As we navigate past the one-month mark of the conflict in Iran, recent data releases are starting to reveal the broader impact on the economy. Currently, growth expectations are dropping, inflation is climbing, and consumer sentiment is plummeting.

Both the bond and equity markets have reacted to these geopolitical headlines, yet there is a growing sense that the markets might already be pricing in the ongoing uncertainty and anxiety surrounding Iran. While the situation remains unpredictable, the recent breakdown of talks over the weekend does not appear to have rattled investors.

This resilience may mirror the market’s reaction to last year’s tariffs. Once the initial shock of Liberation Day subsided and the volatile tariff wars became a familiar backdrop, the markets managed to recover. A key factor in last year’s market performance was that the widely feared economic devastation from tariffs ultimately did not materialize over the long term. While the energy shock stemming from the Iran war certainly poses significant economic threats, there are plausible scenarios where these disruptions are short-lived and the economy maintains its solid footing.

Let’s get into the data:

• Labor Rebounds: Non-farm payrolls for March rose by 178,000. The U.S. Bureau of Labor Statistics reported that the labor market added 119,000 more jobs than the Dow Jones consensus estimate, bouncing back after falling precipitously by a revised 133,000 jobs the previous month.
• Unemployment Dips: The unemployment rate fell to 4.3%, down from 4.4% last month.
• Inflation Spikes: The Bureau of Labor Statistics reported that the Consumer Price Index for March grew 3.3% from twelve months ago. The month-over-month figure was 0.9%, which clearly indicates the spike is related to the war in Iran.
• Sentiment Tanks: The University of Michigan Consumer Sentiment Index fell off a cliff. The preliminary reading for April dropped 11% to 47.6. If the final data reflects this same sentiment, it will mark the lowest reading on record.
• Growth Expectations Cut: The latest GDPNow estimate from the Atlanta Fed revised Q1 growth expectations down to just 1.3%.

What Does the Data Add Up To?

The markets seem to be taking a long-term view of the Iran conflict, hoping that the positive market sentiment we are currently seeing has real momentum rather than just being a temporary relief rally.

Consumers, however, are significantly more pessimistic. According to the Michigan Consumer Expectations Survey, consumer expectations for inflation over the next twelve months have risen to 4.8%, up from 3.8% in March. More concerning is that expectations for longer-term inflation also ticked up, from 3.2% to 3.4%. This long-term expectation of higher inflation is problematic for the Federal Reserve because it often becomes a self-fulfilling prophecy. When consumers expect prices to rise, they modify their spending by shifting purchases to the near term, which inherently drives prices up further.

The Fed held rates steady at their March FOMC meeting, and Chicago Federal Reserve President Austan Goolsbee recently noted that high oil prices stemming from the Iran war could potentially push rate cuts into 2027. While this timeline contradicts the Trump administration’s frequently stated desire for lower rates, the backdrop of spiking inflation could make it very difficult to initiate rate cuts at the summer meetings in June or July, even if Kevin Warsh is confirmed as Chairman on schedule.

Meanwhile, mortgage rates—another critical interest rate for the economy—are moving in the wrong direction. After finally trending downward earlier in 2026, mortgage rates have climbed almost half a percentage point in recent weeks. Consequently, existing home sales have dropped below their 2025 pace, according to the National Association of Realtors. Additionally, home loan applications have fallen for four consecutive weeks.

The longer the conflict in Iran persists, the more likely it is that the current energy shock will evolve into a full-blown energy crisis. Even if a negotiated resolution is reached soon, normalizing global shipping is not as simple as flipping a switch. Delays will likely persist as supply chains attempt to normalize.

Charts of the Month: Energy Shock and Consumer Sentiment

This month requires two charts to fully capture the current economic landscape. First, the steep decline in tanker traffic has clearly started to impact the economy. While the broader market appears to be holding steady, continued energy shocks will cause the economy to suffer across multiple dimensions.

Source: Bloomberg

Second, consumer sentiment has experienced a similarly steep plunge. The 11% drop highlights a deeply pessimistic economic outlook, most likely driven by anxieties over the conflict with Iran.

Source: Axios

Equity Markets in March

• The S&P 500 fell 5.0% in March, which pushed the year-to-date performance into negative territory.
• March experienced high volatility and ended with the index down; ten of the eleven market sectors turned negative, led by industrials and technology.
• However, by mid-April, the market traced a deep V-shape of decline and recovery, rebounding from all of March’s underperformance to return to flat for the year.

Bond Markets in March

• The 10-year U.S. Treasury ended the month with a yield of 4.30%, an increase from 4.21% the prior month.
• The 30-year U.S. Treasury ended February at 4.88%, up from 4.64%.
• The Bloomberg U.S. Aggregate Bond Index dropped by 1.76% during March.
• The Bloomberg Municipal Bond Index also declined, falling 2.32% for the month.

The Smart Investor

The first quarter of the year has been defined by worry, uncertainty, and multifaceted crises. Relief regarding tariffs was quickly overshadowed by headlines about the disruptive potential of AI; before those concerns could fade, a war, an energy shock, a steep increase in inflation, and wildly fluctuating labor statistics refocused everyone on the perception of a fragile economy.

But is the economy truly that precarious?. Unemployment remains historically low. Furthermore, while inflation was driven higher by energy costs, core inflation—which strips out that volatile energy category—remains healthy.

When facing financial anxiety, there are two primary areas to evaluate: your investment plan and your budget. For both, breaking them down into short-term and long-term perspectives can be highly beneficial.

• Investment Plan: Your long-term strategic investment plan should be designed to account for your personal risk tolerance and specific goals, allowing you to hit your milestones and still sleep well at night. In the short term, your tactical investment plan can be adjusted to provide extra risk mitigation or to capitalize on short-term market dislocations.
• Budgeting: Your long-term budget ensures you make sound financial decisions, manage expenses, and consistently meet your savings targets. In the short term, critically reviewing your expenses and prioritizing what is essential can help you navigate rough patches when consumer prices are elevated.

With tax season behind us, spring is the ideal time to tune up your budgeting and investing strategies so you can head into vacation season in excellent shape. We are always here to answer your questions and help you navigate the bumps along the way!