Highlights:
Geopolitical Energy Shock: The U.S.-Israel strike in Iran, and the death of Supreme Leader Ali Khamenei have triggered the largest energy disruption in modern history, with March seeing the biggest single-month gasoline price surge (21%) since the 1960s.
The “Great Price Reset”: Inflation is no longer viewed as a series of one-off events, but as a structural challenge. The OECD has raised U.S. inflation projections to 4.2% for 2026, forcing a shift in consumer behavior toward "trading down" and deferring purchases.
Global Trade Realignment: In response to U.S. tariffs, "middle powers" like the EU, Canada, and the UK are bypassing the U.S. to form independent alliances with India and China, marking a historic shift toward a multi-polar global economy.
Unchanged Portfolio Strategy: Our strategy remains focused on portfolio "ballast” – protecting nine years of cash flow in cash and fixed income to weather a very unpredictable future.
Commentary:
“There are decades where nothing happens; and there are weeks where decades happen.”
-Attributed to Vladimir Lenin, Russian revolutionary, politician and political theorist
The Geopolitical Shock: A "Decade in a Week"
History may show that the U.S. and Israel strike of Iran that killed Supreme Leader Ali Khamenei was one of the events that Vladimir Lenin was referring to when the famous quote above was attributed to him. The United States remains in negotiations with Iran over its nuclear program. A breakdown in these negotiations could result in the resumption of a war that has already created the largest energy disruption in modern times, and the prospect of a long struggle over who controls the Strait of Hormuz, a critical global energy chokepoint where roughly 20-25% of the world’s total petroleum liquids pass through.
The war has already caused a surge in the price of oil, a major input across many sectors of the economy, including manufacturing, agriculture, and transportation. The average U.S. price of a gallon of regular gas has jumped past an average of $4 a gallon for the first time since 2022 and is now over a dollar more than when the war began. The 21% surge in gasoline prices in March was the biggest single-month percentage increase in records that date back to the 1960s. While painful, the oil shortage triggered by the Iran war has not yet spread globally to the point where oil prices are high enough to force people and companies to substantially reduce oil consumption, which could cause an economic shock much like COVID did.
Inflation: From "Transitory" to the "Defining Challenge"
A prolonged increase in the price of oil risks reigniting inflation, which in turn could be a drag for consumer spending and impede economic growth. In fact, the international OECD (Organisation for Economic Co-operation Development) is now projecting that U.S. inflation will edge up to 4.2% this year up from a pre-war forecast of 3% in December. This would come on top of five consecutive years of elevated inflation that has driven up consumer prices by about 25% since December 2020. It is increasingly starting to look as if the inflation problem that emerged coming out of the COVID pandemic was not a one-off event, but the defining economic challenge of the decade. Since inflation first flared up in 2021, economists have chalked it up to extraordinary events like pandemic supply chain issues, excessive stimulus, the Ukraine war, tariffs, and now the war in Iran. But at some point, these one-off events start to look less like a spurt of bad luck and more like a resetting of prices across the economy.
In addition to being hit by surging prices at the pump, interest rates are on the rise, pushing up the cost of borrowing for everything from mortgages to car loans. Faced with day-to-day life that becomes less affordable the longer this war goes on, Americans are deferring purchases, trading down, and moving down to lower-priced retailers and private labels. In fact, skyrocketing gasoline prices did cause consumer prices to increase by 3.3% in March from a year earlier, much hotter than February’s gain of 2.4% before the war in Iran. Big price spikes in other categories besides gasoline, like airfares and groceries, will likely follow as the energy shock reverberates though the economy. Consumer spending is already muted amid current affordability woes.
The Labor Market: A Glimmer of Resilience
As price pressures build, the American consumer’s pain is exasperated by a weakening job market with less hiring and smaller pay increases to help offset higher costs. Even before the Iran war, the labor market was on weak footing as companies became more cautious about hiring in the face of AI adoption, trade chaos, and immigration crackdowns. However, the March jobs report offered a glimmer of hope, with employers adding 178,000 jobs, the best month for job growth in more than a year and blowing past expectations. The unemployment rate fell to 4.3%, but more importantly the resilient rebound in job growth defied concerns about a pending downturn, at least for the time being.
The news was not all rosy though, as the share of Americans working or looking for work slipped to 61.9%, its lowest level since the fall of 2021. In addition, the rate at which companies have hired new workers fell in February to match the lowest levels of the pandemic, and wages are no longer rising as they did earlier in the inflationary surge. This is especially concerning because while the U.S. is experiencing an investment boom from AI and its corresponding infrastructure, many of those economic gains are not extending to workers.
This has sparked 1970s-era stagflation worries, characterized by the dreaded pairing of high inflation and high unemployment. This same speculation last revved up in 2021 when energy prices spiked after Russia invaded Ukraine. Many pundits predicted a recession at that time that never materialized, but the job market is more sluggish today than it was a few years ago, and the oil shock from the Iran war is potentially magnitudes larger than that from Russia’s invasion, potentially removing 20% of the global oil supply. As of now though, most economists believe the Iran war will slow economic growth and cause an increase in inflation, but not to the extremes seen in the 1970s.
The Federal Reserve & The "Warsh" Era
One thing that is likely is that the Federal Reserve (Fed) is unlikely to cut interest rates until the war in Iran is over and inflation goes back down to pre-war levels. Coming into the year, the Fed was divided over whether to cut interest rates further, but recent Fed minutes show that some officials are now willing to consider interest rate increases given the stubborn inflation that is being amplified by the Iran war. Further muddying the waters is the pending appointment of Kevin Warsh to be the next chairman of the Federal Reserve in May 2026. The Fed chair nomination was arguably the most important personnel decision President Trump faced for the remainder of his term because the central bank serves as a first responder in financial crises and sets short-term interest rates that affect every corner of the economy and markets.
Warsh gained a reputation for being an inflation “hawk” during and after leaving the Fed because he spent years warning that easy monetary policy would fuel rising prices. More recently, he has said the Fed should cut rates faster. Warsh will also have to satisfy a president who has made clear he expects rates to fall – and who has shown no patience for Fed chairs who disappoint him. Trump showered praise on Powell after nominating him in 2017, only to lash out regularly when the Fed bucked his demands for lower rates.
A New Global Order: The Rise of "Middle Powers"
In response to U.S. tariff policies and shifting alliances, the world’s "middle powers" are diversifying. We are seeing a historic reconfiguration of global trade:
The EU and India have struck a massive trade deal reducing tariffs over 90% and linking nearly two billion consumers.
Canada and China have reached agreements on EVs and agriculture, with PM Mark Carney notably stating that relations with China have become "more predictable" than those with the U.S.
The U.S.-China Decoupling: Trade between the two superpowers has plummeted to 2010 levels. China is aggressively pursuing "self-sufficiency" in AI and agriculture, while the U.S. builds new mineral alliances with Japan and Mexico to break dependency on Chinese supply chains.
Investment Strategy: Navigating the Unknowable
The near-term direction of the global economy is likely to be heavily influenced by what happens next in the Iran war. Specifically, what the aftermath of the war means for the free passage of energy through the Strait of Hormuz. The economic pain is likely to be uneven with poorer countries that import their oil carrying the heaviest weight, and richer countries like the U.S. likely to suffer the least economic damage. Nevertheless, a supply shock that leads to a prolonged surge in commodity prices for gasoline, diesel, jet fuel, fertilizer and more would also exact a significant toll in the U.S.
Markets are typically good at adjusting to a supply shock and this is certainly not the first conflict in the Middle East that has impacted the flow of oil. No one, including world leaders, central bankers, portfolio managers and all manner of pundit, knows what comes next. Will the conflict spread or be contained? Will energy prices spike further or settle back as strategic reserves are deployed and alternative supply routes open? We will not hazard a guess as to how or when the current conflict may resolve – history is littered with confident predictions that turned out to be embarrassingly wrong. Fortunately, there is no need as the investment policy we espouse is built on the humbler and more durable premise that the future is unknowable, and that the wisest course is to be prepared for any outcome. This is accomplished by insulating your portfolio with cash and fixed income positions matched to projected withdrawal requirements over all rolling nine-year periods. Only once that ballast of your portfolio has been established should you invest in the equity markets, with an emphasis on diversification and a long-term mindset.
Urban Financial Advisory Corporation – April 2026
Disclaimer:
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