Economic and market signals stay steady despite oil shocks

John Maynard Keynes has been credited with saying, “When the facts change, I change my mind. What do you do sir?” There’s no actual proof that he said it, but Keynes was never afraid to change his mind. In fact, there was a longstanding joke that if the British Parliament asked six economists for an opinion on any subject, they always got seven answers, two from John Maynard Keynes.

The facts for the global economy are changing. At the same time, I don’t want to give you two answers to the issues plaguing investors. The problem is that the answer to whether the conflict with Iran has me changing my optimistic view of the global economy and cyclical assets is more dependent on the thinking of the Trump administration, the Israelis, and the Iranians than I would prefer.

So, what facts have changed?

The Strait of Hormuz is effectively closed.¹ Roughly 20% of the world’s oil flows through that passage.² Production in the Gulf states has been reduced significantly,³ both due to direct attacks and because remaining oil storage is limited when barrels can no longer be shipped immediately. The availability of strategic petroleum reserves helps, but only for a limited time. That math is straightforward.

• The world consumes roughly 100 million barrels of oil per day.⁴
• About 20 million barrels per day are now unavailable, the result of the closing of the Straight of Hormuz.⁵
• Strategic petroleum reserves controlled by governments amount to roughly 1.2 billion barrels.⁶
• 1.2 billion divided by 20 million equals 60.

The total strategic reserve covers about 60 days of the missing supply. Compounding the challenge is that the International Energy Agency recently announced the release of 400 million barrels,⁷ so the more appropriate number may be 20 days. The Trump administration is also planning to issue temporary waivers of the Jones Act, requiring American-built ships to be used to transport goods between US ports as part of its effort to stop surging oil prices.⁸ That could potentially help on the margin, but it’s not a fix to the current issues. Whether the conflict lasts longer than 20 to 60 days is anyone’s guess. If it does, then the facts truly change. In that scenario, our core views for 2026 that cyclical assets would outperform the broad market and that the US dollar would weaken — which had been working well until the conflict began⁹ — would be severely challenged.

No clear warning signs yet

That brings me to my second answer.

It starts with the likelihood that most investors have a significantly longer-term time horizon than the probable duration of this conflict. It also acknowledges that markets have historically performed reasonably well in the year following peak geopolitical stress around conflicts, provided the economic backdrop heading into them was largely sound.¹⁰ It also requires an honest look at our preferred indicators. They’re becoming more challenged, but they aren’t flashing clear warning signs yet.

• Credit spreads have drifted modestly wider but remain historically tight.¹¹
• Inflation expectations have risen, with the five-year breakeven now above 2.65%, which still falls within a range that can be described as relative price stability.¹²
• The market continues to expect two to three rate cuts from the Federal Reserve this year.¹³
• The oil forward curve adjusted, and prices six months and 12 months out have moved higher, but they remain below spot prices today.¹⁴
• The US dollar has rallied, but it’s still well below its level at the start of 2025.¹⁵

None of this is meant to sugarcoat the current situation, but to acknowledge that the market recognizes that the conflict could end on a moment’s notice. I’m inclined to manage my action bias and not do anything drastic. We’re sticking with our optimistic views, while recognizing that risks to cyclical assets have risen. Consider hedging where appropriate.