The Middle East Conflict and Oil Prices: Navigating the Uncertainty in Markets
Violence between the United States and Iran commenced on February 28, 2026, and for those of us who follow the news and the markets, it has been a veritable roller-coast ride the last six plus weeks. On March 26 the equity markets had their second worst day of the year to date, with the S&P 500 down 1.7% (representing a loss of approximately $1 trillion dollars in market capitalization) and the Nasdaq down 2.4%, falling more than 10% for the year. But during the week of March 30 the markets rallied, meaning that as of the date of this writing, April 7, the S&P 500 is down for the year by about 3% and the Nasdaq down about 5%.
Again, however, as we write on the night of April 7, futures markets are expecting a large increase in the equity markets on April 8, given the reprieve that was announced between the two warring countries as each engaged in a high-stakes game of “chicken.” Under this “game” the United States threatened to destroy Iranian bridges and energy infrastructure, while Iran threatened to keep trapped in the Strait of Hormuz the huge backlog of commercial ships currently unable to leave due to fear of being attacked. At least as of this writing there is a temporary two-week agreement: the USA and Israel will stop bombing Iran and Iran will let ships pass.
Even though the US equity market declines that we have recently experienced are not large relative to other historical drawdowns, they are unsettling given that they are the result of this war. Notwithstanding this two-week truce, there is considerable uncertainty about how this conflict will unfold and what the ultimate impact may be. As PMA clients know, our approach is rooted in avoiding market timing: monitoring key macroeconomic risks while focusing on portfolio diversification and risk control.
With that in mind, this letter examines the current situation, implications of higher oil prices for the broader economy, historical parallels with other oil-driven economic shocks, and provides thoughts on what may lie ahead.
What has happened thus far
As of late March, the Middle East hostilities that began with coordinated military strikes between the US and Israel on Iran have escalated into a broader regional conflict. The primary economic impact stems from disruptions in the Strait of Hormuz, the critical international waterway through which approximately 20% of the global oil supply passes on a daily basis. Iran has effectively closed the Strait, which it can easily threaten given its close proximity to Iran’s border.
In addition to closing the Strait, Iranian attacks on energy infrastructure in Saudi Arabia and other Gulf countries have restricted oil output. As a result, Brent crude oil prices, which were trading at approximately $70 per barrel before the conflict, surged quickly. They peaked at roughly $120 per barrel in early March and recently have swung sharply based on the news cycle.
Economic implications of higher oil prices
Oil prices are of critical importance to the global economy, and higher prices have a few direct implications. For businesses, higher energy costs boost expenses across supply chains from material inputs to logistics and transportation. These costs are often passed on to consumers in some form and can contribute to higher inflation. From a consumer perspective, most importantly, higher oil prices result in a higher cost of gasoline, which can reduce discretionary spending on various goods and services and weigh significantly on economic activity, i.e., more spent at the pump means less spent almost everywhere else.
To quantify the impact more specifically, the International Monetary Fund has a useful heuristic that suggests that for every 10% rise in oil prices sustained for approximately one-year, global inflation would rise by approximately 0.4% and GDP would decline by about 0.1-0.2%.1https://www.reuters.com/world/imf-says-prolonged-increase-energy-prices-could-boost-inflation-lower-growth-2026-03-19/ In other words, if oil prices remain near or over $100 for an extended period of time, we will likely see a major drag on global GDP coupled with higher inflation.
What does history suggest about the current conflict
Oil price shocks have either frequently preceded or generally exacerbated major economic downturns for the reasons discussed above—they generally contribute to higher inflation and slower growth.
Not surprisingly, many of these shocks are connected to the Middle East given its volatile geopolitical climate and oil-rich exports. For example, the 1973 Yom Kippur War and subsequent OPEC embargo caused oil prices to surge, contributing to stagflation and the painful 1973-1975 US recession during which the US stock market fell by over 40%.
The Iranian Revolution in 1979 and later the start of the Iran-Iraq War caused another oil price spike, which contributed to the 1980 recession with inflation topping 14%. The 1990 Gulf War saw another major oil price jump following Iraq’s invasion of Kuwait, intensifying the 1990-1991 downturn. More recently, the surge in prices in 2008 exacerbated the Global Financial Crisis by eroding consumer purchasing power at a particularly susceptible time.
Does that mean we are due for another recession in 2026 given this year’s events? Not necessarily. Much economic analysis emphasizes that the duration of these oil price shocks matters more than how high or rapidly prices spike. At present, economic forecasts that call for a US recession also include a state of affairs that is markedly worse than where we are today. For example, Vanguard notes that “to induce a U.S. recession, oil prices would need to remain at $150 per barrel the rest of the year, and there would need to be a significant tightening of financial conditions, such as weaker asset prices and higher interest rates.”2https://corporate.vanguard.com/content/corporatesite/us/en/corp/articles/potential-impact-high-oil-prices-economies.html Ultimately, while energy shocks have played a role in a significant number of US recessions over the last hundred years, each time period is unique and needs to be analyzed as such.
Thoughts on the future
Despite elevated stock market valuations, the US entered this particular period from a position of relative macroeconomic strength: US GDP growth has been healthy; inflation is markedly down from 2022 levels; and most importantly, earnings forecasts for the S&P 500’s constituents are still currently strong. Additionally, the US is now a net exporter of oil, and the energy efficiency embedded throughout our economy (and the world) has improved significantly through time. All of the above should certainly provide a buffer, though not indefinitely, to any economic slowdown if the conflict becomes more protracted and oil prices remain elevated.
While PMA has not taken any direct action in portfolios as a result of these events thus far, we are carefully monitoring the markets and may evaluate adding more defensive positioning as the situation evolves. If you would like to discuss the state of the markets or your account in greater detail, as always, please do not hesitate to reach out to your advisor.
