Increasing Geo-Political Tensions
By Brian Andrew, CFA®, Chief Investment Officer
Market Update: Geopolitical Risk and Asset‑Class Reactions
The recent military escalation involving Iran has understandably raised concerns among investors. While the human consequences of conflict are always paramount, markets tend to respond quickly by repricing risk, particularly where energy supply and inflation are involved. Below is a snapshot of how markets have reacted so far and what we are watching.
Equity Markets: Volatility, Not Panic
Global equity markets have sold off modestly since the conflict intensified, with U.S. stocks down roughly several percentage points in recent sessions. The declines have been broad‑based but measured, reflecting higher uncertainty rather than a disorderly exit from risk assets. This likely reflects the uncertainty surrounding the war in Iran and when hostilities might stop.
Historically, geopolitical shocks tend to create short‑term volatility, with longer‑term market direction driven more by economic fundamentals and earnings than by the events themselves.
Sector performance has diverged:
- Energy and defense stocks have generally benefited from higher oil prices and increased geopolitical risk. Oil has risen over $30 per barrel since the war started giving investors comfort that energy companies will benefit from higher prices
- Transportation, airlines, and consumer discretionary sectors have lagged due to rising fuel costs and inflation concerns. These companies could bounce back quickly depending upon when the war comes to an end.
Importantly, equity markets remain relatively close to recent highs, suggesting investors are reassessing probabilities rather than pricing in a severe global recession.
Bond Markets: Inflation Fears Over Safe Havens
In contrast to the traditional “flight to safety,” government bond yields have moved higher, not lower (remember prices move in the opposite direction). This reflects concern that elevated energy prices could reignite inflation and complicate the Federal Reserve’s policy. In fact, the probability of an interest rate cut by June has dropped dramatically since the war began.
- U.S. Treasury yields have risen as investors reassess the likelihood of rate cuts later this year.
- Globally, sovereign bonds have sold off as markets price in the risk that higher oil prices could slow growth while keeping inflation elevated—a classic stagflation concern.
This dynamic is important: geopolitical risk is acting more like an inflation shock than a deflationary one, which reduces the defensive benefit typically associated with bonds.
Keep in mind though that the shift higher in yields has been muted, less than .2% so the price impact has been small.
Commodities: Oil at the Center of the Story
Oil markets have been the most sensitive to developments in Iran. Crude prices have surged sharply, briefly moving above $100 per barrel, driven by fears of disruption to shipping through the Strait of Hormuz, which handles roughly 20% of global oil flows. Iran has declared the Strait closed and shipping in both directions has dropped to 0.”
As we learn more about the damage to energy infrastructure in the Middle East, we’ll get a picture of just how long these higher oil and natural gas prices can last.
Key points on commodities:
- Oil prices are reflecting risk premiums, not confirmed supply losses.
- Natural gas and shipping costs have also increased due to higher insurance and rerouting expenses.
History suggests that the duration of elevated energy prices matters more than the initial spike. Short disruptions tend to fade, while prolonged constraints can meaningfully affect inflation and economic growth.
What We’re Watching Going Forward
Markets are likely to remain headline‑driven in the near term. The most important variables to monitor include:
- Duration of the conflict – Short, contained episodes tend to have limited lasting market impact.
- Oil price persistence – Sustained prices above current levels would increase inflation risks.
- Policy response – Central banks may need to balance growth concerns with renewed inflation pressure.
- Corporate fundamentals – Earnings and cash flows remain the primary drivers of long‑term returns.
As several strategists have noted, markets often recover from geopolitical shocks once uncertainty stabilizes, even if the news flow remains unsettling.
Bottom Line
While the situation is serious and fluid, market behavior so far reflects repricing, not panic. Diversification across asset classes, regions, and risk factors remains the most effective way to navigate periods like this. We continue to focus on long‑term fundamentals while actively monitoring near‑term risks.
Please reach out to your Merit Financial Advisor if you would like to discuss specific portfolio implications or your positioning in more detail.