War Headlines Whipsaw Markets & Portfolios

MIKE TOWNSEND: For the second time in two months, the United States has taken military action against an oil-producing nation. But while January's operation in Venezuela was brief and has had little lasting impact on the markets, the war in Iran is an entirely different beast. There are a host of practical questions about the war. How long will it last? What's the short-term goal? What's the long-term goal? Will it require U.S. boots on the ground? What constitutes success?

And there are the harsh realities of war. Seven American soldiers killed as of the beginning of this week. Hundreds of Iranians killed. Untold damage to a historic city. A dozen countries in the region that have been the subject of Iranian counterattacks. A growing humanitarian crisis. 

For investors, the Iran situation is a source of deep concern because of the broader implications for the region, the global oil trade, the U.S. economy, and markets both here and abroad. At home, gas prices have increased by nearly 17% on average just since the conflict began. The S&P 500® is in negative territory year to date. Bond yields are rising. Oil prices, which were just above $60 a barrel in mid-February, have been whipsawing on the news, rising to a peak of $116 a barrel on March 9, only to drop down to $84 a barrel on March 10. The market is anxious. Investors are anxious. So what's an investor to do? 

Welcome to WashingtonWise, a podcast for investors from Charles Schwab. I'm your host, Mike Townsend, and on this show, our goal is to cut through the noise and confusion of the nation's capital and help investors figure out what's really worth paying attention to. We've been talking in recent weeks about how it's important for investors not to get too distracted by headlines. But the U.S. involvement in a major military conflict in Iran is at the top of everyone's mind, and it's been roiling the market since it started with investors large and small reacting and overreacting to the headlines. 

On today's episode, I want to dig into the ramifications for the oil market, the U.S. economy, the global economy, and the capital markets broadly. And I want to offer some practical suggestions for investors whose heads are spinning just trying to keep up with this fast-changing market. For that discussion, there's no one better than Kevin Gordon, head of macro research and strategy at the Schwab Center for Financial Research. Kevin will join me in just a few minutes. But before we get to that, here are three things I'm watching in Washington right now. 

First, a judge last week ordered the administration to begin refunding more than $160 billion it collected in tariffs that were invalidated by the Supreme Court last month. The high court did not weigh in on tariff refunds in its decision, leaving that up to the lower courts.

Last week's decision by a judge at the U.S. Court of International Trade orders Customs and Border Protection to issue refunds. But the mechanics of that are still being worked out. Late last week, a customs official told the court it would take about 45 days to upgrade the systems necessary to process refunds, but that they could be done electronically and repaid with interest. Each importer will reportedly receive a single payment covering all of the refunds they are owed.

There are an estimated 330,000 businesses who are likely eligible for a refund, ranging from global giants like FedEx, Costco, and Nintendo down to micro businesses run by individuals. And there have been worries by small-business owners that the administrative hurdles to claiming a refund would be too burdensome to make it worth the time and effort. But the initial plans from the customs service appear to be headed toward a surprisingly simplified process.

Of course, nothing is set in stone yet, as the administration is considering whether to appeal the court's ruling. But just three weeks after the Supreme Court invalidated the tariffs, the idea that companies may be about to get a huge infusion of cash in the form of tariff refunds is looking increasingly likely. 

Second, I'm also keeping my eye on the Department of Homeland Security, which will hit the one-month mark on its shutdown on March 13. Of course, an estimated 90+ percent of the agency's 260,000 employees are considered essential workers and are required to stay on the job without pay. So the disruption to the public has been relatively minimal so far. But that may be changing and it's becoming more visible at a familiar spot, airports. With TSA agents receiving only a partial paycheck at the end of February and set to miss a full paycheck next week, there's been a significant uptick in sick-outs, absences, and resignations, creating a staffing shortage that is leading to long lines at major airports. Last weekend saw security wait times of three or more hours at Houston's Hobby Airport and in New Orleans, and lines nearly that long at major hubs like Atlanta and Charlotte. Airport headaches, more than anything, may put public pressure on Congress to resolve the standoff.

On Capitol Hill, there's hope that the president's decision last week to fire Kristi Noem as the secretary of homeland security could rekindle talks between the two parties about the funding stalemate. Democrats are still pushing for restrictions on ICE agents as part of any deal. Republicans have offered some changes while resisting others. And the two sides remain far apart.

But three-hour security lines at airports is not a sustainable place to be, either practically or politically. So don't be surprised if talks get more serious in the days ahead. The changing of the guard at the top of Homeland Security will have implications on Capitol Hill. The president has announced that Senator Markwayne Mullen, a Republican from Oklahoma, will take over as DHS secretary at the end of March. He'll need to be confirmed by his Senate colleagues, and the Senate is pushing towards a quick confirmation hearing as soon as next week. Mullen's departure from the Senate will mean that Oklahoma's governor will need to appoint a caretaker senator. A quirk in the state's law prohibits that person from running for election to the seat this fall. With a full six-year term on the Oklahoma ballot in November, a scramble is taking place to see who might run. At least two House members are expected to enter the Senate race. A Republican is almost assured of winning the seat in the fall in the ruby-red state. 

Finally, the midterm elections kicked off in earnest last week with primary voting in Oklahoma's neighbor to the south, Texas. Senator John Cornyn, a Republican who was seeking his fifth term, outperformed expectations, edging the favorite, Texas Attorney General Ken Paxton, in a three-way Republican primary that also included Congressman Wesley Hunt.

But with none of the candidates getting to 50% support, the top two finishers, Cornyn and Paxton, advanced to a runoff on May 26 to determine who will be the Republican nominee. The race is already the most expensive Senate primary ever, and it's about to go on for three more months. President Trump has said he will make an endorsement soon, which could be decisive. Meanwhile, Texas state legislator James Talarico defeated Congresswoman Jasmine Crockett in the Democratic primary. Democrats are high on Talarico and feel like they have a real chance to score an upset win in this race. I'm a bit skeptical about that. It is Texas after all, which hasn't elected a Democrat to the U.S. Senate since 1988. But Democrats will need to win a couple of hard-to-win seats next fall in order to have any chance of capturing the Senate majority.

Analysts are looking at Texas along with Alaska, Iowa, and Ohio as possible places where a Democrat could pull an upset in a blue wave kind of election and flip the Senate. So I'll be keeping my eye on how things unfold in Texas. 

On my Deeper Dive today, I want to take a closer look at the biggest story going on right now, the war in Iran and its implications for the economy and the markets. The speed at which this situation has been changing is staggering. So it won't be surprising if some of what we say will have been overtaken by events between our recording this episode and you listening to it. But there's no one better to help understand this fast-moving story than Kevin Gordon, head of macro research and strategy at the Schwab Center for Financial Research. Kevin's got a great ability to look at this kind of complicated situation and focus on what is most likely to matter to investors. Kevin, thanks so much for making the time to join me today.

KEVIN: Hey, Mike, always great to be back with you.

MIKE: So, Kevin, let's start very high level. We're about 10 days into the military conflict in Iran. No clear timeline, shifting goals, just a lot of uncertainty. And of course, the human toll has been immeasurable. But from a market standpoint, the S&P 500 is down about 2.5% since the day before the military action started and is now in negative territory year to date. Meanwhile, the 10-year Treasury yield is up about 20 basis points. So from your perspective, how has the market been sorting this out so far, and what's it looking for going forward?

KEVIN: Well, I think the most important thing you said, which will be the most important thing moving forward, is that there is no timeline. So we're sort of living in this headline-to-headline world with the war, and the potential for whiplash is pretty huge. And in market terms, central to this conflict is the spike that we've seen in oil prices, which is now nearing historic rates of change, both to the upside and the downside. And given the importance of the Middle East when it comes to both oil production and oil flow, there has been this significant jump in the price of Brent crude oil, and that's the global benchmark. So far, at the time that I was putting these stats together, so caveat that this could have changed by now, but so far, it's up close to 30% just this month. Even if it were unchanged from here, so if you held that increase so far, that would be one of the largest monthly increases in history. And to me, the duration of this war is really the key to how much the global economy will ultimately suffer.

I think we have to be really humble in our assessment of what the war will mean for the economy, given none of us has any insight as to how long it will last, what the end game is, or how long it will take for operations in the Middle East to get up and running once it's safe to do so. But given that uncertainty, we've seen U.S. stocks largely take this whole thing in stride. So the S&P 500 is down by almost a percent year-to-date. And most important to keep in mind with stocks right now is that the selloff is really more of a matter of which region or country is seeing these steeper losses. So I mentioned the S&P being down almost a percent, but if you look across to Europe, or if you look to Asia, in Europe, losses at their worst point were about double what they were in the U.S. And in Asia it was slightly worse than that.

That is almost entirely driven by the fact that when you look at those regions' exposure to the energy sector, they are more at risk when it comes to either oil imports in the case of Asia or more aggressive increases in natural gas prices in the case of Europe. And the U.S. has been a net exporter of natural gas since 2017 and a net exporter of oil since 2020. So by almost definition, we are relatively more insulated by energy price shocks, which is a huge reason that we've seen the U.S. dollar rise so much over the past week. In any event of geopolitical instability, investors tend to flock to the dollar, and they view it as this perceived haven currency. And that's even truer today. 

If we shift to the bond market, and we look at Treasury yields, I find it just a little bit more concerning to see them rise over the past week, and at a relatively aggressive pace, I might add. Normally when you get a jobs report as weak as the one for February, we would see this big flight to Treasuries, meaning yields would move lower as prices went up. But since the jobs report, we've seen almost this firmness to yields even as equities have moved down at the same time. And it means that yields are going higher for the so-called "wrong reasons," as inflation has become a little bit more of a dominant concern. Vice versa, if yields were moving up along with stocks, it would be for the so-called "right reasons," because economic growth prospects would be improving.

Now, to put the yield move into context and to zoom out a little bit, the 10-year Treasury yield is still a bit below the middle of its range over the past year. And it's not at all close to the peak back in May of 2025 in the aftermath of Liberation Day. So I don't think that we should extrapolate recent moves into the future indefinitely, almost purely because of the little visibility that we have with this conflict.

But how about you and your world, Mike? What's been the reaction in Washington thus far? It seems to me that Congress seems content to let this play out for a bit.

MIKE: Yes, but as you might expect in the polarized Washington, pretty stark divide from the two parties. The president, of course, did not seek congressional authorization, something that really isn't as controversial as a lot of people have made it out to be. Over the last few decades, presidents of both parties have gone into military conflicts without authorization from Congress. Last week, both the House and the Senate narrowly rejected a war powers resolution that would have restricted the president from escalating the military action without first consulting Congress. 

Almost every Republican, with a couple of exceptions, voted against that, while almost every Democrat, again with a couple of exceptions, voted for it. But I think the next big fight in Congress on this is going to come very soon, perhaps as soon as next week, when the administration is expected to request supplementary funding to support the cost of the war, which is already in the neighborhood of a billion dollars a day. So it may take a supplementary funding request of $50 billion or more. And that's going to bring a lot of questions and a lot of difficult votes for members from both parties, especially those facing tough re-election fights this fall. And it raises questions of whether some of our allies are going to help foot the bill for this war, which, given the degree to which tariffs and other tactics from the administration have strained relations with some of our allies, is no sure thing.

But Kevin, in addition to just the sheer cost of the war and its impact on the budget deficit, there are much bigger potential impacts to the U.S. economy and the global economy because of the war's impact on the global oil market. And of course, anything impacting oil has sweeping ramifications for everything from global shipping to the price of gas here at home.

So let's start with shipping. What's the latest with regard to the impact on shipping?

KEVIN: Yeah, so there has been an immediate impact on shipping given traffic through the Strait of Hormuz is essentially ground to a halt. And the strait is this really interesting global choke point for oil. It's one of the most strategic ones that we have in the world. And it is the only open-water passage from the Persian Gulf to the ocean. And given there has been this drone warfare happening there, the ships that are in there trying to get through the strait have sort of been like these sitting ducks trying to get out.

And it's crucial because the Strait of Hormuz itself transports about 25% of global oil, about 20% of liquefied natural gas, and about 35% of fertilizer feedstock. So based on those statistics alone, you can get a sense of how vital it is to the global economy, not just the energy economy, but really everything. And it gets to a point that I like to make about oil being this super commodity. You sort of need it for everything. 

If it's not in the product that you're using, it's likely played a huge part in getting that product to you. So when you have these strategic points like the Strait of Hormuz being cut off, you tend to see remarkable increases in swings in energy prices. And so far, that's been the case, as I mentioned earlier with Brent crude oil prices. There are, of course, so many potential ripple effects that can come from this. But to me, the major initial risks as of now are twofold. First, from a global perspective, I think there are growth risks that are a bit more severe for regions like Asia and Europe.

So as I mentioned, they're more directly exposed to the Middle East when it comes to energy, especially given several countries like China, for example, import a ton of oil from the Middle East. Europe happens to be a major liquefied natural gas importer. And since prices have spiked more severely in that region, and they've been more volatile, there's a little bit of a higher chance that households pull back on their spending given some higher energy bills. But the second major risk is here in the United States. And you just mentioned it, Mike, it's gas prices.

MIKE: Yeah, absolutely. You and I talked about this at a client event last week, but there's perhaps no more visceral number in the economy to the average American than the price of a gallon of gas. Everybody knows how much they paid for a gallon of gas. We probably all grew up watching our dads drive five miles out of his way because he knew of a gas station that was selling gas for seven cents a gallon less than the place down the street. For a lot of people, gas prices are sort of a proxy for how the economy generally is doing. And over the last 10 days, we've seen a significant spike.

KEVIN: Yeah, it really has been this stunning increase in the average price of gas in the U.S. And at the time I was looking at the stats for our conversation, the average price of a gallon of gas climbed by 16% just over the prior seven days. If you look at the only two periods with a comparable increase in that short time frame, it was 2022 in the aftermath of Russia's invasion of Ukraine, and it was 2005, right in the aftermath of Hurricane Katrina.

And I am not in the business of forecasting gasoline prices, but based on the relationship with oil prices, you could see that there's room for gasoline prices to continue to move higher. Of course, they could roll over when oil prices roll over further, but we're not guaranteed to see the same pace on the downside as we did on the upside. Plus, price level really matters here. So if oil price volatility comes down, that's great. But if oil prices are still much higher than they were before the war, we might not see as severe of decline in gasoline prices. 

But to your point, I don't think that the general public is going to respond favorably to all of this, which is a bummer because we were just starting to see some signs of improvement across an array of consumer sentiment surveys. And it's also a bummer because inflation has been inching further away from the Fed's target. So now it's much closer to averaging 3% versus the Fed's target of 2%. 

One thing to keep in mind is that energy plays a smaller role in the broader U.S. economy today than it has during prior oil price shocks. So as a share of consumer spending, energy goods and services spending has come down from close to 10% in the 1970s and the 1980s to just below 4% today. 

That doesn't mean that the share won't climb as oil prices climb, which is likely to happen, assuming oil stays relatively elevated in the coming week or two. But it does mean that the rise in oil prices needs to be both large and persistent for it to act as a more meaningful hit to the economy. That said, to your point about gas prices being visceral for the American consumer, we can't ignore the psychological impact that they tend to have. And this is where assessing the consumer spending and retail sales data in the next month is going to be crucial. There is a chance that we could see consumers add more to their savings and pull back on spending. And I put that probability a little bit higher today since we've seen this meaningful pullback in the savings rate over the past year.

And in fact, the U.S. savings rate right now is at 3.6%. That's the lowest since October of 2022. However, that pullback in spending is very different than this conflict, leading to a deterioration in the labor market. So the key metric that I'm keeping my eyes on for that in the next few weeks is the initial jobless claims data that we get every Thursday morning at 8:30 Eastern Time.

So if those start to spike, it will be increasingly indicative of the fact that companies are struggling from higher energy costs and need to not only pull back on hiring, but they need to increase layoffs to keep their profit margins from falling. This is key because the labor market is in a much more fragile position today than it was in 2022. So back then when Russia was invading Ukraine, non-farm payroll growth in the U.S., it was at just over 5% year-over-year.

That growth rate today has come down to 0.1%. So we are skating on some pretty thin ice when it comes to labor.

MIKE: Yeah, really important point that you're making about the connection between energy costs and the labor market, and that labor data that you mentioned is something I think we'll all be watching very carefully over the next few weeks. Well, I want to switch things over to the stock market. One of the most noticeable trends in the market over the last few months has been this dramatic sector rotation away from tech-heavy sectors like communication services and information technology and towards sectors like energy and materials.

In fact, energy is far and away the best performing sector year to date. So is that leadership at risk as a result of the situation in Iran? Or does a war with an oil-producing country push the energy sector higher?

KEVIN: Well, to answer your second question, the war has pushed up oil prices, which has in turn been good for energy stocks. This is probably not terribly surprising, but the energy sector is tightly correlated to moves in oil prices. So all else equal, when you get this strong upward move in oil, you tend to see energy stocks follow. I think it's important to stress, though, that the energy sector was already doing well this year before the war broke out. So in the first two months of 2026, it was up by nearly 25%. Putting that in context, the sector is lucky if it can get a 25% gain in a full year, let alone two months. And I think a lot of that initial boost at the start of the year was this sort of sentiment and positioning unwind, meaning investors had gotten so bearish on the energy sector, they sort of left it for dead last year. And then when you look at flows into the ETFs that track that sector, they were dismal. And then you look at the fact that oil prices in December had fallen below $60 a barrel, which was a new five year low. After that, you started to get some modest inflation pressures as we turned into the new year. We saw some signs of stabilization in the global economy, even some signs of reacceleration in some countries. And then there was a bit of this tilt away from the prior AI winners like tech and communication services. So all of that swept sectors like industrials and materials in with the energy trade. And you had the makings of an increasingly constructive stock market when it comes to the prospects for economic growth.

Of course, a lot of that started to come into question as the war broke out, not necessarily in a terribly bearish sense, maybe more so in a terribly confusing sense, since nobody knows the maximum severity or the duration of this conflict. But now, as we sit more than a week into this, there hasn't been much of a change for energy's leadership status. But interestingly, tech has started to bounce back a little bit. This could be maybe another instance of a sentiment washout, given the carnage that we saw in the software industry and the fact that it has already gone through a bear market decline this year. But at this point, at the broad level, I wouldn't try to pull much of a signal from sector swings that we've been seeing. I think we're going to continue to see this kind of whiplash and these really aggressive moves under the surface of the market. And even at the index level, again, I think we're sort of one ceasefire announcement away from oil dropping and stocks shooting higher and then bond yields moving lower. And that's not a forecast from me, but it's just to sort of prepare investors that when we live in this headline-by-headline world, reversals can be jaw dropping in both magnitude and speed.

MIKE: Yeah, you mentioned earlier how gas prices can contribute to a broader spending pullback by consumers. But there are some signs that that was happening even before the action began in Iran. In fact, there are number of worrying signals in the economy, last week's jobs report being one. What's the outlook for the job market? And will the prospect of a drawn-out conflict in the Middle East exacerbate the slowdown in hiring?

KEVIN: So yes, we had already seen a bit of an easing in consumption before the war. And if you look at personal spending in year-over-year terms, as of the end of 2025, which is the latest data that we have available, personal spending in the U.S. fell to a 4.7% pace. And that was the slowest since January of 2024. It was also down rather significantly from the 6.4% pace a year earlier. And I will say 4.7%, it's still strong relative to history, but momentum is important here.

If you're holding at 4.7% on average, that is very different than slowing quickly to 4.7%. And we're a little bit closer to the latter scenario than the former. If you add on the fact that in inflation-adjusted terms, that year-over-year spending looks a little bit weaker. So it's actually down to 1.7%, which is the slowest since December of 2022. To me, moving forward, I think what has the potential to slow spending is if we do see more jobs reports like the one that we got for February. That one was pretty negative all around. There were some caveats worth mentioning, though. If you look at the total 92,000 jobs that we lost that month, somewhere between 30,000 to 40,000 are estimated to have been in the health care sector purely due to labor strikes. So if you assume that those are fully resolved by the time that we go through the next data collection period for March payrolls, health care probably goes back to being a significant support for non-farm payrolls.

Second thing I would mention is that we had a pretty significant and severe weather issue. So severe weather was disrupting sectors like construction, leisure, hospitality, and there was probably some overstating when it came to losses for those sectors in February. So if you add those things together, and you factor those in, you get to the scenario where weakness in February was probably overstated, and then the surprising strength in January's payrolls was probably overstated. 

So to me, that's actually fully in line with the new normal that we find ourselves in these days, which is relatively low job creation and a relatively low unemployment rate, despite continued growth in the economy. And you can say it's almost akin to this jobless expansion. Of course, the economy is not jobless, but the implication is that we're not really near what is considered average when it comes to job creation in a normal economic expansion. And most of that really just boils down to, number one, we have an aging demographic issue in the country, which we've been facing for a while.

And number two, we've seen this significant slowdown in immigration. And the latest estimate from the Census Bureau is for net migration to total just slightly more than 300,000 people this year. That is a significant reversal from nearly three million people just a couple of years ago.

MIKE: I think that's a great point that you make about how the January numbers and the February jobs numbers may have been overstated kind of in opposite directions. But I think that kind of fits in with all the uncertainty that we have as a background right now. So given that context, what's an investor to do? At a high level, I suppose the answer is really to do nothing. Geopolitical developments, even wars, tend to have relatively little impact on the U.S. markets, especially after the first few days of a conflict.

But there's no question that investors get spooked by wars, especially one with such an uncertain outlook in terms of how long it will last and what constitutes success. So in that context, are there sectors that you're maybe more worried about in this kind of environment?

KEVIN: Well, I think that when it comes to knee-jerk reactions that an investor feels that they need to make, I always think of that Jack Bogle quote "Don't just do something; stand there." We know in theory that making rash moves within a portfolio tends to be a poor decision. But of course, we as humans tend to forget those rules when our emotions are running hot in the moment. And this is where having a plan really comes into play.

The calmest interactions that I have in moments like these are with investors who have constructed portfolios not to be immune to these events, but to help keep them on track with their goals. And to me, those are two very different things. It's not possible to build a portfolio that will guard you against losses outright, but it is possible to create one that gives you an elevated degree of comfort when we go through these really turbulent periods. To get to your question from a sector standpoint, there are a couple that jump out to me.

So front and center in this is the energy sector, of course, which is definitively the leader in the U.S. stock market this year. Energy can continue to do well if oil prices keep shooting higher. But the one thing that I worry a little bit about is that energy is becoming the momentum trade, meaning its strength is sort of feeding off of how well it has been doing. And when momentum reverses, for whatever reason, tends to be pretty powerful, which means energy can be subject to more aggressive swings, both to the upside and then the downside. And I say this because, again, we don't know what the headlines will be when it comes to this war. And as we've just learned over the past couple of days, we might be one ceasefire announcement away from oil prices reversing lower and energy following suit. And so I think it's just worth keeping in mind, especially for investors who are trying to maybe chase some of the performance that energy has had lately. 

The second sector I'm really keeping my eye on is consumer discretionary. And this is perhaps another obvious one. But I do think that if we're going to see meaningful consumer pushback to higher gasoline prices, there is some more meaningful downward pressure that could form for discretionary. And as a reminder, discretionary is this huge category that spans goods and services. It has everything from clothing retailers to e-commerce to automakers and many more industries. And to be sure, it has been one of the worst performers this year, but I'm not sure that the market is pricing in a meaningful move lower in consumer spending and then a meaningful increase in the savings rate.

But of course, as we've mentioned many times, there's not much visibility here. So there is an element of the market really not knowing how to price this in. But I would say overall, to me, the big takeaway is that we haven't made changes to our views purely because of this war. There are so many moving parts. And when we see how this affects growth, if at all in a meaningful way, then we may adjust our views. But for now, we're not making any decisions based on it.

MIKE: Well, great perspective as always. I really appreciate your sort of calm take on what's a very un-calm situation right now. Really appreciate you taking the time to talk today. I know you have been extraordinarily busy with everything going on right now. So thanks for being here.

KEVIN: It's always great to chat, Mike. Thanks so much for having me.

MIKE: That's Kevin Gordon, head of macro strategy and research at the Schwab Center for Financial Research. You can follow Kevin on X @KevRGordon, and you can read his regular commentary at schwab.com/learn.

Well, that's all for this week's episode of WashingtonWise. We'll be back in two weeks with a new episode when Collin Martin, head of fixed income research and strategy at Schwab, will join me to talk takeaways from next week's Fed meeting and how the Iran war is impacting the bond markets. Take a moment now to follow the show in your listening app so you get an alert when that episode drops and you don't miss any future episodes. And don't forget to leave us a rating or a review. Those really help new listeners discover the show. For important disclosures, see the show notes or schwab.com/WashingtonWise, where you can also find a transcript. I'm Mike Townsend, and this has been WashingtonWise, a podcast for investors. Wherever you are, stay safe, stay healthy, and keep investing wisely.