@theMarket: Wartime Energy Prices Sink Markets

As we close out the first week of Donald Trump's attack on Iran, markets have succumbed to the relentless rise in oil prices. The higher the energy prices rise, the lower global stock markets will fall.

 

West Texas oil is up more than 25 percent this week compared to last week, not counting Friday morning's move. As I write this, crude is up another 10 percent today to $89.18/bbl. Stocks fell, and gas prices are already rising at the pump. The missiles are still flying, and neither side appears to be backing down.

 

"There will be no deal with Iran except UNCONDITIONAL SURRENDER!" said the president on Friday on Truth Social. Traders initially expected this attack to mirror the first in June 2025: a few days of bombing strategic targets followed by a presidential victory lap. It seemed an ideal buy-the-dip opportunity, but by week's end, profits were scarce.

 

Granted, the administration had warned Americans that this encounter would require "several weeks" to achieve their objectives. The first goal is the strategic destruction of Iran's war-faring and nuclear capabilities. The second objective is to institute a regime change in a country ruled by religious clerics. Critics argue that it is easier said than done.

 

Since the war department refuses to rule out "boots on the ground," the media assumes the worst. Meanwhile, over a dozen nations are caught in the crossfire, leaving images of burning refineries, shattered high-rises, and bodies on the nightly news.

 

Market participants are selling first and worrying about details later. Unexpectedly, traders have sold the year's top performers over laggards. This left many seasoned traders scratching their heads, since the normal playbook for what to buy and sell during geopolitical strife is not working this time around. Usually, market participants pile into U.S. Treasury bonds, precious metals, and other areas that provide some defense during market declines, not this time.

 

Precious metals, typically a haven, have dropped, as have utilities, treasury bonds, consumer durables, and industrials. Technology has fared better. Energy stocks are up, surging with oil prices.

 

Iran has declared a "holy war." If the Strait of Hormuz stays closed, considerable risk looms for global oil shipping (20 percent), fertilizer (30 percent), and LNG flows. Beyond defense stocks, likely sector winners are U.S. refiners and petrochemical firms, while airlines will be hardest hit.

 

Investors fear this conflict could last longer than most expect. The prediction markets do not believe Trump's assurances that it will be a four-week event. The betting leans heavily toward a ceasefire by the end of May (67 percent chance) and toward the conflict ending by June 30 (70 percent chance). If those odds are even close to coming true, then one can assume that oil prices would remain elevated or even rise further. Some are predicting a worst-case price of $120/bbl.

 

The inflation impact under those circumstances would be considerable. In which case, it would be doubtful the Fed would be willing to loosen monetary policy anytime soon. As a result, bond vigilantes are dumping bonds. Yields on Treasury bonds are rising, not falling (the 10-year Treasury at 4.12 percent), and the only real safe place to hide appears to be the U.S. dollar.

 

Regionally, Southeast Asia, a winner along with emerging markets in 2026, will be severely hurt by this war. Japan and South Korea rely most on Middle Eastern oil, while China purchases nearly all of Iran's. Europe is also battered by soaring natural gas prices due to a lack of LNG from the Gulf.

 

Although most investors are focused on the war, the U.S. non-farm payrolls report for February was a shocker as well. The economy shed 92,000 jobs in February, and the unemployment rate rose to 4.4 percent. On-going revisions of the data was disappointing as well. The Bureau of Labor Statistics revised downward December job gains from plus-48,000 to minus-17,000, while January was reduced by 4,000, from plus-130,000 to plus-126,000.

 

As for the markets, my warning of more volatility has proven conservative. If you give me an end date for the cessation of hostilities, I can give you a reasonable idea of where markets can go. In the meantime, there is a real possibility that the S&P 500 Index could  fall to the 200-Day Moving Average which is currently at 6,580. That would represent a 6.5 percent pullback, so we are already halfway there.