It felt like plain sailing for investors through January and February: resilient economic growth, moderating inflation, and falling interest rates had given markets a powerful tailwind, sending global indices to new all-time highs in February, and key bond markets to their lowest yields in over a year. There were a few choppy currents but compared to the storm that had struck a year earlier with the White House’s “Independence Day” tariffs, markets were set fair.
We had highlighted at the start of the year the “demonstration of US military force and willingness to intervene in Nigeria, Venezuela and, one must fear, beyond”. When the US (and Israel) launched strikes on Iran at the end of February, the shock was perhaps not in President Trump choosing a military confrontation - the shock came in the lack of preparedness for retaliation: a seeming lack of forethought that turned a confrontation into a crisis. As the Iranian regime struck back not only at military assets, but also at energy infrastructure across the region, and blocked the flow of oil and liquefied natural gas (LNG) through the Strait of Hormuz, the US-Israel strikes on Iran quickly developed from a geopolitical storm to a whirling vortex: a supply shock that pulled in every asset class - and indeed the global economy. As we write, tensions appear to be easing, with the White House moving from threats of destruction towards apparent acceptance of a ceasefire; we hope that course is held.
It’s still worth highlighting the risks, in case another policy swing lurks around the corner. The world consumes just over 100 million barrels of oil per day. In normal times, around 20 million pass through the Strait of Hormuz, along with significant LNG flows. Much of this is destined for Asia, with China, India and South Korea the dominant buyers. This is not all “lost” supply: Saudi Arabia and the UAE have rerouted some exports via pipelines to Red Sea ports, while strategic reserve releases have offset part of the disruption. The net impact is still around 10 million barrels per day not reaching the global market, the biggest oil supply shock in decades. This may not remove the risk so much as relocate it: one chokepoint problem could migrate into another.
Today’s global economy is not the 1970s and fearful comparisons to the 1973-74 oil crisis are not helpful. Developed economies are much less energy-intensive: reflecting the bigger role of services and the digital economy, improved fuel efficiency and the growth of renewables, modern economies use far less oil to produce every unit of GDP. This provides some resilience to a supply shock, but oil remains a vital input that keeps the wheels of the global economy turning: a sustained disruption to supply and a persistent increase in oil prices could still have very significant consequences.
As Iran retaliated, and the disruption to global supply became clear, oil prices spiked from around $70/barrel to over $110, driving expectations of shortages and higher prices across the economy, from transportation to plastics and fertiliser.
While oil price rises are often viewed as inflationary, that is only a first-order (and likely temporary) effect. The more important second-round impact is weaker growth, as input costs rise, supply chains are disrupted, profit margins are pressured and consumers’ real incomes are squeezed. These signs are already becoming visible: consumer confidence is weakening, even in the US, where diesel has topped $5 a gallon for only the second time in history, and companies are reporting rising costs and increasing concern over demand. Disruption to fertiliser supply from the Gulf States could yet add a further leg of food price inflation.
With the rise in uncertainty, the strong momentum of corporate earnings, dividends and the global economy in the rear-view mirror becomes irrelevant: all that matters to investors is the prospect of crashing into rocks in the immediate future.
A supply shock like this presents a challenge for central banks: tighten interest rate policy to combat inflation? Or look through what might be only a short-term inflation shock, to focus on the risks to growth - at the risk of losing their hard-won credibility on inflation? Before the Iran crisis, investors expected modest rate cuts this year. By the end of March, those cuts had been priced out, and markets started pricing possible rate hikes.
Sharp energy price rises caused some tempestuous swings in markets: but if the crisis rekindles and inflation keeps rising, growth falls, and interest rate policy swings direction to become a strong headwind, that storm could become something worse.
Investors, central banks, companies and households face a simple scenario: if the Iran crisis is indeed abating, supplies of oil, gas, fertiliser and other products can start to flow freely again. Oil prices would fall, growth momentum should be broadly intact, with inflation just a short-lived bump in the road, leaving it easier for central banks to look beyond and steer markets back towards rate cuts.
But if the conflict flares again, and persists or broadens, that supply shock could be much more damaging: inflation would become more entrenched, eroding real incomes and dampening growth. If central banks responded with higher interest rates, that could risk a more severe market dislocation. The scenarios seem quite clear: policy in Washington perhaps less so.
As the March quarter ended, markets were rallying on indications that the conflict may be at its conclusion. The relief was palpable, with oil prices falling, stocks rallying and bond yields easing. But messaging from the White House has been inconsistent, with markets swinging between volatility and relief, as Presidential tweets alternate between belligerence and ceasefire. For investors, the message is uncomfortable but clear: when the outlook is shifting so rapidly, any attempt to change course risks being mistimed - sometimes you have to hold on and wait for the storm to pass.
Given the scale of the disruption to global energy supply, market reaction has been relatively contained, suggesting investors expected a fairly rapid resolution of the Iran crisis. Global stocks rose around 3% into late February, before the US strikes on Iran pushed global equities around 9% lower, before a late rally on hopes of de-escalation, leaving total returns around -3.5% at the quarter’s end.
There were strong cross-currents beneath the surface: with oil prices up over 60%, energy companies performed extremely strongly. Tech stocks led markets lower, with investor concerns over the profitability of their spending on AI emerging even before the strikes on Iran. Software came under particular pressure, with investors worried that AI could undermine profitable services. This helps explain a sharp style divergence, with Growth stocks losing 8% by the end of March, while Value stocks made marginal gains.
Regional equity performance reflected the same cross currents, with energy importing economies under pressure and markets with more exposure to oil producers riding out the storm. European and Asian stocks sold off sharply in March, with energy costs driving concerns on inflation and growth. Some Asian markets had performed extremely strongly at the start of the year and still show healthy year-to-date gains, but China (the world’s largest oil importer) fell notably. UK and Brazilian equities held up better, supported by their large energy sectors. The cross currents of oil producers and consumers produced turbulence but largely cancelled out for global emerging markets equities: year-to-date returns were flat. Which leaves the United States: more resilient during March’s oil storms, but with a fall of over 4% by the end of March, the weakest of the major markets, after tech stocks’ weak start to 2026.
Other than oil and oil companies, there were few safe havens from this market storm. After surging to record highs above $5400/oz in late January, investors might have hoped that an inflation scare could put more wind in the sails for gold: on the contrary, gold weighed down portfolios, retreating around 20% from its January peak by late March, with a fall of over 10% in just a week from 17th March, its worst performance in decades. Sometimes, in stressed markets, investors rush to sell what they can and take profits where they have them: and the price of gold still stands 50% above its level of a year ago. The US Dollar strengthened a little, but overall currency markets were surprisingly calm.
Bonds can diversify equity risk, but offered little protection in this episode. That’s not surprising in a market reacting to an inflation shock: bonds can rally if equities fall on growth fears, but where inflation fears mean that higher interest rates are expected, bond yields usually rise. We saw exactly that, with growth fears swamped by an inflation scare, and markets swung from expecting interest rate cuts to pricing in possible rate hikes.
Government bond yields rose sharply, especially Gilts, leading to modestly negative returns. Inflation-linked bonds gave some protection, delivering marginal gains. Riskier bonds (e.g. emerging market debt and high yield corporate bonds) were undermined by growth fears and rising credit spreads.
High yields on bonds do offer some reassurance, with income making a healthy contribution to total return, and cushioning capital losses. If the inflation scare passes and markets return to expecting central bank rate cuts, bonds are able to deliver upside from both capital gains and steady income.
Market corrections are nothing unusual and this correction remains modest by any measure: equity volatility is the price investors pay for longer-term outperformance, and does not mean permanent losses unless fear leads them to sell at the wrong moment. The average intra-year correction in US stockmarkets over the last few decades stands at around 14%. That means many periods of unease, where choppy waters, squalls and storms threaten our smooth sailing, on the journey to strong long-term returns. In episodes like this, investors and managers can feel caught in a dilemma: sell, or de-risk and find a safe haven - but potentially miss a rapid market rebound if peace breaks out? Or stay invested, hold a course for the long-term and have to endure volatility and potentially more losses before the storm passes and calm returns? In reality, this should not be a dilemma at all: least of all in today’s circumstances, where the unpredictability of short-term US policy makes short-term navigation all but impossible.
This storm may be passing, if recent signs of de-escalation prove correct; it may blow on longer, if Washington or Tehran decides that it should. For now, visibility remains cloudy and there’s an unpredictable navigator at the policy wheel. In the longer-term, the climate pattern is clearer: markets have repeatedly weathered storms that felt overwhelming at the time.
So, what should investors do? When the winds are shifting so unpredictably, attempts to steer a new route can do more harm than good. The strategy in such times is to stick to one’s course with a robust and well-diversified portfolio, ride out the choppier waves and wait for calmer waters to return, as they always do.
N.b. All content is based on data at the time of writing on 07/04/26.