Geopolitical Update: March 2026
The conflict between the US and Iran has resulted in a meaningful increase in market volatility over the past week. Wall Street’s often-cited volatility index (“VIX”) increased by more than 30% for the week. That said, despite the increase in volatility across global stock market indices, major US Large Cap stock indices finished the week only down about 2%. In fact, the S&P 500, the Dow Jones Industrial Index and the Nasdaq still remain within a few percentage points of their all-time highs.
Bond markets also experienced elevated volatility this week. US Treasury yields moved higher across all maturities. The 10-year Treasury yield increased by close to 20bps since last Friday (current yield is close to 4.15%).
There are a lot of uncertainties with the current conflict that are driving the market volatility over the past week. The biggest questions that investors are trying to determine today are:
- How prolonged will the conflict be?
- Will the conflict continue to expand across the region?
- How prolonged will energy shipping routes be unsafe to navigate?
This is a very dynamic and fluid situation that will certainly change in ways that cannot be predicted with confidence. That said, the information below provides a summary of our thinking following the first week of the conflict.
How prolonged will the conflict be?
It is uncertain just how long the conflict will last. The US has stated publicly that the conflict will last “4 to 5 weeks,” but there is growing concern over Iran’s willingness to continue the conflict well beyond this timeline. So, while there are many reasons to believe that the conflict may end relatively soon, the possibility of a sustained conflict cannot be entirely ruled out today.
What are the largest economic risks that markets are paying close attention to?
The price of energy is being followed closely by market participants due to the possibility of prolonged energy supply chain disruptions. A key shipping route, the Strait of Hormuz, has been largely impassable for about a week due to security- and safety-related issues evolving from the conflict. About 1/5 of the world’s crude oil, for example, is transported through the Strait of Hormuz each year.
Markets assume that the longer that key shipping routes remain impassable, the more likely it is that energy supply shortages will put upward pressure on global energy prices.
And should energy prices continue to increase due to supply shortages, it would put upward price pressure on just about anything that is transported or produced around the world.
How long will energy shipping routes be unsafe to navigate?
The US (and other countries) are attempting to do what they can to help ease the current safety and security issues in energy shipping routes in the Middle East. While it is possible that these energy shipping routes will see more traffic in the days ahead, it is far from certain at this point. That said, it is important to remember that Iran is in a fragile economic position. If Iran wishes to continue the conflict indefinitely, it is in the country's interest to allow safe passage of energy shipping through the Strait of Hormuz at some point. A significant portion of Iran’s annual GDP (about 15%) is driven by revenue generated by its energy exports.
How much will energy prices increase?
It is impossible to know just how much oil prices and shipping insurance costs may increase in the weeks and months ahead.
That said, once markets believe that energy shipping routes will operate at full capacity, energy prices are likely to retreat very quickly. In this scenario, it is certainly possible that energy prices decline to around where they were prior to the onset of the conflict.
If hostilities escalate and continue for months — and key shipping routes remain impassable over that time — it is possible that energy prices could increase another 20% or more from where they are today.
Will energy shortages impact inflation?
Inflation will not be impacted all that much if the current energy supply disruption is short lived.
Long-lasting energy shortages would likely result in higher inflation over time, but it is important to remember that energy prices are far less impactful to inflation compared to other variables. For example, wage growth is a much more significant long-term driver of inflation than energy prices.
How will higher energy prices impact the US economy in 2026?
Just how much higher energy prices may impact the US economy is highly uncertain at this point. For one, a short-lived energy shortage will have little impact on the US economy for the full calendar year. Secondly, it is important to remember that the US has been a net exporter of energy for about 5 years now. As such, the US is actually less exposed to the risk of high energy prices than most countries across the globe. The US can and will produce more energy domestically if needed, but that increase in energy production cannot happen overnight.
Will the conflict change the Federal Reserve’s monetary policy in any way?
It is too early to determine how the Fed’s monetary policy will be impacted by the conflict overseas. That said, the Fed has recently communicated to the market that short-term interest rates will likely remain at current levels for now. Today, it seems likely that the conflict overseas will not change this assessment.
How have investment recommendations changed as a result of the conflict overseas?
Long-term investors should not change their long-term investment strategy due to the conflict overseas. For one, it is far too early to know how long the conflict will last. Second, even if the conflict continues indefinitely, markets are currently focused on the increase in energy prices and how this increase could impact economic growth in the future. Should key energy shipping routes return to operating at full capacity relatively soon, the steep price increases that occurred within the energy complex this week would likely reverse course quickly. The point is that short-lived high energy prices would not have a material impact on economic growth.
History has shown us, time and time again, that market volatility arising from geopolitical events tends to be short term in nature. A long-term investment strategy should be based on the investor’s long-term investment goals and willingness and ability to take risk. Making long-term investment decisions without considering this framework often leads to missed opportunities, suboptimal return outcomes and regret.
As always, we will keep you posted as facts and circumstances change. If you have questions about how to navigate this situation, please consult with your Enterprise Wealth Advisor.
Disclosures
Investment services offered by Enterprise Bank & Trust are not deposits, obligations, or guaranteed by the bank or its affiliates. The information provided represents the opinions of Enterprise Bank & Trust and is not intended to forecast future events or guarantee future results. Past performance does not guarantee future returns. This information is for educational purposes only. Investors should consult with their investment professionals for advice concerning their particular situation.
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