Discipline matters when markets are uncertain

That challenge has been front and center since the escalation of the conflict with Iran. The economic consequences of a prolonged disruption in the Strait of Hormuz and sustained higher energy prices are easy to understand. Inflation pressures rise, growth slows, and margins are squeezed. At the same time, the possibility of a sudden pause in hostilities or productive negotiations has the potential to lead to a sharp one-day rally in stocks. We saw this clearly last week:

• Stock futures were higher the night of March 22 into March 23 following signals from President Trump that the US and Iran were working toward an agreement.²
• By the end of the week, that optimism faded, and concerns about a widening conflict resurfaced. Markets responded as quickly as sentiment changed.³
• By March 27, the Dow Jones Industrial Average had officially entered a correction, defined as a decline of 10% to 20% from the recent peak.⁴
• The technicals have weakened, including the S&P 500 Index, which fell below its 200-day moving average,⁵may be a harbinger of further near-term weakness.

What are markets telling us?

Since the beginning of the conflict, I’ve been consistently asked how long it would have to last before fearing an economic recession. I’d prefer the market to provide that answer. For example, the oil market has also been telling an important story. Prices have been in backwardation, suggesting that investors expect energy prices to be meaningfully lower in the months ahead.⁶ In other words, the market doesn’t seem to believe today’s pressure will last indefinitely.

Also, credit spreads have widened, although only moderately.⁷ Inflation expectations have moved higher but remain within a range that would still qualify as price stability.⁸ Markets have begun to assign a small probability to a Federal Reserve rate hikelater this year, which is an unsettling thought but one that’s unlikely to materialize.⁹ Inflation driven by geopolitical conflict may be more likely to be viewed as a temporary shock than a persistent structural problem.

That said, expectations for a synchronized global expansion in 2026 have faded. At the start of the year, markets were pricing in a broad improvement in growth across regions. That outlook has become less likely. A slowdown now seems more probable. Asia faces headwinds from higher energy costs combined with weaker currencies. Europe is similarly constrained by rising energy prices. As markets reprice for slower growth, we’ve moved back to an emphasis on higher-quality, larger-cap stocks and US dollar exposure for the time being.

The longer geopolitical stress persists, the greater the drag on global growth. This doesn’t require advanced economic theory to understand. Yet it’s worth noting that market behavior has been more orderly than many might have expected. The takeaway remains clear:

• We favor staying invested but prioritizing quality, including US assets for now.
• Abrupt exits from stocks may be poor timing precisely when markets may be most prone to sharp recoveries.
• In uncertain environments, we believe discipline matters more than conviction in any single outcome.