WESCAP Q1 2026 Commentary: Geopolitical Conflict and the Energy Supply Shock
Up through the start of the Iran conflict in late February, inflation had been falling and investment markets rising. However, the conflict and the closure of the Strait of Hormuz changed economic and investment conditions. As close to 20% of world oil shipments go through this strait, as does much fertilizer and liquefied natural gas (LNG), global prices have risen on many products, and global growth is expected to slow.
Oil prices have risen by about 75% since the end of 2025, with West Texas crude (WTI) at about $102/bbl at quarter’s end. When oil prices double, historical data shows that global economic growth often turns negative and stocks drop 25% or more (details upon request). Fortunately, WTI at $120 has yet to occur, and longer-term damage may be averted. The U.S. is much less sensitive to oil prices than several decades ago, but Europe and most of Asia remain more reliant on oil and LNG. A sustained further rise in oil prices may warrant a more conservative investment approach.
Midterm elections normally favor the out-of-power party. Republicans are incentivized to resolve the Iran conflict well before November to bring down energy and food prices and improve their election prospects. Therefore, the consensus is that open warfare will be largely wrapped up in about a month, with the U.S. initiating de-escalation. Iran may maintain effective control of Hormuz and may not choose to de-escalate further until it receives important concessions. Other countries have their own goals, which will slow negotiations. Thus, the de-escalation process could be stepwise and slow enough to keep energy prices elevated for many months.
For investments, short-term uncertainty is high, with asset prices remaining volatile. Conservative investors may want to wait until clear de-escalation is evident before buying stocks and other risk assets. More aggressive investors could buy U.S. and foreign stocks now in anticipation of positive intermediate-term returns. Long-term bonds and REITs should benefit from de-escalation as inflation trends down, resulting in lower interest rates.
The S&P 1500 Growth Index and S&P 500 lost 7.3% and 4.3%, respectively, over the quarter. The less tech-heavy S&P 500 Value Index gained 0.2%. Foreign stock indices and long-term Treasury securities also posted small losses. Despite losses in most U.S. and foreign stocks, WESCAP clients generally experienced modestly positive quarterly returns. Selling higher-risk precious metals and high-yield credit funds, and increasing commodities, generated strong returns. Our allocation to higher-quality, short-term fixed income assets provided a risk buffer. Our tilt toward value and mid-cap stocks, and currency-hedged foreign stock funds, provided outperformance relative to the broader indexes.