Markets Slide as War Escalation and Stagflation Fears Weigh on Stocks
Stocks had another volatile week as the ongoing conflict between the United States and Iran continued to intensify and weigh on global markets.
The S&P 500 fell nearly -2% last week and is now down close to -5% for the year.
The biggest driver behind the market’s weakness has been rising oil prices. Continued disruptions and escalating attacks tied to the Strait of Hormuz have kept oil near multi-year highs, increasing concerns about inflation and further delaying hopes for interest rate cuts.
At the same time, recent economic data is adding to stagflation concerns- a period of slowing growth combined with persistent inflation. Manufacturing data softened notably, while Producer Price Index (PPI) readings came in hotter than expected, signaling that price pressures (especially in services) remain elevated even as growth shows signs of cooling.
While the headlines have been dramatic, the market reaction has mostly followed a simple pattern: when oil moves higher, stocks tend to move lower.
The recent break below key technical levels suggests a more cautious environment in the near term.
Rates, Dollar & Commodities
Energy markets remain the center of attention. Oil prices continued to push higher last week as the conflict escalated, with disruptions around the Strait of Hormuz keeping supply concerns elevated. Brent crude surged sharply, while WTI crude also posted strong gains on the week.
The key factor remains the Strait of Hormuz, one of the world’s most important oil shipping routes. If shipping conditions improve, oil prices could decline quickly. If disruptions persist, prices may remain elevated and continue to pressure markets.
The U.S. dollar was volatile throughout the week, briefly pushing above 100 on the Dollar Index following the Fed meeting before pulling back and finishing slightly lower overall. Treasury yields moved higher, with the 10-year Treasury rising to around 4.4%, reflecting growing concerns that inflation may remain elevated longer than expected.
Gold saw a sharp and somewhat surprising decline, posting one of its worst weekly performances in decades as rising yields and a stronger dollar earlier in the week pressured the metal. Copper prices also fell, signaling increasing concerns about global economic growth.
Takeaway
Right now, the main issues that appear to be influencing the market are:
- The U.S.–Iran conflict and oil prices
• Rising inflation uncertainty coupled with slowing economic growth (stagflation risk)
The most important factor for markets remains oil prices.
If oil stays elevated near or above $100 per barrel, it could continue to fuel inflation and slow economic growth. However, if oil falls back toward lower levels, much of the pressure on stocks could ease.
Outside of energy, the economic backdrop remains mixed. The labor market continues to show stability, with jobless claims remaining relatively low, reinforcing the “no hire, no fire” environment. However, weaker manufacturing data and rising input costs suggest the economy may be cooling.
This all seemingly suggests the economy is slowing but not breaking, at least for now.
This Week – What Matters for Markets
While this week is lighter on major economic events, there are still several important reports to watch.
Investors will be focused on:
• Manufacturing and Services PMI data
• Consumer sentiment and inflation expectations
• Oil inventory data and prices
Markets will be looking for signs that growth is stabilizing, and inflation pressures are not accelerating further.
Any data that reinforces slowing growth alongside persistent inflation could increase volatility and add to stagflation concerns.
Broad Overview
The market is currently navigating multiple uncertainties at once.
Geopolitical tensions, elevated energy prices, and uncertainty around future interest rate policies are all contributing to increased volatility.
At the same time, the underlying economy still shows some resilience. The labor market remains stable, and while inflation is elevated, it has not yet accelerated uncontrollably.
Because of that, the current environment still appears to be more of a period of adjustment and volatility rather than the start of a prolonged downturn.
However, risks are clearly rising. If oil prices remain elevated and growth continues to soften, stagflation could become a more dominant theme.
Until energy markets stabilize and geopolitical tensions ease, investors should expect continued market swings in the weeks ahead.
If you have any questions about your portfolio or the market outlook, please contact your CIAS Investment Adviser Representative.
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