War Over There, Inflation Over Here

When war disrupts a critical commodity, the price shock rarely stays contained. It travels through inflation, through interest rates, and eventually into portfolios.

You don’t have to look far for a live example. The conflict with Iran has disrupted the Strait of Hormuz — a major chokepoint through which global oil supply typically flows. The head of the International Energy Agency called the current situation "the greatest global energy security threat in history."

Speaking of history, this isn’t the first time we’ve seen an energy supply shock.

In 1973, an oil embargo sent energy prices sharply higher and helped push the U.S. economy into recession. In 1990, Iraq’s invasion of Kuwait triggered another oil spike — markets followed. In 2022, Russia’s invasion of Ukraine disrupted global energy and grain supplies at a moment when inflation was already running hot.

Commodity price shocks have a long history of reaching into places innocent investors don’t expect, including their own portfolios.

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When Diversification Breaks Down

The 2022 Russian invasion of Ukraine is recent enough to be instructive, and painful enough to be remembered.

When Russia invaded Ukraine, energy and grain prices spiked sharply. That shock landed on a U.S. economy that was already uncomfortably warm with inflation, an unintended (or not) consequence from COVID-related stimulus.

The Federal Reserve, which had held rates near zero through the recovery, was forced into one of the most aggressive rate-hiking cycles in modern history, raising rates at a pace not seen in decades.

And that is where the story gets interesting for portfolios.

Stocks fell, and — surprising to many investors — so did bonds. The traditional 60/40 balanced portfolio, the one many investors believed was their all-weather solution, offered very little shelter that year.

By year-end, stocks and bond both fell double digits in the same calendar year — something that had not happened in any living investor’s lifetime.

The commodity shock started it. But it was the Fed’s aggressive response — raising interest rates faster than anyone had expected — that reached into every corner of the portfolio.

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WHY INFLATION COULD BE COMING BACK

The conditions could be in-place for inflation to run hot once again.

Consider the current policy backdrop that a sustained commodity shock could land on:

• Tariffs have been raising input costs across a widening set of goods.

• Stricter immigration policy is tightening the labor market, forcing companies to pay more to attract workers.

• Proposed tax cuts are projected to expand a deficit that is already running at historically high levels.

• The Federal Reserve is under visible political pressure to lower rates.

Each of these policies are inflationary on their own. We’ll see what happens when you higher energy prices and an unknown wartime bill on top of it all…

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WHAT THIS MEANS FOR Investors

Inflation is one force that can cause stocks and bonds to break down at the same time.

The 60/40 portfolio has been the foundation of American investing since the introduction of the first balanced mutual fund nearly 100 years ago. For most of that time it worked — because stocks and bonds tended to move in opposite directions. When one fell, the other cushioned the blow.

“As the global financial system continues to evolve, the classic 60/40 portfolio may no longer fully represent true diversification.”

Larry Fink, CEO of BlackRock (CNBC)

But, in recent years, we’ve seen the relationship between stocks and bonds breakdown at critical moments.

So far in 2026, both asset classes have shown genuine resilience in the face of significant headlines. Markets — often considered a forward-looking machine — have not collapsed. That’s an important piece of evidence.

The war in the Middle East is still unfolding. How it resolves — and how long the energy disruption persists — will have a meaningful bearing on whether inflation reaccelerates from here.

What is worth asking right now isn’t whether your portfolio survived the headlines, it’s whether it is built for the future.

Because a portfolio has two jobs. The first is to weather the storm. The second — and more important — is to help fund the life you have planned. Both require the same thing: a portfolio built with intention.