The negative trends in the markets since the U.S.-Israeli attack on Iran reversed mildly over the past week or so.
Of course, the market is as hyper as a monkey on meth so this may just be noise. The war was always a choice by the U.S. since Iran was not a threat (though it has been and remains a deadly, aggressive threat to Israel). The temporary cease-fire for Vice-President JD Vance to negotiate with Iran may not hold since those talks have failed as of today. It’s hard to know how the market will react on Monday.
Control of the Strait of Hormuz and Iran’s Uranium Stockpiles Were Sticking Points
The U.S. had demanded that Iran immediately reopen the strait to all maritime traffic, but Iran said it would do so only after a final peace deal, according to Iranian officials…[end quote]
The situation is clearly worse than it was before the war started. Iran now controls the Strait of Hormuz in a way it didn’t before. About 20 percent of the world’s oil and liquefied natural gas flows through the strait, along with critical commodities like fertilizer and helium. Iran almost certainly won’t give up the income they will get by charging a toll now that they have started. That will add to inflation all over the world.
The supply chain choke at the Strait of Hormuz will affect inventories as well as prices all over the world. Since many countries are more dependent on imports than the U.S., international stocks may be hit.
The U.S. consistently underestimates the intransigence of other cultures. The U.S. may turn on a dime but an Islamist culture (especially one with a strong revenge motivation since their leader’s family was assassinated) will not back down readily. Iran says they will continue negotiations but that’s their standard delaying tactic. Assume that they will “negotiate” indefinitely while continuing to choke and/or toll the Strait of Hormuz.
Desperation in the rest of the world may cause international investors to flee to the safety of the U.S. markets which could cause the price of international stocks to crater. That would support the U.S. markets but potentially cause emergent unintended problems like the collapse of the European chemical industry. The U.S. economy is also slowing.
Inflation, Growth and Jobs All Look Worse With the War
Forecasters in the Journal’s survey see hits to GDP, inflation and the job market from the Iran conflict
By Anthony DeBarros and Matt Grossman, The Wall Street Journal, April 12, 2026
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Economists surveyed by The Wall Street Journal dimmed their 2026 outlook due to the war in Iran, forecasting 2% growth, 3.2% inflation, and 45,000 jobs created per month.
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Economists put the probability of recession in the next 12 months at 33%.
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Economists now foresee only one Fed rate cut in 2026, down from two, due to higher expected inflation and an unchanged unemployment outlook.
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The Atlanta Fed’s latest GDPNow Estimate for 2026:Q1, April 09, 2026, was only 1.3%. The chart shows the precipitous decline from earlier 2026.
Although they do not forecast shrinkage (recession) the growth is practically stalled.
The Cleveland Fed’s Inflation Nowcast forecasts Quarterly annualized CPI inflation almost 5% for 2Q26. The BLS reported that in March, the Consumer Price Index for All Urban Consumers rose 0.9 percent, seasonally adjusted, and rose 3.3 percent over the last 12 months, not seasonally adjusted.
The combination of slow growth and higher inflation has a name: stagflation. It’s nowhere near as severe as our memories of the 1970s stagflation caused by oil shocks and other factors, but the fun has just begun and it’s impossible to say whether conditions will improve or worsen.
The markets are counting on TACO. Negative trends are rebounding the way they did after President Trump backed away from so-called “Liberation Day” extreme tariffs in early 2025. The impact can be seen in VIX and the Financial Stress Index. They never got as bad from the Iran war as earlier stress times but now they are receding.
However, Chicago Fed’s National Financial Conditions Index (NFCI) provides a comprehensive weekly update on U.S. financial conditions in money markets, debt and equity markets, and the traditional and “shadow” banking systems shows that financial conditions continued to tighten at least up to April 3. It’s not current enough to show the sudden decline in the Treasury yield curve and junk bond spreads over the past week.
The Fear & Greed Index shows a sudden improvement to Fear (instead of deep Extreme Fear). The trade has suddenly sprung into risk-on instead of risk-off as stock and junk bond prices are suddenly rising faster than the 10 year Treasury price.
USD has stabilized within its channel. Gold, silver, copper and bitcoin seem to have stabilized and are climbing slowly after sharp drops from high levels. Oil and natgas fell.
Stock indexes rose. The CAPE index is back to almost 40 (median 16) showing the bubble is still inflated. The SPX dividend yield is only 1.15%, a record low (median 4.19%). Stock investors are betting on the FOMO story that there will always be a bigger fool to buy stocks at a higher P/E ratio and lower dividend yield. SPX earnings are at a record high and investors are buying earnings, not return to their own pockets. Some companies are issuing debt to buy back shares, propping up the share price instead of investing the borrowed money into productive capacity in their business.
Consumer sentiment sank about 11% this month, extending a decline that began with the start of the Iran conflict, and is currently about 9% below a year ago. Note that 98% of interviews were completed prior to the April 7th announcement of a temporary cease-fire. Economic expectations will likely improve after consumers gain confidence that the supply disruptions stemming from the Iran conflict have ended and gas prices have moderated.
The METAR for next week is unsettled. The markets may jump around with the uncertainty of what will happen with the Iran war. Currently the mood is turning optimistic but we all know how quickly the market’s moods may shift.
Wendy
