Before I head out of the country for the next week, I thought I would send out a quick update. There have been some developments in the Iran conflict, and we’ve been seeing those reflected in markets over the past several days.

While the headlines can sound dramatic, markets so far have been handling the situation fairly well. Yes, we’ve had a couple of red days recently, but they haven’t been tremendously negative. In fact, most days we’ve seen markets come well off their lows by the close.

We saw that again today. Markets opened deep in the red, but as the day progressed, they recovered significantly. By the close, the S&P 500, TSX, and other major indices finished meaningfully higher. That kind of intraday recovery is usually a sign of a fairly resilient market environment.

The Base Case Has Shifted

While unfortunate, it’s not really a big surprise that the original “best case” scenario many analysts were hoping for hasn’t quite played out. 

Had it played out that way, we likely would have seen a short, targeted military campaign focused on Iranian military infrastructure, followed by a quick de-escalation or even internal regime change. In that scenario, energy markets would remain largely unaffected and critical shipping routes like the Strait of Hormuz would stay open without disruption.

Instead, while the initial strikes appear to have achieved many of their military objectives, Iran is still responding and the situation remains unresolved. That means negotiations, retaliatory actions, and diplomatic maneuvering are likely to continue for some time.

One thing worth remembering in situations like this is that while it’s rare for the best-case scenario to play out exactly as hoped, it’s also just as rare for the worst-case scenario to unfold the way the headlines sometimes suggest. Markets are constantly trying to price these possibilities in real time. What typically happens is that reality lands somewhere in between — not the quick resolution everyone hopes for, but also not the catastrophic outcome that some fear. That middle ground is what markets are grappling with right now.

The Energy Question: Strait of Hormuz

The most important economic variable in this conflict is the Strait of Hormuz, one of the world’s most critical oil shipping routes.

A large portion of global oil exports passes through this narrow channel in the Persian Gulf.

If shipping through the strait were significantly disrupted, the economic impact would not be evenly distributed.

Countries most exposed include:

• Japan

• South Korea

• India

• China

These economies rely heavily on imported energy that moves through this route.

North America is less vulnerable, largely because of domestic energy production. This is one reason analysts believe the U.S. economy may be more resilient than other regions if energy prices remain elevated.

What We’re Seeing Across Markets

Several trends have already started to emerge.

Stronger U.S. Dollar
Periods of geopolitical uncertainty tend to push investors toward safe-haven currencies. The U.S. dollar has strengthened, which often puts pressure on emerging markets.

Emerging Market Volatility
Countries that depend heavily on imported energy or global trade flows tend to feel these shocks first.

Commodity Strength
Energy and some commodity prices have moved higher as markets price in the possibility of supply disruptions.

These reactions are typical whenever geopolitical risk increases.

What This Means for the Global Economy

The most important question now is how long the situation lasts.

Energy shocks can affect the global economy, but their impact depends largely on duration.

If tensions ease within the next few weeks:

• Oil prices likely stabilize

• Inflation effects remain limited

• Markets return their focus to economic fundamentals

If tensions last longer:

• Energy prices may remain elevated

• Growth outside the U.S. could slow somewhat

• Some central banks may face renewed inflation pressure

Even in that scenario, the U.S. economy appears structurally less sensitive to Middle Eastern energy disruptions than Europe or parts of Asia.

Final Thoughts

With all of this in mind, it’s probably a good time for everyone to take a bit of a deep breath.

I know that’s not always the most popular thing to say when headlines are flashing across screens and social media is filled with worst-case scenarios. The doomsday predictions are already in full force — we’re hearing about runaway oil prices, global recessions, and the end of the economic cycle.

But the reality is usually much less dramatic.

Over the weekend we saw crude oil briefly spike to around $120 a barrel, only to fall back to roughly $86 a barrel today at the time of writing. That’s a massive swing in a very short period and a good reminder of how volatile markets can be when investors react to headlines in real time.

I’m still in the camp that this conflict will likely last weeks to perhaps a month or two rather than turning into a prolonged geopolitical crisis.  Why? Because every country involved has strong incentives to see it resolved sooner rather than later.

• The United States wants to claim success and move on

• Iran wants the military pressure to stop

• China, Japan and Korea need stable oil supplies

• Europe would very much like to return to a more stable global environment.

In other words, while the conflict has clearly moved beyond the very best-case scenario of a quick resolution, there are still powerful forces pushing toward de-escalation.

I’ll continue monitoring developments and will update everyone as the situation evolves.