Stagflation Risk the New Narrative

The war in Iran is now entering its fourth week. The conflict, often referred to as the 2026 Iran War or Operation Epic Fury, began on Feb. 28, when the United States and Israel launched a massive wave of surprise airstrikes across Iran. Since that very day of the initial attacks, energy prices and Treasury yields have spiked, while the vast majority of equities have corrected, some severely.

The old Wall Street maxim that “the charts don’t lie” could not be truer than the present situation. The yield on the benchmark 10-year Treasury reached 3.95%… the day before the war broke out. As of Friday’s close, the yield spiked to 4.39% — a huge move that has contributed heavily to the market selloff.

The bond market is sending a strong message to the stock market that the Fed is in no hurry to lower rates, with the latest set of data points flashing short-term inflationary pressures. This past week, the Producer Price Index for final demand increased 0.7% month over month (consensus: 0.3%) following a 0.5% increase in January. The Producer Price Index for final demand, excluding food and energy, jumped 0.5% month over month (consensus: 0.4%) following a 0.8% increase in January.

The primary takeaway from the report is that the uptick in producer prices was seen in both goods and services that occurred before the war with Iran and the subsequent surge in energy prices, which will fuel concerns about a worsening inflation situation for February and March data.

Oil prices remain elevated, with WTI hovering around $100/barrel, with natural gas and liquified natural gas (LNG) prices spiking after Qatar, the largest exporter of LNG in the world, suffered a material attack on its LNG infrastructure. Following the attack, 12.8 million tons per annum (MTPA) of capacity is offline. This represents 17% of Qatar’s total export capacity and roughly 20% of the global baseload supply. This is bad news for Europe and China, which are hugely dependent on energy imports.

If and when the war with Iran winds down, oil prices will decrease, as will natural gas prices and bond yields, because the short-term spike in energy, food and bond yields is a broad-based headwind for most consumers. Hence, forward-looking forecasts for GDP growth are sure to come down. To this point, The Atlanta Fed GDPNow model estimate for real GDP growth (seasonally adjusted annual rate) in the first quarter of 2026 is 2.3% on March 19, down from 2.7% on March 13.

The other old Wall Street adage, “the cure for high prices is high prices,” is essentially the market’s version of what goes up must come down, but with a specific economic engine behind it. In the current 2026 climate, where we are seeing a massive spike in energy and commodity costs due to the conflict in Iran and the Qatar LNG attacks, you will hear this phrase being tossed around a lot by the financial media. It describes a self-correcting cycle driven by two main forces: demand destruction and supply incentive.

With oil trading around $100/barrel, consumer discretionary spending will be curtailed, while oil producers are spending whatever they can to bring supply to the market. Eventually, all that new supply hits the market at once, creates a glut and crashes the price of oil. At least, that is the historical pattern. When spending declines, commodity prices decline, and finished goods prices will come down with the (maybe) new Fed Chair Kevin Warsh stepping into power to craft a soft economic landing.

At this juncture, investors have to have a keen eye for bullish price action among individual stocks that reside in the energy, aerospace/defense, suborbital space infrastructure, data center infrastructure and select health care. Last week, investors saw a rare phenomenon: gold and equities selling off sharply together. This usually means large hedge funds have to meet major margin calls. They are forced to sell their winners (gold) to cover losses in their losers (tech/small caps).

It felt like the flush that typically defines a market bottom. No promises, but it definitely had the look and feel of the market enduring a short-term rinse cycle following three weeks of steady war-related selling. Fingers crossed that the market has priced in the bad news from all that is going on.

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