if the best course of action in the current climate is to do nothing and wait to see what happens. .

One point of clarity for the market at the moment is that interest rate cuts are now considered unlikely any time soon. Before the war, the Fed funds futures market had been pricing in moderately high odds for a cut in June, but standing pat is now considered likely for the next seven policy meetings through Jan. 2027. Rate hikes aren’t expected, at least not yet, but in a sign of the times the crowd is now pricing in non-zero odds for the months ahead.

The Treasury market is also flirting with the possibility of rate hikes. For the first time in more than a year, the policy-sensitive 2-year Treasury yield (3.76%) is trading above the median effective Fed funds rate (3.64%), based on data through Wed., Mar. 18.

While the bond market is considering the chance that the Fed may have to raise rates at some point to combat a rise in inflation due to the war, the central bank’s collective outlook for the target rate is still expected to remain roughly unchanged or lower through the end of 2026, based on yesterday’s update of economic projections.

Commenting on the latest rate outlook by the Fed, Powell said: “If you notice, the median didn’t change, but there was actually some movement toward — a meaningful amount of movement — toward fewer cuts by people,” he noted in his press conference yesterday. “So, four or five people went from two to one, let’s say, two cuts to one cut.”  

It’s all a guessing game in the extreme at the moment, which Powell effectively acknowledged:

“In the near term, higher energy prices will push up overall inflation, but it is too soon to know the scope and duration of the potential effects on the economy,” Powell said. “The thing I really want to emphasize is that nobody knows: the economic effects could be bigger, they could be smaller; they could be much smaller or much bigger; we just ​don’t know.”

That’s everyone’s mantra for the foreseeable future. No one knows, no one knows.

Sometimes the wisest move for a central bank is to stand still long enough to see whether the economy is actually moving or if inflation is rising. The danger, of course, is that waiting too long risks letting the inflation cat out of the bag. The Fed, presumably, learned that lesson during the inflation spike in 2022-2023.

It’s unclear if a repeat performance is brewing, or whether the central bank will have enough hard data to make an informed decision to minimize the risk. Like everyone else, the monetary gnomes will have to watch and wait, just like the rest of us.

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The pain isn’t equally distributed. It never is, as the fallout from the war in Iran makes clear. Since the attack began on Feb. 28, nearly every major asset class—aside from commodities and cash—has slipped into the red, with losses spreading broadly across global markets through yesterday’s close (Mar. 17).

Let’s start with the upside outlier: commodities. A broad measure of raw materials (GCC) has surged 4.7% since the war began, sparked by soaring energy costs as the conflict restricts oil and natural gas exports from the Persian Gulf region — a supply shock that’s spilled over into other commodities.

In stark relief with the singular rise of commodities since the war’s start, there are many losers. Foreign property shares are posting the deepest decline so far: Vanguard Global ex-US Real Estate (VNQI) has shed 8.5%.

That compares with a 2.4% drop in U.S. stocks (VTI) and a 1.3% slide for U.S. bonds (BND) during the war’s blowback to date. Notably, inflation-indexed Treasuries (TIP) are posting the strongest relative performance (excluding commodities). The near-flat performance for the iShares TIPS Bond ETF is likely a market reaction to concerns that the war could spark higher inflation for some period of time.

A Consensus Economics poll last week reports that analysts have lifted their inflation forecast for this year for most of the G7 and Western European countries compared with estimates in February, the FT reports.

The main question for investors: when will the war end? The optimistic view is that energy costs will fall sharply once the fighting stops and blocked exports of crude oil and natural gas start flowing again. But with no sign of an endgame in sight at the moment, the war’s trajectory remains foggy, which in turn will keep markets guessing about the near-term outlook for risk assets.

Some experts think this could be over soon, perhaps days, if diplomacy kicks in or Iran keeps losing steam. But the US is reportedly planning for the conflict to run through the late summer or even fall, so a longer fight in some form is on the table as a possibility, however remoted. The raw calculus boils down to how much more Iran can take, how long the US and Israel want to keep at it, and whether everyone can agree on a deal before things get too expensive and messy.

The key dynamic is bound up with how the S and Iran view the conflict, and how that will influence decisions on the war’s duration.

“The United States and Israel want a quick and decisive victory,” says Mehran Kamrava, Professor of Government at Georgetown University in Qatar. “For Iran, simply resisting and surviving is victory.”

“What we see are two different logics at work here,” he adds. “The United States and Israel measure success through visible military damage. Iran sees this as a prolonged conflict. It is a war in which, over time, Iran would grind down American and Israeli resolve. The question is who is going to blink first.”

Learn To Use R For Portfolio Analysis
Quantitative Investment Portfolio Analytics In R:
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By James Picerno

Estimating the timeline for the end game for the war in Iran remains a slippery task. Gaming out the costs, by contrast, is relatively straightforward. Each day the war continues, the outlook turns a bit murkier, and the risk ticks higher for economic harm.   

No one doubts that an end to the fighting would immediately relieve stress for the global economy. An end to hostilities would quickly lead to a resumption of energy shipments through the Strait of Hormuz, which represents roughly one-fifth of the world’s crude oil consumption. But as the war drags on, the potential for collateral damage that lingers is mounting.

Some analysts are starting to consider the effects of a prolonged war. “If the conflict is prolonged, financial amplifications could magnify the macroeconomic impacts,” said Hyun Song Shin, head of the economics and monetary department at the Bank for International Settlements. “A spike in interest rates could put pressure on rich asset price valuations. Rising financing costs for governments and the need to issue more debt could undermine fiscal sustainability given already strained public finances in many countries.”

The bond market, however, remains calm, at least for now. The US 10-year Treasury yield, for example, has increased since the war started, but the benchmark rate continues to trade at a middling range relative to its history over the past year.

But an extended war is no longer considered beyond the pale, which is starting to motivate thinking about the implications.

“In my view, markets are underestimating the risk of a prolonged war,” said Frederic Schneider, a senior fellow at the Middle East Council on Global Affairs. Pondering another month of war and ongoing increases in energy prices, he predicts the blowback for the global economy could be harsh. “The worst-case scenario would be an economic slump combined with an interest rate hike to curb inflation.” 

The war’s effects are starting to move central banks to adjust monetary policy. Australia’s central bank today lifted its benchmark policy rate for a second straight time, raising it to their highest level in nearly a year. The Reserve Bank of Australia cited the war as a factor in its decision:

The conflict in the Middle East has resulted in sharply higher fuel prices, which, if sustained, will add to inflation. Short-term measures of inflation expectations have already risen. As a result, the Board judged that there is a material risk that inflation will remain above target for longer than previously anticipated.

The Federal Reserve, by contrast, is expected to keep rates steady for the foreseeable future. Fed funds futures are pricing in no change to the Fed’s target rate for the next four meetings through July, and a slight possibility of a rate cut in September.

But with the war continuing, and the potential for surprises front and center, forecasting interest rates, inflation and economic activity is becoming increasingly challenging these days.

By some accounts, a return to “normal” will take time, which raises the possibility that stagflation risk could persist. Even if the war ended tomorrow, “lingering geopolitical uncertainty and the inevitable delays in getting shut-in oil wells back online could keep oil prices elevated for months,” advise analysts at the Chicago Council on Global Affairs.

Unfortunately, the odds still appear low for an imminent end to the fighting, which is still putting upward pressure on oil prices.

“Mixed messages are coming from the Trump administration on the war’s duration, as the market focuses more on the actions on the ground that remain escalatory,” said Saul Kavonic, head of energy research at MST Marquee.

Economic output for the first quarter is expected to partially recover from the stall‑speed pace of Q4, but the threat of an energy shock is looming as the war in Iran continues.

The blowback from surging energy costs is only just beginning to affect the broader economy, suggesting that the impact on Q1 will be limited. The current nowcast for Q1 points to an annualized 2.3% increase, based on the median estimate from a set of nowcasts compiled by The Capital Spectator. If accurate, growth will regain some of the momentum lost in Q4, when the economy expanded by a sluggish 0.7%.

The Bureau of Economic Analysis is scheduled to release its initial Q1 estimate on April 30. With the war still raging, and no immediate end in sight, that leaves a long stretch for macro surprises between now and then. The basic calculus: the fallout from soaring oil prices is expected to create stronger headwinds for global economic activity the longer the conflict lasts.

The US economy remains exposed to oil shocks, but its role as a major energy producer gives it more resilience today than in previous decades, even though rising prices still strain consumers and raise inflation risk.

Europe and much of Asia, by comparison, are more exposed due to their reliance on imported oil from the Middle East. China, Japan, and South Korea are heavily dependent on imported fuel, for example. The US, by comparison, is the world’s leading energy producer and has become a net oil exporter in recent years.

To counter the macro blowback for the global economy, the International Energy Agency announced Wednesday that its 32 members will release 400 million barrels from emergency reserves—an unprecedented drawdown equal to about one‑third of the agency’s total strategic petroleum reserves. In another effort to ease prices, the US last week issued a temporary waiver allowing the purchase of sanctioned Russian oil and petroleum products.

The damage to US economic activity in Q1 will likely be relatively muted, or so current nowcasts suggest. But as the war enters its third week, the potential for slower growth and higher inflation is mounting for Q2.

“Underlying inflation pressures were already rising ahead of the war in the Middle East and are set to intensify,” said Diane Swonk, chief economist at KPMG.

Whether the expected Q1 recovery holds will depend on how long the world can outrun the energy shock now gathering force.

“Energy prices are back at the wheel,” advises Jeremie Peloso, a strategist at BCA Research. “The disruption level is global.”

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● The Alibi of Capital: How We Broke the Earth to Steal the Future on the Promise of a Better Tomorrow
Timothy Mitchell
Review via Publishers Weekly
Political theorist Mitchell (Carbon Democracy) offers a paradigm-shifting critique of the logic that underlies the modern economy. Today is “an age in which extraordinary wealth seems to arrive from unfathomable sources,” Mitchell writes, noting that even critics of the current system seem unable to reckon with the vast and concentrated wealth “conjured… out of thin air” by speculative financial markets. To fully reckon with this “mode of acquiring unearned wealth” that is “the defining feature of our contemporary form of life,” Mitchell argues that one must understand what capital actually is. Capital, he asserts, is foremost “a practical means of consuming the future.”

● Good Money: Six Steps to Building a Financial Life with Purpose
John Coleman
Essay by author via Harvard Business Review
In my book, Good Money, I argue that the traditional retirement model—40 years of work followed by decades of withdrawal from it—is out of step with modern life and with what we know about human flourishing. Americans now live longer lives than any generation before them, as do others around the world, and many can expect 15-20 years or more of retirement. Yet research repeatedly shows that leaving work entirely can sometimes lead to poorer physical health, cognitive decline, and even increased mortality if handled poorly. This is perhaps not surprising given that full retirement can lead to decreased physical activity, lower community engagement, and loss of a sense of purpose and direction.

Please note that the links to books above are affiliate links with Amazon.com and James Picerno (a.k.a. The Capital Spectator) earns money if you buy one of the titles listed. Also note that you will not pay extra for a book even though it generates revenue for The Capital Spectator. By purchasing books through this site, you provide support for The Capital Spectator’s free content. Thank you!

The 10-year Treasury yield was close to its “fair value” estimate in February, based on the average of three models. Before the start of the war in Iran on Feb. 28, the fading market premium in recent months was expected to continue, and perhaps slide to a discount in the near future. The outlook has been upended due to the ongoing military conflict, which is sending shock waves through the world economy.

The 10-year yield in March has jumped more than 30 basis points since last month’s close, rising to 4.27% on Thursday (Mar. 12). A key driver in the yield’s rebound: increasing concern that the surge in energy costs related to the war will lift inflation for some period of time.

The counterview is that the war’s end will ease inflation risk, but it’s unclear how long lingering effects from the disruption to energy supplies will reverberate. The general consensus: the longer the war lasts, the greater the risk that inflation will rise well into the future.

Using the 10-year yield as a proxy, the market appears to be repricing inflation risk, albeit moderately so far. The 10-year rate’s rise so far this month leaves it at a middling level relative to recent history. A decisive and sustained move above 4.30% (the previous peak), however, would signal increasing concern that energy-related risk for inflation won’t quickly fade when the war ends.

Heading into the war, the market premium for the 10-year yield was roughly 20 basis points in February, according to CapitalSpectator.com’s ensemble model. That’s in line with recent months, which reflects a sharp slide from the high premium that prevailed over the past several years.

It’s unclear if investor sentiment will demand a higher premium – again – in the months ahead. The key variable is how the war in Iran unfolds in the days (weeks?) ahead, and how the conflict influences energy costs.

For now, the bond market is pricing in higher reflation risk, albeit moderately so far. The question is whether energy costs normalize after the war. Some analysts are skeptical of a quick return to pre-war prices.

“Too much geopolitical risk has been exposed,” says Blerina Uruçi, chief U.S. economist at T. Rowe Price. She forecasts that it’s unlikely that oil will soon trade below $80 per barrel, much less return to the pre-war $60 range.

“I don’t think that’s going to normalize anytime soon.”      

The US crude oil benchmark, West Texas Intermediate, has pulled back from its intraday peak of roughly $120, but Thursday’s $96 reminds us that a return to “normal” still doesn’t look imminent.

The war in Iran has roiled the outlook for financial markets and the global economy, but commodities are clearly benefiting from the turmoil as prices rise for energy and other raw materials.

The shift in leadership for the major asset classes has turned sharply in favor of a broad measure of commodities, based on a set of ETFs through yesterday’s close (Mar. 11). The WisdomTree Enhanced Commodity Strategy Fund (GCC) is up 15.3% year to date, far ahead of the rest of the field.

Running at a distant second place this year: foreign stocks in developed countries ex-US (VEA), which is up 5.4% in 2026. VEA had been the year’s top performer, but in line with equities just about everywhere, the war has triggered selling in risk assets. To date the retreat has been moderate, but the extent of the damage to the risk appetite remains unclear as long as the war continues.

Commodities are the exception. Energy is the main beneficiary of the fighting, which has disrupted oil exports from the Gulf region. The interruption of energy flows has spilled over into other areas that are affecting supply chains in some agricultural sectors, for example.

Various metals are also in the crosshairs. “The Gulf is a major supplier of aluminum, and disruptions could tighten supply chains for advanced manufacturing,” said Tony Pelli, practice director of supply chain security and resilience at BSI Consulting, a global risk management firm. “Aluminum prices are already rising, and further disruption could increase input costs for automotive, aerospace, and construction manufacturing in the US and Europe.”

Soaring energy prices will likely fall once the war ends, but as of this writing the odds still appear low that the conflict will cease in the immediate future. Meanwhile, energy markets continue to price in a worst-case scenario. Oil prices rose in early trading on Thursday despite a coordinated announcement the day before from world leaders to release 400 million barrels of oil from their strategic reserves.

Economists are struggling to estimate the breadth and depth of the war’s effects on the global economy, but you don’t need sophisticated models to recognize that the negative consequences will continue until the hostilities end.

“If this disruption goes on longer, we will see faster drawdowns [of existing oil supplies],” said Amin Nasser, head of state-owned oil giant Saudi Aramco. “There would be catastrophic consequences for the world’s oil market, and even more drastic consequences for the global economy.”

There’s never a good time for war, but the current crisis comes at a time of pre-existing macro challenges for the US economy. Economists at Wells Fargo sum up the situation in a research note published on Wednesday:

Independent of the oil price spike, employment growth has effectively stalled over the past year, with payroll levels treading water amid weak hiring outside a handful of industries (Figure 2). At the same time, real personal income excluding transfer payments—a metric closely watched by the National Bureau of Economic Research recession dating committee—has lost momentum as wage growth has slowed and inflation has remained sticky. A renewed rise in energy prices would likely push inflation back above 3% in the near term, mechanically eroding real income and placing additional strain on households, particularly the lower- and middle-income households that tend to allocate a greater share of spending to fuel costs.

The good news is that the repair and recovery will likely start as soon as the conflict winds down. Unfortunately, that point doesn’t appear imminent.  

“If the hostilities wrap up in relatively short order, we see little reason for investors to expect a lasting market impact,” predict strategists at Alliance Bernstein. “That’s largely because the economic impact wouldn’t be lasting either. But geopolitical conflicts are complex and unpredictable. If things drag out, the situation—and our assessment of the impact—could change. Time will tell.”

Before the attack started on Feb. 28, lingering concerns about inflation had kept the Fed wary of extending last year’s interest rate cuts. Although several measures of pricing pressure had stabilized at lower levels relative to recent history, Fed officials expressed caution about declaring victory in fully taming the price spike that peaked at 9.0% year over year for the Consumer Price Index in June 2022.

The inflation trend has since fallen dramatically, and remained relatively stable in the mid-2% range, which is modestly above the Fed’s 2% target. But the cautious optimism that had accompanied the disinflation could be ancient history due to the war.

The concern is that the sharp rise in energy costs will reignite inflation and force the central bank to react by keeping monetary policy tighter for longer. It’s uncertain how long the surge in oil, gasoline and natural gas prices will last, and so it’s debatable how, if or when the Fed should respond. This gray area for policy will take time to clear. The longer the war lasts, the deeper the ambiguity about what comes next for policy decisions.

The critical questions: When will the war end, and what will follow in terms of economic consequences? It’s all speculation at this point, but analysts are considering an array of possibilities. Much of the analysis centers on how soon oil exports will rebound through the Strait of Hormuz, which remains essentially closed due to the war, and accounts for roughly one-fifth of the world’s seaborne exports. The basic calculus: the longer exports are blocked, the bigger the hit on supply, which in turn will bring longer-lasting upside pressure to energy prices, estimates Capital Economics via the FT.

The challenge for the Fed is deciding which scenario is likely, and setting monetary policy appropriately. But with no clear end to war in sight as of this writing, the near-term outlook is as cloudy as ever for energy costs and the implications for inflation and economic growth.

Markets are struggling to price in the possible scenarios and insteada are favoring a wait-and-see approach. Consider the policy-sensitive US 2-year Treasury yield, which is widely followed as a proxy for the Fed’s expected policy stance. Unsurprisingly, sentiment has adjusted in recent days so that the 2-year yield is sticking close to the effective Fed funds rate – an implied forecast that the Fed will keep rates steady for the near term.

Fed funds futures reflect a similar outlook and are pricing in expectations that the central bank will leave rates unchanged for the next three policy meetings. The odds start to favor a rate cut in July or September, but those estimates should be viewed cautiously given the depth and breadth of uncertainty at this point about how the war will impact growth and inflation in the months ahead.

“The Fed always has a problem on how to respond to a supply shock,” said Alan Detmeister, a former Fed economist who’s currently at UBS. “On the one hand, the inflationary aspects suggest you should be raising interest rates. On the other, the reduced output and increased unemployment suggest you should be lowering interest rates. It’s not clear, and it just causes the Fed to wait and see which part of their dual mandate they think needs the biggest help.”

In the end, a ceasefire at some point may calm the region, but the potential for economic aftershocks won’t provide clarity for the Fed’s calculus anytime soon.

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The war in Iran is increasingly weighing on global financial markets and economic activity. Reflecting the rising macro risk, the major U.S. equity benchmarks have slipped into negative territory for the year. But a closer look at stocks shows that most equity risk factors continue to enjoy positive returns in 2026, based on a set of ETFs through Monday’s close (Mar. 9).

Mid-cap growth (IJK) is leading the field, posting a 6.6% year-to-date gain. Although the fund has slipped in recent days, it traded up yesterday and is just 4.4% below the record high it set last week.

Most of the risk factors that make up the stock market are holding on to gains this year. The two exceptions: momentum (MTUM) and large-cap growth (IVW), which are mainly responsible for pulling the broad equity market indexes into the red this year. The SPDR S&P 500 ETF (SPY), for instance, is down 0.5% in 2026 vs. a 2.8% loss for large-cap growth (IVW).

Although the war so far has had varied effects on different segments of the stock market, the threat to equities will likely rise the longer the conflict continues. Until a solution, diplomatic or otherwise, reopens the shuttered Strait of Hormuz — the transit point for roughly 20%-plus of the world’s oil and liquefied natural gas — a global energy crisis looms, which could in turn trigger a worldwide recession.

The divergence in performance this year highlights a market that is repricing broad macro risk while still rewarding more defensive or structurally resilient styles. The key question for the months ahead is whether the economic drag from higher energy prices, weaker confidence, and tighter financial conditions becomes strong enough to drag down all factor returns down as well. If the macro shock deepens, the current resilience in factor strategies may prove temporary.

There are positive signs emerging. Saudi Aramco, based in Saudi Arabia, says it expects to restore roughly 70% of its usual crude exports within days by rerouting up to 5 million barrels a day through its Red Sea port at Yanbu, allowing shipments to bypass the war‑disrupted Strait of Hormuz.

President Trump on Monday offered an optimistic view that the war is nearing an end. In response to a question about a timeline, he said “very soon.”

Perhaps, but an energy shock is already starting to reverberate across the global economy and the clock is ticking. For now, the effects are most acute in countries that are dependent on oil imports, including South Korea, Taiwan, Japan, India and China, along with much of Europe.

The US, by contrast, is the world’s largest oil producer and a net exporter, providing a degree of immunity from the supply shock. But oil is priced globally, and so the surge in energy prices recognizes no national border.

The energy shock also has implications beyond oil and gas. Joseph Glauber of the International Food Policy Research Institute estimates that up to 30% of global fertilizer exports move through the Strait of Hormuz, and the current disruption is already cutting shipments, raising farm costs, and likely pushing food prices higher.

The key macro risks: higher inflation and slower growth – threats that will strengthen the longer the war disrupts energy markets. The IMF’s managing director, Kristalina Georgieva, estimates that a sustained 10% rise in energy prices would add about 40 basis points to global inflation and trim global growth by 0.1–0.2%.

“This is a very concerning shock to consumers, which have been a driving force in the economy,” said Tim Mahedy, chief economist at Access/Macro, a research firm, formerly at the Federal Reserve Bank of San Francisco. “I am very concerned this could tip us into a recession if it persists.”

Traders at the betting site Polymarket are still downplaying the odds of a US economic downturn this year. The current estimate this morning – 28% – reflects a jump since the war started, but optimism is still intact that growth will prevail.

The crucial variable, of course, is the timeline for the war, and the potential for ongoing repercussions after the fighting stops. Estimating the risk outlook, in short, will remain a day-to-day affair for the foreseeable future.

Iran named Mojtaba Khamenei to succeed his slain father Ali Khamenei as the country’s supreme leader. The choice sends a signal that the country’s hardliners are still in control of the country and will remain defiant against President Trump’s demand for “unconditional surrender.” With neither side blinking, a quick end to the war, now in its tenth day, still appears elusive.

The main macro effect: oil prices on Sunday soared to nearly $120 a barrel for the US benchmark (West Texas Intermediate) before pulling back to just above $100 in early trading on Monday (Mar. 9). The spike marks the first return to triple-digit pricing in four years.

Assessing the risk outlook for the global economy boils down to a basic calculus: How long can Iran hold out?

The reasonable view: Not long. The combined military might of the US and Israel is vastly superior to Iran’s. But The Islamic Republic is fighting for its survival and is probably reasoning that it has little to gain from acceding to Washington’s demands. Although Iran will surely be transformed when the fighting stops, getting from here to there looks increasingly risky as the regime lashes out in a strategy to inflict maximum damage on the global economy by widening the conflict throughout the Middle East and thereby raising energy prices.

The US will almost certainly “win” in the end, but debate rages about the cost of victory and how the current conflict will reshape the Middle East and the politics of energy supplies.

Escalating the war won’t improve Iran’s odds of winning per se, but it will increase the pressure for a negotiated settlement in some form if public pressure ramps up in the West to end the fighting as a mechanism to lower energy prices.

Among the latest signs of Tehran’s strategy to widen the war, Saudi Arabia reported that its air defenses intercepted a new wave of airstrikes targeting Aramco’s giant Shaybah field. Expect more of these attacks to come.

The US is less vulnerable to an oil shock these days due to an increase in domestic production in recent years, a shift that’s has transformed America into the world’s largest oil producer and a petroleum exporter. In addition, the US economy, like most countries in the West, has become more energy efficient in recent decades and so the amount of oil needed to generate growth has fallen.

Despite this progress, the key macro challenge at the moment is that oil is still priced globally. Yale University Professor William Nordhaus presented a useful metaphor in a 2009 discussion that still applies today:

We can envision the oil market as a giant bathtub. The bathtub contains the world inventory of oil that has been extracted and is available for purchase. There are spigots from Saudi Arabia, Russia, the United States, and other producers that introduce oil into the inventory; and there are drains from which the United States, Japan, Denmark, and other consumers draw oil from the inventory. Nevertheless, the price and quantity dynamics are determined by the sum of these demands and supplies and the level of total inventory, and are independent of whether the faucets and drains are labeled “U.S.,” “Russia,” or “Denmark.”

The main economic risk from the war is stagflation. The longer the conflict lasts, the greater the threat of higher inflation and slower growth – a mix that is especially difficult to address through monetary policy. Raising interest rates can limit if not reduce inflation, but doing so at a time of rising energy costs will likely slow economic growth at a vulnerable time. The opposite is equally unappealing: cutting interest rates to stimulate growth, which could lift inflation even further for longer.

The solution, of course, is to end the war. The main uncertainty is when the economy crosses the Rubicon and an energy shock becomes unavoidable. The good news is that we’re probably not yet at the point of no return.

Market expectations for inflation have increased in recent days, but the current implied estimates via the Treasury market are still trading in the mid-2% range that’s prevailed over the last several years.

Meanwhile, the Dallas Fed’s Weekly Economic Index continues to reflect an upswing in economic activity through the end of February. The current 2.48% reading is slightly above the year-over-year GDP pace through the fourth quarter.

The threat that’s lurking is that the longer the fighting continues, the greater the possibility that the economic damage will deepen and linger.

The betting site Polymarket this morning is pricing in US recession risk for 2026 at 32%. That’s up about ten percentage points since the war started, but it still reflects optimism that growth will endure. So far, so good, the economic outlook will become increasingly precarious with each new day of war.

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● The Coming Storm: Power, Conflict, and Warnings from History
Odd Arne Westad
Interview with author via Keen on America podcast
“If we let things continue in the direction that they are taking now, I think it is more likely than not that we will end up in some kind of Great Power war within the foreseeable future.” — Arne Westad
This conversation was recorded before the invasion of Iran, which makes what you are about to hear even more chilling. In new book, The Coming Storm: Power, Conflict, and Warnings from History, Yale historian Arne Westad warns that the structural parallels between our multipolar 2020s and the world before the First World War are too striking to ignore—and he names the Middle East as one of the flashpoints that could spark a much broader conflagration.

● Streetwise: Getting to and Through Goldman Sachs
Lloyd Blankfein
Review via Reuters
Unlike many rivals, Goldman decided to hedge its exposure to U.S. subprime housing debt, in part by buying protection from American International Group (AIG.N), opens new tab against defaults in mortgage-backed securities. When the U.S. government – with Paulson as Treasury Secretary – bailed out the insurance giant in September 2008, many on Wall Street suspected the rescue had indirectly saved Goldman. Blankfein insists that the firm, which had also taken the precaution of buying insurance against an AIG default, would have survived its counterparty’s collapse. Still, whether the banks that sold that protection could have honoured their obligations in such a meltdown remains an open question.
Yet if Blankfein nimbly guided Goldman through the storm, he stumbled in the aftermath. Intense public scrutiny and criticism from politicians came ​as a shock for a firm unused to being a household ​name. Blankfein offers a spirited defence against Goldman’s many critics. ⁠Yet he acknowledges that bailouts helped polarise public opinion, clearing the way for Trump.

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The economic fallout from the war in Iran has been limited for the US so far. But as the conflict continues, the effects will become increasingly clear.

The main risks: slower economic growth and higher inflation, driven largely by higher energy prices. It’s too early to confidently estimate how the war will influence those factors, but as the war – one week old tomorrow – persists, the macro price tag will surely rise.

Because economic data is reported with a lag, the blowback will take time to show up in official releases. For next month’s first-quarter GDP release, for instance, even if the war continues through the end of March, the effects may be hard to spot.

The Atlanta Fed’s Mar. 2 nowcast of Q1 GDP: +3.0%, marking a solid rebound from the sluggish 1.4% increase in Q4. Revisions are likely before the official April 30 release, but the war-related impact may be modest, given that the attack began late in the quarter.

February data published earlier in the week underscores ongoing strength in private‑sector hiring and services activity. ADP on Wednesday said that companies added 63,000 jobs last month, the strongest monthly gain since July. Meanwhile, the ISM Services Index rose to its highest growth reading in February in nearly four years.    

The outlook for Q2 is more vulnerable. US and Israeli officials have said the war could continue for several weeks, which would give the inflationary and slower-growth effects more oxygen. The degree and extent of pain these effects could bring is unclear for now, but markets are already reflecting greater caution relative to the pre-war outlook.

One of the clearest signs of shifting sentiment relates to monetary policy. The rate cuts that were priced in via Fed funds futures for June are now seen as unlikely. September is currently the earliest month in which odds favor an initial cut.

Earlier this week, Cleveland Fed President Beth Hammack called for an extended pause on rate cuts. Part of the calculus is that economic activity appears to be firming in Q1. Add in the inflation-related uncertainty from the war and she sees a stronger case for holding rates steady. “I want to see evidence that we are making progress on the inflation side of our mandate to have more confidence in my forecast,” she said.

Treasury yields have remained relatively steady since the war started, trading within the range that’s prevailed in recent months. But the market is starting to pick up on the potential for higher inflation. The policy-sensitive 2-year yield has increased every day this week, rising to 3.59% on Thursday.

Higher yields are likely until there are signs that the war, if not ending, is winding down. For now, the opposite seems to be the likely path ahead for the immediate future.

The FT this morning is reporting: Qatar, the world’s second-largest producer of liquified natural gas, says the war will force Persian Gulf energy exports to end “within days.”

“This will bring down the economies of the world,” predicts Saad al-Kaabi, Qatar’s energy minister. “If this war continues for a few weeks, GDP growth around the world will be impacted. Everybody’s energy price is going to go higher. There will be shortages of some products and there will be a chain reaction of factories that cannot supply.”

Hyperbole? Maybe, but making that case that the fallout will be limited is becoming tougher every day the war continues and energy infrastructure in the Gulf comes under additional strain.

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The war in Iran has upended expectations about winners and losers in the US stock market, redirecting equity investment flows into energy, materials, and industrials. How long this leadership rotation lasts will likely be determined by the course and duration of the war. Meantime, old‑economy stocks are back in vogue.

Driven by rising oil and gas prices, energy shares are the leading sector performer by far, based on a set of ETFs through yesterday’s close (Mar. 4). The State Street Energy Select Sector SPDR ETF (XLE), a Big Oil proxy, has surged more than 25% year to date. That compares with a near‑flat performance for the broad stock market via the SPDR S&P 500 ETF (SPY), which is holding on to a fractional 0.5% gain so far in 2026.

Materials (XLB) and industrials (XLI) are distant second‑ and third‑place sector performers this year, followed by consumer staples (XLP), utilities (XLU), and real estate (XLRE). The remaining sectors are close to flat or underwater. The biggest loser: financials (XLF), down 6.0% year to date.

The attitude shift could be short‑lived, depending on how the war unfolds from here. Many analysts assume the conflict will end soon, in which case the current sector leaders could lose their performance crowns and a return to AI and digital‑economy themes would ensue.

Perhaps—but it’s already clear that the US and Israeli strike on Iran is no quick surgical attack. The conflict is now five days in and the odds appear low for a resolution in the immediate future.

Both the US and Israel have publicly said that a weeks‑long war is possible, perhaps even likely. Top Pentagon officials on Wednesday warned that the war could become a longer conflict and that the fighting is “far from over.” Defense Secretary Pete Hegseth said the conflict could last as long as eight weeks.

“We’re preparing for several long weeks,” acknowledged a senior Israeli military officer.

The duration of the war is the key variable for risk appetite and how markets evolve from here.

“If disruption is relatively short‑lived, history suggests that price spikes driven by geopolitical tension can fade once uncertainty begins to ease,” said Rick de los Reyes, a sector portfolio manager at T. Rowe Price. “But if production or exports face sustained disruption, that would amount to a genuine supply shock, with implications for inflation, interest rate expectations, and global growth.”

Hanging in the balance is the outlook for inflation, economic growth, interest rates, and the near‑term leaders and laggards in the stock market and other asset classes.

The only certainty now is that no one knows where this is going or how it will unfold. Several reasonable scenarios are plausible on paper. but when the fighting ends, the outcomes will almost certainly overturn many of today’s forecasts.

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The Iran war has slowed oil exports through the Strait of Hormuz to a crawl, leading to the expected result: a surge in energy prices. So far, so expected. The bigger, more important question: How long will the spike last? The stakes surrounding the answer are high since the path of energy prices could influence an array of macro factors, including economic activity, interest rates and monetary policy.

The US crude oil benchmark (West Texas Intermediate) has increased sharply in trading so far this week, jumping nearly $75 a barrel by the close of trading yesterday (Mar. 3). Year to date, WTI is up 30%, and spot gasoline in the US is trading 44% above its 2025 close.

Crude Risk

The optimistic spin is that once the war is over, energy prices will quickly return to the subdued levels that prevailed before the Iran war dominated trading.

“The primary near-term driver for oil prices remains the US-Iran conflict,” said OANDA senior market analyst Kelvin Wong. “At this stage, only clear signs of de-escalation could mitigate or reverse the current bullish ‌trend for WTI, and such signals are currently lacking.”

The key choke point is the Strait of Hormuz, which is a crucial trade route for energy. A fifth or more of the seaborne oil exports flow through  this narrow channel, whose shores include Iran and Saudi Arabia.

The war has dramatically reduced shipping through the strait. “It’s a de facto closure,” said Dan Pickering, chief investment officer of Pickering Energy Partners, a Houston financial services firm. “You’ve got a significant number of vessels on either side of the strait, but no one is willing to go through.”

Shipping Flow

Attacks on shipping have become “a huge deterrent for all but a few shipping companies and charterers,” said Martin Kelly, head of advisory at maritime intelligence group EOS Risk.

The White House is trying to counter the risk, announcing on Tuesday that the US will “immediately” offer “political risk insurance and guarantees.” President Trump also wrote on social media that “If necessary, the United States Navy will begin escorting tankers through the Strait of Hormuz, as soon as possible.”

The conflict rages on, with few signs of an end game in the immediate future. When it does end, oil shipments could quickly rebound, acting as a downward force on prices as supply rebounds. But that scenario will be threatened if Iran extends and expands attacks on energy infrastructure in the Gulf region. In that case, the squeeze on exports could linger for months.

A key oil refinery in Saudi Arabia and two facilities in Qatar were attacked earlier in the week.

“Gulf energy infrastructure [is] now squarely in Iran’s sights,” said Torbjorn Soltvedt, an analyst at the risk intelligence company Verisk Maplecroft. “An extended period of uncertainty lies ahead as Iran seeks to impose a heavy economic cost by putting tankers, regional energy infrastructure, trade routes and US security partners in the crosshairs.”

Repairing damaged pipelines and refining operations won’t happen overnight. An additional risk: attacks on Saudi Arabia oil infrastructure could trigger retaliatory attacks, which would threaten an escalation in the war.

Asia is especially vulnerable to reduced exports, advises S&P Global: “This is because the majority of exports from the region through the strait are to Asia, namely China and India.”

US Production Will Help Soften The Blow

The US, by comparison, is less vulnerable, thanks to a dramatic increase in domestic oil production in recent years, driven development of shale sources. America energy output has soared, according to US government data. But the odds are reportedly low that American producers will quickly act to increase supply to offset effects of the war in an effort to keep energy prices low.      

The path ahead is as uncertain as it is risky for the global economy. The potential for higher inflation, slower growth, and higher energy prices for an extended period will complicate decisions about monetary policy for central banks and increase the possibility of policy errors.

The path to greater pain, however, is clear. “If this war does continue as long as US President Donald Trump suggests – three or four weeks – there will definitely be a situation where the price of oil will skyrocket which will have adverse impacts on the global economy and more locally for the US,” predicts Arang Keshavarzian, professor of Middle Eastern and Islamic Studies at New York University.