Iran War and Recent Stock Market Volatility

No one knows what’s going to happen in the Middle East on a day-to-day basis; it makes sense from investment point of view to look ahead a bit.  When this conflict calms down, what do we think the markets will do? 

Eventually the hostilities will dimmish and traffic through the strait to Hormuz will start to normalize.  We expect interest rates to fall.  The 10-year Treasury note, which effects borrowing costs across the economy has jumped on concerns of inflation risk from higher energy costs and lower odds of the Federal Reserve cutting rates in 2026.   

We’d also expect Growth stocks to rebound.  This makes sense because as rates go down, investors can focus on the value that high-growth companies like these are actually producing, without getting distracted by conflict in the Middle East. 

The US economic reports have been mixed but generally show a steady picture.  Continued job growth suggests that many businesses continue to need workers, especially in areas like health care, construction and transportation.  Also, consumer confidence edged up to 91.8 in March.  This number is not really high by historical standards; however, it shows that consumers feel slightly better about current economic conditions, even if they remain cautious about the future. 

The Fed has been cutting rates since the fall of 2024.  The goal of these cuts was to support a slowing economy and prevent job losses once inflation showed signs of cooling.  However, recent economic data suggests that price pressures continue to be stubborn and may not be as well off as previously hoped.  In addition, inflation expectations have shifted higher due to oil supply disruptions related to the US-Iran war.  Lower interest rates normally would exacerbate inflationary pressures. 

Fed Chairmen Jerome Powell recently suggested that raising rates now could hurt an economy that is already showing signs of weaker job growth and rising recession fears.  Because of this, the Fed tends to look past short term supply shocks like sudden increases in energy prices. 

Increasing uncertainty, Fed leadership is transitioning from Jerome Powell to Keven Warsh, who is expected to take over as Fed chairmen amid a highly charged political environment.  Kevin will face strong pressure from elected officials and financial markets to cut interest rates to support growth and lower borrowing costs.  Quite a dilemma. 

In this environment, we suggest investors remain patient and focus on the long-term.  Rather than trying to guess day-to-day headlines, we should stick to our plans, make sure our portfolios are well diversified and avoid rash decisions.