Iran Conflict: Nearing the 90-day Mark

Marc Zabicki (00:00):

The current U.S. Iran conflict began on February 28th when the U.S. and Israel launched large scale strikes on Iranian military, nuclear, and leadership targets. In this latest edition of LPL Street View, we're going to break down what's actually happening now in the U.S. Iran conflict, what strategy Washington is indeed pursuing, and most importantly, how investors should interpret the recent rally in equity markets. After several weeks of intense military strikes, a fragile ceasefire was reached in early April, but it has not resolved the conflict. Instead, we've shifted into a phase of brinksmanship and negotiation with ongoing military pressure, naval blockades, and intermittent strikes continuing in the background. So while headline risk feels lower than in early March, the reality is that this conflict remains unresolved and structurally unstable. Meanwhile, tanker traffic through the Strait of Hormuz has been shut in, and as a result, global oil prices remain elevated.

Marc Zabicki (01:18):

The U.S. approach could perhaps be best described as coercive containment, with U.S. negotiation leverage. First, in terms of military engagement, the U.S. has aimed to degrade Iran's capabilities, targeting missiles, naval assets, and nuclear infrastructure to remove what it calls imminent threats. Second, economically and strategically, the U.S. has imposed a maritime and energy choke hold on Iran, including the naval blockade designed to constrain Iran's oil exports and limit its ability to finance operations. Third, and this is indeed critical, the U.S. is combining net pressure with active diplomacy. Negotiations continue through intermediaries with Washington signaling that hostilities will only fully end if Iran makes concessions, particularly around its nuclear program and regional activities. In other words, this is not a strategy aimed at immediate regime change through full scale invasion. Instead, it is a classic escalate to deescalate approach, applying maximum pressure and degrading capabilities with a goal to force a negotiated outcome on favorable terms.

Marc Zabicki (02:47):

Now, here's the part that matters for markets. Despite all of this, equities, particularly in the U.S., have remained resilient and have even reached new highs. Why is that? There are three key reasons. Number one, markets are forward looking. Equities are pricing where the world will be in six to 12 months, not necessarily today. Investors are largely betting that this conflict does not spiral into a prolonged global shock, but instead resolves or stabilizes. Number two, the contained conflict thesis. So far, while oil has spiked, supply, has adjusted, and infrastructure damage has been limited. The prevailing view is that this is a short term geopolitical shock rather than a structural energy crisis. Number three. There's also a belief that policy makers, particularly in the U.S. will step back from escalation. If economic damage becomes too severe, this expectation is likely helping suppress risk premiums, which is indeed supporting equity prices for investors.

Marc Zabicki (04:03):

The key is not to anchor on headlines, but on likely outcomes. Does the Trump administration need a near term resolution to this issue? We believe that answer is yes, and that is what the market has been pricing in. But admittedly, the underlying reality is a fragile equilibrium, a conflict that is at the moment neither fully escalating, nor truly resolved Tactically, LPL research added to risk in early April by increasing our suggested equity exposure, we have done so cautiously however, given that the situation remains tenuous despite the recent market momentum, this is not the time to swing for the fences. Thanks for listening, and as always, allocate wisely.