The Duality of Hormuz
Wait to add equities, particularly small-caps, to your portfolio.
The April 1st status of the conflict in the Middle East has bifurcated market sentiment into two distinct schools of thought. As we navigate the path forward the market will be driven by whether the Strait of Hormuz returns to its status quo or remains under Iranian control .
The De-escalation Camp: The "Normalization" Thesis
This school of thought suggests that a ceasefire will lead to a withdrawal of military assets and a gradual return to pre-conflict shipping norms. The premise is that once diplomatic pressures are applied, the regional temperature drops, and oil prices normalize as the "war premium" evaporates.
We assign a Probability of only 40%. The hurdle for this camp is the physical and psychological damage already done to global shipping lanes. History suggests that once a maritime choke point is contested, insurance premiums and security requirements are slow to recede.
The Structural Shift Camp: The "High-Cost" Thesis
This camp argues that regardless of a formal ceasefire, the security architecture of the Strait of Hormuz has been fundamentally altered. In this view, the United States and its allies will face a permanent "high-cost-to-pass" structure, requiring sustained naval escorts and significantly higher maritime insurance rates for the foreseeable future.
Probability: 60% This aligns with the current "Attritional" regime we are tracking. The OECD and Reuters both indicate that shipping disruptions are becoming embedded in global growth forecasts, suggesting the market is beginning to price in a "new normal" for transit costs.
Economic Implications: US and Global
A transition to a high-cost-to-pass structure acts as a hidden tax on the global economy.
US Implications: While the US is a net energy exporter, the global nature of oil pricing means domestic inflationary pressures will persist if Hormuz remain constricted. Higher input costs for petrochemicals and transport will keep the "last mile" of inflation sticky.
Global Implications: Europe and Asia are significantly more exposed. A permanent increase in transit costs erodes the "globalization dividend," potentially leading to further "near-shoring" of supply chains as companies seek to bypass volatile maritime routes.
The Fed and Corporate Earnings: 12 to 24 Months
The Federal Reserve: Persistent supply-side pressure from energy and shipping costs complicates the Fed’s path. If inflation remains buoyed by these structural costs, the "higher for longer" interest rate environment may persist, even if the broader economy shows signs of cooling.
Corporate Earnings: Small-cap companies are particularly sensitive here. Unlike large-cap multinationals with diverse supply chains and massive hedging books, small caps are often "price takers" for shipping and energy. We expect earnings volatility to increase as these firms struggle to pass through sustained higher costs to consumers.
Over the past 41 year of managing portfolios I have used the words “Steady at the Helm” and “This too Shall Pass” many times. Our current fixation on Iran will pass, but the short term and more importantly the intermediate term effects, could impact earnings, and leave the Fed little justification to ease in 2026.
The management of investment assets requires a long-term commitment to a disciplined process. We provide this framework not to offer a simple answer, but to help you, our clients, understand how we make difficult decisions for you. Risk management comes from understanding that a market bottom is a process, requiring confirmation of data, not reacting to headlines.
Based on our framework, we are currently maintaining a Wait signal. While some indicators are stabilizing, the "three confirmations" (Oil Ceiling, Equity Price Floor, and Credit Thaw) have not yet aligned in a way that warrants the deployment of the first tranche.
We are watching these developments as they occur, ensuring that our clients' capital is governed by discipline rather than speculation.
