IMPACT REPORT Oil, Inflation, & War: What Changes Now? | S3 E125 | 03-03-26

Markets turned sharply volatile as the Middle East conflict entered its fourth day, expanding beyond initial strikes and raising fears of prolonged disruption in the Strait of Hormuz.

In today’s special Impact Report on Markets with Megan, hear what escalating geopolitical tensions mean for oil prices, inflation expectations, Federal Reserve policy, and global markets.

🚨 Topics Megan Covers:

• Crude oil rises to $77 per barrel, highest level since January 2025
• The VIX volatility index jumps to its highest level since Liberation Day
• The S&P 500 posts its worst day since October
• All 11 sectors trade lower, led by materials, industrials, and consumer discretionary
• Two-year inflation expectations hit a 10-month high
• Fed funds futures move from 3.00% to 3.20%, pricing out rate cuts
• Tanker traffic through the Strait of Hormuz, which moves 20 million barrels per day, drops significantly
• Gasoline prices climb to $3.10, up 30 cents

With oil supply routes under threat and inflation expectations rising, markets may remain volatile in the weeks ahead. Investors are now weighing how long this conflict lasts and whether disruptions in global energy flows continue.

📊 What does higher oil mean for the economy?

• A sustained $10 increase in oil could reduce GDP by 10 to 20 basis points
• The same move could lift headline inflation by 20 basis points
• Higher gasoline prices reduce consumer spending power by billions annually

While short-term volatility is elevated, history shows that geopolitical shocks often become long-term buying opportunities. Megan explains why prior Middle East disruptions have not derailed long-term equity growth and how portfolios were positioned ahead of this risk.

Subscribe now and listen to all past episodes:
https://marketswithmegan.fm

#OilPrices #StraitOfHormuz #MiddleEastConflict #Inflation #FederalReserve #InterestRates #StockMarket #VIX #EnergyMarkets #MarketVolatility #Investing 

https://youtu.be/1IDCiA-4Cwc

Disclaimer:  material was prepared by Verdence Capital Advisors, LLC (“VCA”). VCA believes the information and data in this document were obtained from sources considered reliable and correct and cannot guarantee either their accuracy or completeness. VCA has not independently verified third-party sourced information and data. Any projections, outlooks 
or assumptions should not be construed to be indicative of the actual events which will occur. These projections, market outlooks or estimates are subject to change without notice. This material is being provided for informational purposes only and is not intended to provide, and should not be relied upon for, investment, accounting, legal, or tax advice. Past performance is not a guarantee of future results. Different types of investments involve varying degrees of risk, and there can be no assurance 
that the future performance of any specific investment, investment strategy, or product or anynon-investment related content, made reference to directly or indirectly in these materials will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. You should not assume that any 
discussion or information contained in this report serves as the receipt of, or as a substitute for, personalized investment advice from VCA. Due to various factors, including changing market conditions and/or applicable laws, the c...

Transcript

Why Markets Are Volatile Today

Megan Horneman 0:00

We're coming to you today with a special impact report as we're in the fourth day of the conflict that we're seeing in the Middle East. This is Markets with Megan, and it is Tuesday, March the 3rd. If you like this podcast, you can subscribe, hit the alarm bell, share with your friends, family, or colleagues. But we want to break down after we gave a little bit of information yesterday with the first trading day after the war began. But now we're here into the second day, and it is quite a volatile day in the not only the equity markets, but the bond markets as well as the commodity markets. So let's talk a little bit about and the two main issues that are causing the volatility today. First of all, it is expensive the war has expanded beyond just the US and Israel. Trump has warned that it could take weeks before we see a resolution here. And then he didn't, he hasn't rolled out completely ground troops, U.S. ground troops. So this has caused a lot of fear and anxiety in the markets. Oil prices, which have skyrocketed here because of this turmoil, that also is disrupting the markets, and we'll talk about that in a second. And then what is going on in the Strait of Hormuz? Um, there is Iran has said that they would attack any container ships or shit or any kind of vessels that enter through there. So while it's not officially shut down, um, that cause of fear has people diverting away from the Strait of Hormuz. And this does have impacts from an economic standpoint and from an inflation standpoint. We've seen tanker activity both um west to east and east to west drop significantly in in recent days. And remember, the Strait of Hormuz is the second largest daily volume of moving petroleum. It moves about 20 million barrels of petroleum a day. The biggest destination of the oil that moves to the Strait of Hormuz is to China, because China gets 89% of its oil from Iran. Now let's just talk about the market perspective. Um as you know, we're filming this, it's been a pretty ugly day from the equity standpoint. The VIX has jumped, which is a volatility index, to the highest we've seen since Liberation Day, the SP 500s, and it's the worst day since October of last year. Small and mid-cap stocks, which have been really one of the favorite areas of the market, are taking the brunt of it today. And also international equities are underperforming the US because there is a lot of uncertainty what this disruption will do to some of the other developed economies, especially within Europe. Crude oil is at$77 a barrel. That's the highest we've seen since January of 25. All 11 sectors are lower in the SP 500. It's led by materials, industrials, and consumer discretionary. And energy, you know, as we when I came into this, it was slightly lower for the day, but very muted decline. The dollar is higher, and then treasuries are weaker as we're seeing inflation expectations increase. We've seen two-year inflation expectations rise to a 10-month high. The good news out of that is long-term inflation expectations have been relatively contained. Because of the concern here from an inflation standpoint, Fed funds futures contracts for year end coming into this at the end of last week, that was about 3%. So looking for a few more a couple more interest rate cuts, it's now at 320. So the market is pricing out some interest rate cuts for the year. So let's break this down from an economic standpoint. What does the higher oil prices mean for GDP and inflation? There are some estimates that a$10 increase per barrel of oil, if it's sustained, can cut GDP between 10 and 20 basis points. The headline inflation, um, that is a that's a little bit more concerning because you can see that that a$10 per barrel increase could increase headline inflation, remember that includes energy, by 20 basis points. And given that we've already seen a 10 per a$10 increase in um oil prices year to date, and this is before we the turmoil began, we do expect that this can have a bit of a bigger impact. And again, I want to stress if this continues for a prolonged period of time, now that can have an impact to GDP specifically through taking away spending power from the consumer. So there's a there's a rule of thumb that for every you know one cent increase or one dollar increase in in gas prices, it reduces annual spending power by um a billion dollars. So we're looking at you know tens of billions of dollars of reduced annual spending power. Again, this just depends on how long this goes on. So let's give a, you know, our our bottom line and our takeaway from this. This was not an unknown event would happen. The timing of it was a little uncertain, but it also isn't surprising given the activity and movement towards Iran in recent weeks. The one there's two things that that will really impact how these markets pan out with this. It's the duration of the conflict, which we know will go on for several weeks, and then how much of this disruption continues in the Strait of Hormuz. Um, because this is probably gonna last for weeks, we expect equity volatility to continue. Um, oil will probably remain high as well. We don't know exactly how high it can go. There's a couple positives here. Um, first of all, the U.S. is the largest producer of oil right now. We're also the largest exporter of liquid natural gas. Also, OPEC has already agreed to increase production starting in April, and this was before the war broke out. So they they even did debate increasing it more. So there's is still that on the table that we can have an increase from an oil supply perspective. That can take some of the pressure off that upward move in the price. Um, if this does become prolonged, then you will see some more increase in inflation expectations. And that is something we're keeping an eye on because of the fact that inflation was already starting to stir a little bit before this. So anything can um, you know, really disrupt that inflation, specifically at the headline level. The the impact to the core level, which is what the Fed looks at, may um be a little bit more delayed, but we do expect to see maybe some ugly inflation prints here in the near term. Again, we haven't expected a significant amount of rate cuts this year because inflation was starting to emerge again. Um, but we think now at this time you can really kind of price out rate rate cut expectations and maybe rate hikes may be on the table. Now, sounds like bad news, and it's really um watching the markets like we're seeing today, watching the consistent coverage on the news can be very, very um create a lot of anxiety and a lot of angst with investors. And we're here to tell you that we've looked at a lot of different geopolitical events. Um, we went all the way back to the early 80s, we've looked at many things that have impacted the Strait of Hormuz and we and and and what that has meant from an equity standpoint. And what we see is that typically these end up being buying opportunities. We don't think this is gonna have a long-term impact on growth because we don't think this is going to be a long-term event. A few weeks, maybe, yes, but Iran was already in such a difficult situation coming into this that we don't think they're really gonna have much legs to stand on. And they have um really angered a lot of other countries in that Middle East region. So they really, I don't think, have a good way out of this. Um, we do think that, like we mentioned, the volatility will be there, but historically it's presented good opportunities to buy. So we're looking at some how this shakes out, we're looking at some of the valuations in the market, and we won't be afraid to add to our equity exposure if we see some opportunities here. The other area that is likely to get hit from this will be on the credit side. High yield credit, we've avoided, and that's been because spreads did not give enough reward for the risk, but there may be some opportunity there to get some more yield in the portfolios. We were positioned coming into this with a short duration and fixed income. And remember, if inflation is a risk, you'll see yields higher. So we have seen a lot of weakness in long-term treasuries. So we've been in that short-term rage. That should help cushion some of this volatility from a return perspective. We had sold some equities in January, and we are now underweight global equities across all of our portfolios. And that's because Iran is just one of many risks that we saw were being underappreciated in the market. So we did come into this with an underweight global equity exposure. And as I mentioned, we'll continue to look at maybe opportunities. What history has shown us is in the one, three, six, and twelve month time period, equities are higher after these types of events. And actually, believe it or not, in the events that we looked at, there are six of them going back to the early 1980s, oil prices were lower. Um, so this may take some of that concern out of longer-term inflation, and that may be why we're not seeing long-term inflation expectations really tick up. From a consumer standpoint, there is the one big beautiful tax bill, which is offering a lot of relief to consumers for the first half of the year. So instead of, again, it's not great to see oil prices higher. We have seen um gasoline prices go up to$3.10. So they're up about 30 cents. But the there is some extra room here, wiggle room with consumers. It does not mean it won't they won't pull back in spending in some other areas, but at least it's a very timely offer here for consumers that can get the tax refunds, and we're seeing them pick up significantly as we get to the height of the tax filing season. Now that's all we have today. If you have any questions, please feel free to reach out to your financial advisors. We'll be back with more impact reports as this unfolds and if we see that there's um opportunities in the market to make you aware of. But again, remember this is a short we think this is a short-term geopolitical event, and historically these do present good buying opportunities for investors. Thank you, Mm.