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.

 

Iran is on everyone's radar screen. Markets are tumbling. Oil is skyrocketing, and explosions echo throughout our evening news shows. You may be nervous but remember that we have been here before.

 

And while war is a monstrous thing, its impact on your stock market investments is negligible. Last summer, I remember reading a J.P. Morgan research report that listed 36 geopolitical events between 1940 and 2022 that we could call crises. What they found was that in the first three months after an event, markets do underperform.

 

However, if you look at returns six and 12 months later, it was as if the risk event had never happened. You might know this, but in the heat of battle, many investors let emotions override their objectivity. Don't do it.

 

This conflict, although less than a week old, is playing out just like so many others. There has been a sharp sell-off in stocks and a flight to quality into the U.S. dollar. Energy prices, both for oil and gas, have also spiked, as they did on several prior occasions, most notably in 1973 and at the onset of Russia's invasion of Ukraine in 2022.

 

This time around, however, gold and even U.S. Treasury bonds, which are usually a "go-to" in times of geopolitical strife, have not responded as expected. It is unusual since gold has historically been one of the best-performing hedges against war risk. It may be that gold has already had a spectacular run both in 2025 and thus far in 2026. That may mean traders are hesitant to chase the price higher.

 

This war could curtail both energy shipments and production. Investors fear that rising energy prices may spark a resurgence in inflation. This is one reason the yield on longer-dated U.S. Treasury bonds spiked rather than fell. Higher yields and a stronger dollar — both antithetical to gold and other commodities — could also explain gold's poor performance.

 

Higher energy prices are among the main determinants of inflation, as energy permeates almost every aspect of the economy. The longer and steeper the price of oil and gas climbs, the higher the inflation rate. Herein lies the risk of the present conflict between Iran and the U.S.

 

Normally, as I said, wars in the past have had little to no impact on equity market returns on a one-year horizon; there have been exceptions. The 1973 oil crisis did have a lasting impact on returns. The reason had everything to do with a prolonged oil supply shortfall. That resulted in a two-fold hit to the U.S. economy as growth slowed and inflation rose, producing a period of stagflation.

 

This time around, we have a completely different scenario when discussing the energy markets. Back in 1973, America relied heavily on Middle Eastern oil, while U.S. production was already as high as it could be given the technology available at the time.

 

Today, the U.S. is among the world's leading energy producers, and the worldwide supply of oil and gas is plentiful. Bringing more of these resources online while the conflict continues may temporarily disrupt global markets, but few expect the energy shortfall to linger for many years. Remember 2022, the Russia/Ukraine war also spiked oil prices, but they quickly fell as additional oil supply came online.

 

We are in an era where trade wars, real wars, and repeated supply shocks challenge the world's economies and will continue for at least the next decade. Older generations must relinquish control so new leaders can guide us.

 

Unlike in prior decades, these new threats cannot be managed by an interest rate cut, a little more fiscal spending, or a protest march. Shocks to the system, whether through conflict, political and/or climate change, artificial intelligence, or pandemics, will require new leadership and policies. It is an age where economic and political relationships have been upended, and that, my dear reader, will continue.