Markets Await Conflict Clarity

The Iran conflict continues to dominate headlines. As we have shared in these pages and in a recent client webinar, markets tend to go through three stages when assessing new phenomena. The first stage is the immediate reaction to an event, whether it is a company providing negative earnings guidance, a geopolitical event’s initial outbreak or some other news flow. The second stage involves portfolio adjustments, sometimes forced by margin calls and other times stemming from a behavioral response to a portfolio position moving against an investor. The third stage begins once the longer-term implications become clearer; for example, when a company’s earnings trajectory recovers quickly or in a swift resolution to a geopolitical event.

Given the Trump administration’s 10-day extension for Iran to reopen the Strait of Hormuz announced Thursday, the third stage of the Iran conflict remains in the distance. Consequently, we anticipate more sideways movements in markets with a bias to the downside until negotiations produce more tangible outcomes than mere overtures. Troop deployments to the region, oscillating negotiation timelines and still-elevated hydrocarbon prices are all contributing to investor agita and risk aversion.

We continue to emphasize the strong corporate profit cycle and resilient consumer activity. Recognizing those realities are not permanent fixtures in a dynamic environment and that rebuilding energy supply chains is a significant undertaking, we still see time for a negotiated solution without losing too much momentum. As we have stated, that glass-half-full view will be tested the longer the conflict endures and the broader its geographic reach. 

Since the conflict’s inception, very few asset classes have delivered a positive absolute return, but four weeks does not necessarily a trend make. In the context of a “typical” year (if there is such a thing), our research shows that the S&P 500 has averaged a 14% intra-year peak-to-trough decline, also known as a drawdown, over the past 30 years, and broad bond proxies like the Bloomberg US Aggregate Bond Index averaged a 3.5% intra-year drawdown over the same measurement period. As of Friday morning, broad bond market total returns are down 0.82%, and the S&P 500 is down less than 6% for the year (more on this later).

What is somewhat unique since the conflict’s inception is that several perceived safe havens, or assets that have performed well historically in periods of turmoil, have not delivered positive returns: Since February 28, proxies for gold, silver, long-duration government bonds, the Swiss Franc and the Japanese Yen have all produced negative total returns, with precious metals weakness that began in late January exacerbating in recent weeks. Very few categories, including the trade-weighted U.S. Dollar and select hydrocarbon and energy-related assets, have delivered positive total returns.

In spite of these results, we do not interpret the last four weeks’ market activity as a referendum on diversification. This is similar to our view that 2022 — when the Fed raised its target interest rate from zero to 4.5% and both stocks and bonds fell double digits — did not mark the end of the diversified portfolio. In fact, the following three years produced strong total returns. This suggests that the shorter-term investor reactions that have characterized the first two stages of the current news cycle are largely consistent with history. As the third stage comes into sharper focus, we anticipate diversified investors will be rewarded for their discipline and patience. 

Investors remain intently focused on the bond market. U.S. Treasury bond yields, which move in the opposite direction of price, continued to move higher this week, touching levels we have not seen since May of 2025. A few catalysts are driving this: First, investors holding longer-maturity bonds are requiring additional yield compensation despite their expectations that inflation will eventually revert to longer-term levels near 2%. In other words, short-term inflation concerns are currently dominating long-term inflation expectations. This sentiment appears to be corroborated by University of Michigan consumer sentiment data, where respondents expected higher one-year inflation than they expect over the next five to 10 years.¹

Second, this week’s bond auctions, which represent regular issuance by the Treasury Department, saw tepid demand from typical investors such as banks, other institutions and foreign buyers. Tuesday’s 2-year Treasury note auction, Wednesday's 5-year note auction and Thursday’s 7-year note auction all featured bond yields that were higher following the auction.

Third, credit spreads, or the additional yield compensation (or price discount) investors seek for assuming credit risk, have increased by about a half percentage point since the conflict began for riskier borrowers. That said, using data going back to the mid-1980s, credit spreads remain almost two full percentage points below their historical average.²

For disciplined investors, higher yields allow redeployment of incoming cash flows into bonds at lower prices, which helps them compound at higher interest rates. We still do not see an adverse credit cycle emanating from the current conflict, and buying high-quality bonds with strong interest coverage benefits investors over time. 

Our Economics Team put together some thoughtful analysis on this topic, courtesy of Chief U.S. Economist Ryan Boyle. Refunds have averaged over $3,000 per household in the past two years, providing a significant boost to American taxpayers.³ This year brought the potential of even larger windfalls to households, coming at a time that many can put them to good use.

To date, refunds have indeed increased. Through mid-March, total individual tax refunds are running more than 12% above last year’s level. Individual circumstances will vary widely, but the Tax Foundation estimates that the One Big Beautiful Bill Act generated an average of $611 in additional tax refunds for the 2025 tax year — a 20% gain over long-run levels.

However, the stimulus is not broad-based. The tax policy works through higher refunds for those who pay higher taxes and interest. Its benefits will skew more toward higher earners who are less likely to spend a windfall. While this compounds an uneven spending dynamic, it hedges the inflationary risk of putting money rapidly into circulation.

Recent geopolitical developments have tempered our hopes for a near-term lift to discretionary spending from tax refunds. Oil prices have entered a new range that is about a third higher than last year’s average. U.S. consumers see the consequences directly in gasoline prices, which are up by about $1 per gallon. In aggregate, motor fuel represents about 2% of household consumption, which will also vary widely depending on vehicle and lifestyle choices. Consumers will feel ripple effects in higher goods prices, transportation costs and food prices, as fertilizer becomes more costly. The extra $611 may quickly be spent on essentials.

¹ University of Michigan Surveys of Consumers. Accessed 27 March 2026.

² Northern Trust Wealth Management Research, Bloomberg data produced on terminal March 27, 2026. 

3 Filing Season Statistics For Week Ending Oct. 17, 2025. Accessed 27 March 2026.