Starting Finance Club Cassino
Università degli Studi di Cassino e del Lazio Meridionale
This report is prepared for educational purposes and does not constitute investment advice.
How the Iran conflict is threatening the global economy and what it means for investors
In early March 2026, the escalation of military operations between the United States, Israel, and Iran triggered what many analysts are calling the most significant oil supply disruption since the 1973 OPEC embargo. The Strait of Hormuz — a narrow waterway between Iran and Oman through which approximately 20% of global oil supply passes daily — has been effectively closed to commercial shipping following a series of attacks on foreign vessels transiting the Gulf.
The scale of the disruption is enormous. According to the Deloitte Global Economic Update for the week of March 9, 2026, over 3,000 ships are currently stranded due to the closure of the Strait, including approximately 10% of the world's container fleet. Three foreign ships were struck in the Persian Gulf overnight on March 12 alone, as attacks intensified on vessels sailing through or near the strategically vital waterway. A container ship was hit by an unknown projectile approximately 35 nautical miles north of Jebel Ali, a major port near Dubai, according to the UK Maritime Trade Operations center.
The impact on energy prices has been immediate and severe. Brent crude futures surged past $100 per barrel in March 2026, with Iran's leadership warning that prices could climb to $200 if the conflict escalates further. West Texas Intermediate (WTI) settled at $98.71 per barrel on March 13, 2026, up 3.11% in a single session. Goldman Sachs has issued a new price forecast for 2026 reflecting the geopolitical premium now embedded in oil markets.
But the disruption extends far beyond oil. As Deloitte emphasizes, the conflict has led to sharp rises in natural gas prices, shipping costs, air freight costs, and fertilizer prices. When Russia invaded Ukraine in 2022, fertilizer prices also spiked dramatically due to supply disruption — and the current crisis is expected to produce a similar or worse effect. The majority of ships passing through the Strait of Hormuz do not carry energy products; many carry merchandise connecting Gulf economies to global manufacturing supply chains. The shutdown could therefore have cascading effects on supply chains across numerous industries far removed from the energy sector.
Stagflation is a portmanteau of "stagnation" and "inflation" — it describes an economic environment in which growth slows (or turns negative) while prices continue to rise. It is considered one of the most dangerous macroeconomic scenarios because it puts central bankers in an impossible position: raising interest rates to fight inflation further weakens growth, while cutting rates to support growth risks fueling inflation. There is no good policy option.
The term entered the economic lexicon during the 1970s, when the OPEC oil embargo caused energy prices to skyrocket while Western economies fell into recession. The combination devastated financial markets — the S&P 500 fell more than 40% between 1973 and 1974 — and ushered in a "lost decade" for equity returns. Interest rates were eventually raised to extreme levels (the Fed funds rate hit 20% under Paul Volcker in 1980) to break the inflationary spiral, but at enormous economic cost.
The current data increasingly resembles a stagflationary setup. The combination of slowing growth and rising inflation is now the central risk facing the global economy:
| Indicator | Latest Reading | Prior / Estimate | Signal |
|---|---|---|---|
| US GDP Q4 2025 (2nd estimate) | 0.7% annualized | 1.4% (1st est.) / 1.5% (consensus) | Sharp slowdown |
| US GDP Q3 2025 | 4.4% annualized | — | Strong prior quarter |
| PCE Inflation peak (2026, ABA est.) | 2.8% | Fed 2.0% target | Above target |
| Fed Funds Rate (current) | 3.50-3.75% | — | Rate cuts now uncertain |
| Prob. of no rate cut in 2026 (CME) | 44.7% | ~10% three months ago | Dramatic repricing |
| Unemployment peak (2026, ABA est.) | 4.5% | — | Rising gradually |
| S&P 500 from Jan high | -5% | — | First 3-week losing streak in ~1 year |
The Commerce Department's Bureau of Economic Analysis reported on March 13, 2026 that U.S. real GDP grew at an annualized rate of just 0.7% in Q4 2025 — a sharp downward revision from the initial estimate of 1.4% and well below the Dow Jones consensus forecast of 1.5%. This marked a dramatic deceleration from the 4.4% growth in Q3 2025. The slowdown reflected downturns in government spending (partly due to the October-November 2025 government shutdown) and exports, as well as a deceleration in consumer spending and investment.
The American Bankers Association's Economic Advisory Committee projects real GDP growth of 2.2% for 2026 overall, but this forecast was formulated before the full impact of the Iran crisis. Committee chair Beth Ann Bovino noted that "labor market uncertainties and persistent price pressures continue to weigh on the outlook, yet the economy is still growing at a measured pace." The committee described the current environment as a "low fire, low hire economy" — outside of healthcare, the economy actually lost jobs in 2025.
The labor market data is mixed but concerning. Initial jobless claims for the week ended March 7 came in at 213,000 — relatively stable. But continuing claims fell only modestly to 1.85 million, and the breadth of job creation remains narrow. The ABA expects unemployment to peak at 4.5% in mid-2026 before edging down slightly to 4.3% toward the end of 2027.
The ABA's Economic Advisory Committee projects overall PCE inflation — the Fed's preferred measure — to peak at 2.8% in Q2 2026 before declining to 2.1% by end of 2027. However, this forecast may prove optimistic if oil prices remain above $100. As committee chair Bovino stated: "Inflation remains a primary source of macroeconomic risk, and our baseline expectation is that it will persist above the Federal Reserve's 2% objective over the forecast horizon. Geopolitical developments — particularly disruptions tied to the conflict in the Middle East — reinforce the committee's assessment that elevated energy prices will remain a persistent headwind."
The core CPI data for February 2026, released on March 11, showed persistent stickiness in services and shelter inflation. While energy-driven headline inflation can be volatile and temporary, the risk is that higher energy costs feed through into core inflation via transportation, logistics, and producer input costs — creating the kind of "second-round effects" that central banks fear most.
Critically, financial markets are no longer pricing in Fed rate cuts for 2026. According to CME FedWatch data, there is now a 44.7% probability that rates are not cut at all this year. A 25 basis point cut is seen at just 38.8% probability. This represents a dramatic shift from expectations just months ago, when multiple cuts were anticipated. Fed funds futures imply the overnight rate at 3.345% by end of 2026, compared to the current 3.64% — barely one cut.
Adding to the uncertainty is the imminent transition at the Federal Reserve. Fed Chair Jerome Powell is expected to leave office in May 2026, to be replaced by President Trump's nominee Kevin Warsh. The change in leadership at a moment of maximum policy uncertainty adds another layer of risk for markets and economic outlook.
The current situation invites comparison with two previous oil shocks, each of which offers instructive — but incomplete — parallels.
The 1973 OPEC Embargo. The Arab oil embargo triggered a roughly 300% increase in oil prices. The S&P 500 fell more than 40% as a recession coincided with the energy crisis, leading to a lost decade for large-cap equity returns. Interest rates were eventually raised to 20% by Fed Chair Volcker to break the inflationary spiral. However, the global economy was far more oil-dependent then than it is today.
The 2022 Russia-Ukraine shock. Oil prices briefly exceeded $120 per barrel following Russia's invasion of Ukraine. Fertilizer prices spiked, supply chains were disrupted, and central banks were forced to choose between fighting inflation and supporting growth. The Fed chose to fight inflation, raising rates aggressively from near-zero to 5.25-5.50% — a decision that eventually brought inflation down but at the cost of significant financial market volatility and regional banking stress.
A critical difference today, as Deloitte's chief economist Ira Kalish emphasizes, is that the world uses far less oil per dollar of economic activity than in the past. Since 1980, U.S. real GDP has increased by more than 300%, yet the amount of oil consumed has barely budged. The reasons include energy efficiency improvements, the shift from manufacturing to services, and the growth of renewable energy. This structural reduction in oil intensity means that an oil shock today has a significantly smaller impact on the economy than in 1973 or even 2022.
However, as Kalish also notes, the closure of the Strait of Hormuz affects far more than oil. The disruption to 3,000 ships — many carrying non-energy merchandise — represents a supply chain shock that could cascade across industries in ways that are difficult to predict or model.
The S&P 500 has fallen approximately 5% from its January 2026 high, reaching its lowest level since November 2025 and posting its first three-week losing streak in about a year. On March 12 alone, the Russell 2000 fell 2.11%, the Nasdaq dropped 1.78%, the Dow lost 1.56%, and the S&P 500 shed 1.52%. Over 72.8% of U.S. stocks declined in that single session.
The sectoral impact has been highly differentiated. Energy stocks — including Chevron and ExxonMobil — have been among the few beneficiaries, rising alongside oil prices. Utilities have also shown resilience as a defensive play. Conversely, industrials, consumer discretionary, and technology stocks have borne the brunt of the selling pressure. Banks have also suffered, led by Morgan Stanley's 3.6% decline on private credit concerns (discussed in our separate report).
The bond market tells a similarly challenging story. Rising inflation expectations have pushed Treasury yields higher, while the prospect of delayed rate cuts has dampened demand for duration. For investors in traditional 60/40 portfolios, this creates a particularly painful environment: equities face earnings pressure from slower growth, while bonds offer limited protection due to inflation risk. It is precisely this dynamic — equities and bonds falling together — that made the 1970s and 2022 so destructive for balanced portfolios.
One interesting dynamic has been the relative performance of European versus U.S. equities. The trade to non-U.S. developed markets has been in place since late 2025, driven by more attractive valuations and structural themes like defense spending. European interest rates sit at just 2%, significantly below the U.S., and Eurozone inflation is closer to the ECB's target level. This should provide a more supportive backdrop for European equities — though the energy shock complicates the thesis significantly, as Europe is more dependent on imported energy than the U.S.
The S&P Global PMI data showed that prior to the outbreak of war, the global economy was showing signs of renewed life. The global PMI's output index hit one of its highest readings since the pandemic in February 2026, signaling an upturn in global GDP growth to an annualized 3.0% rate. The critical data point will be the March flash PMIs, due on March 24, which will provide the first real indication of economic health since the war started.
Energy exposure: Oil and gas companies are the most direct beneficiaries. Beyond individual stocks (Chevron, ExxonMobil, Shell), energy ETFs offer diversified sector access. The United States Oil Fund (USO) has attracted significant attention as a direct play on crude prices. For investors who believe the crisis will be prolonged, integrated oil majors with strong balance sheets offer both upside participation and dividend protection.
Inflation hedges: Treasury Inflation-Protected Securities (TIPS) are designed to protect against inflation erosion. Commodity baskets — including agricultural commodities that may benefit from fertilizer price increases — offer broader inflation exposure. Gold has historically performed well during periods of geopolitical uncertainty and inflationary pressure, and the current environment supports the case for precious metals allocation.
Defensive sectors: Healthcare, consumer staples, and utilities have historically shown resilience during stagflationary periods because demand for their products and services is relatively inelastic. Companies with strong pricing power — the ability to pass input cost increases to consumers without losing volume — are particularly attractive in this environment.
Cash and short duration: In a world where rate cuts are being pushed out and inflation is rising, short-duration bonds and money market funds offer attractive nominal yields (~4-5%) with minimal interest rate risk. This is not a glamorous allocation, but it provides optionality — the ability to deploy capital when opportunities emerge from the current volatility.
The return of $100 oil is not just an energy story — it is a macro story with implications for monetary policy, corporate earnings, consumer spending, and portfolio construction. The risk of stagflation, while not yet the base case, has moved from the tail to the body of the probability distribution.
History suggests that stagflationary episodes are among the most challenging environments for traditional portfolios. Equities suffer from both earnings compression and multiple compression; bonds suffer from rising inflation and rates; and diversification benefits diminish as correlations between asset classes increase.
The key variable to watch is the duration of the Hormuz closure. A quick diplomatic resolution could see oil retreat to $80-85, inflation expectations reset, and markets recover. A prolonged conflict — lasting months rather than weeks — could push oil toward $120-150, entrench inflationary expectations, and force the Fed into the impossible choice between fighting inflation and preventing recession. As in the 1970s, the answer to the macro question ultimately depends on geopolitics, not economics. Investors should position for uncertainty rather than conviction, maintaining diversified exposure across asset classes and geographies while keeping enough liquidity to act when the picture clarifies.
Starting Finance Club Cassino
Università degli Studi di Cassino e del Lazio Meridionale
This report is prepared for educational purposes and does not constitute investment advice.