It has been a chaotic six weeks with geopolitics and other events. There is so much going on that it becomes easy to lose track of important trends and developments in markets and investing. Markets are complex systems and if we are too myopic with one variable, we can lose sight of the big picture.
Given the variety of things going on I want to consider four areas that will likely continue to drive markets. Periodically zooming out is important and helps us be measured in our approach as investors. In this month’s Insights, we’ll dive into the following:
- The current state of the conflict with Iran and current/potential impacts
- The mid-term elections which a just a little over six months away
- What the data say about the current state of the US economy
- Long-term trends around demographics, debt, and the US Dollar
Any of these topics are worthy of much more space than this format allows, so my intent isn’t to be exhaustive, but to hit the key points of each topic.
What is the Latest in the Middle East?
The war with Iran has been extremely fluid and changes day by day and sometimes hour by hour. As of the time of this writing (4/14/26), the US has imposed a blockade on Iranian ports. This blockade is an attempt to impose enough economic pain to extract the desired concessions from the Iranians. This represents an economic game of chicken. On the one hand the United States is betting that the cutting of funding to the IRGC, militias, proxies, and Iranian army will be sufficiently destabilizing to lead to the regime’s demise (or force them back to the negotiating table). For their part, the Iranians are betting that the economic pain from the blocking of the Strait of Hormuz will be so great, that the pressure from the US public and impacted nations will force the United States to stand down.
It appears that independent of this, both formal and backdoor discussions are occurring and that the possibility of a negotiated peace or settlement could be reached at any time. It is also possible that this conflict heats back up militarily and escalates beyond what we have seen thus far.
The chief economic concern that we have relates to the global energy supply. A conflict with a relatively quick resolution results in acute but short-term economic pain. A drawn-out conflict that results in energy shortages and persistently high energy prices is very problematic. On the one hand, supply shortages can slow economic growth, and on the other hand we could see an inflation spike. In economic terms this is called stagflation and the faster this conflict comes to end, the more this risk is reduced.
Overall markets have declined, but the fall has been very modest relative to the severity of the conflict. If we look at major indices since the war began, the overall drop has been very minor by historical standards. The initial drop was 7-8% and since the ceasefire was announced, markets have rallied and are now mostly positive. The Dow Jones is down slightly but both the Nasdaq and the S&P 500 are up. Sometimes the market seems to err on the side of pessimism and other times it seems to err on the side of optimism. This is very much a case of the latter and the concern is that markets could decline materially if the current rosy thesis of a short conflict proves to be inaccurate.
What is Mid-Term Polling Showing and How Do Elections Impact Markets?
The mid-term elections are just over six months away. While six months is a long time in terms of elections and voter sentiment, there are some clear trends. Generally speaking, mid-term elections are tough for an incumbent President. The current polling we’re seeing shows both a downward trending approval rating for President Trump and net favorability for Democrats in generic congressional polling:
Source: RealClear Politics
At this point, it seems likely that the House will switch to Democratic control and that the Senate could switch as well. There are 35 Senate seats up for grabs and 22 of those are Republican. In the even that Congress changes hands, we’ll likely see political gridlock for balance of President Trump’s Presidency. While modern Presidents do much by executive order, much of President Trump’s legislative agenda would die on the vine.
Investors will often assign too heavy of a weight to the impact of elections on markets. Markets can do well under a variety of political combinations. Based on historical data, markets do best when we have divided Congress. They tend to do their worst when we have a Republican President and a fully Democratically controlled Congress (which we may see this time around). This insightful chart outlines this in detail:
In my career I’ve seen people place too much weight on politics in making investment decisions. I think this stems from the following:
- People will often fail to delineate between culture/politics and economics. While the party in power can have large impacts on the direction of policy and culture, they may have more minor impacts on economics
- Politics are visceral and emotional and these powerful emotions can lead us to make sub-optimal economic decisions
- People fail to recognize that election outcomes aren’t permanent. In a democracy like ours there is a frequent changing of the guard, but we’ll often project out as though the current status quo will perpetually continue
Overall, it is healthy to consider policy and election outcomes as but a few of many variables we should look at when considering the overall state of markets and the economy. Below are a few adages that I think are accurate as we think about elections and markets:
- Markets aren’t always an accurate arbiter of whether or not government policy is economically sound (because they are being impacted by so many variables)
- Markets can thrive in spite of policy, not because of policy
- Market responses to electoral outcomes can be counterintuitive
- Government policy is but one of many variables driving economic output
- There is a lag time between policy implementation and policy impact, therefore the frequency of governmental change makes market attribution difficult
As mentioned above, we still have a long ways to go until mid-term elections, but both history and polling are pointing towards a change in Congress.
What do the Data Indicate is Really Happening with the Economy?
When I was in college, I took a class on statistics and one of assigned texts was a book entitled, “How to Lie with Statistics”. The premise was that for either ignorant or malicious practitioners, statistics could be manipulated to paint specific narratives-even if such narratives are fundamentally false. In a like manner, we see popular media using economic data in a variety of ways to promote certain narratives. We see omissions of key day data, misattribution of certain outcomes, modification of measurements, and many other ploys to further specific narratives. In economic reality, the data is often mixed and is often highly nuanced and today is no exception. Below are some data-driven observations about what we’re currently seeing with the economy:
Observation #1: Economic growth appears to be modest
Both recent and real time measures of GDP have been relatively modest. If we look at real time estimates of GDP growth, they come in at 1.3%. Ideally speaking, this figure should be closer to 2-3%:
If we look at the trend of GDP over time, we see a general slowing over the past few months as we fell from over 4% growth in Q3 of 2025 to just .50% for Q4 of 2025:
While we’re still seeing growth, we do see a general slowing and an economy that is currently punching below its weight.
Observation #2: Inflation has come down, but is still elevated
The most recent inflation data show that while inflation is well off its 2022 highs, it remains persistently high. The most recent data show year-over-year inflation at 3.3%. This is well in excess of the Federal Reserve target of 2%, and the average good or service costs nearly 25% more than what it did five years ago:
Sustained inflation rates at high levels make interest rate cuts increasingly difficult and any relief on this front through productivity gains and reduced economic friction (tariff/regulation relief) are welcome.
Observation #3: Artificial Intelligence (AI) is transformational and disruptive
Artificial intelligence has taken the world by storm and is transforming the way we live and the way we work. The amounts of money being spent in this space are absolutely staggering. Below is a summary of quarterly AI spend figures of the top AI spenders and this year AI spending is forecast to pass $700 billion.
In our view, AI represents a technology as transformational as railroads were in the 19th century and as the internet was in the late 20th century. There are few economic endeavors that won’t be touched by AI in the coming years. In addition to the vast sums of money being spent, the demand for power to support AI is similarly staggering. By 2030, the IEA estimates that data centers will consume about nearly 950 terawatt hours of electricity, which will represent about 3% of the world’s annual electricity consumption.
The AI space will have both winners and losers as technology evolves, but its potential for productivity gains are vast. Having some exposure to this technology is important in portfolio composition.
What Long-Term Trends to Watch?
While many trends could be called out here, the three that we will call out are demographics, debt, and the Dollar. In terms of demographics, most developed economies are seeing more people leave the workforce than entering the workforce. This is problematic from many perspectives; we may see fewer doctors at a time where we have an aging population that needs more doctors, we need more money going into social security at a time when fewer workers are paying in, we need more creativity and innovation at a time when overall populations will be trending downward, to name a few. This is where things like AI become indispensable as we need to get more output from fewer numbers of people.
As a corollary to the demographic trends, sovereign debt levels also bear a close watch. As entitlement spending has grown and as the working population declines, debt levels across many countries have exploded. Note the public debt to GDP ratios for the countries on this list:
We don’t know when-it could be years, but eventually this sovereign debt problem will come to head unless it is solved by austerity or outsized economic growth.
The last long-term trend I’d like to note is the downward pressure on the US dollar. For decades the US Dollar has been the world’s reserve currency. This means that it has been regarded as the world’s safe haven asset and as the world’s vehicle for commerce and trade. This has given the US discounted borrowing rates and economic advantages that the rest of the world does not have. The US Dollar supremacy, however, is under pressure both from within and externally. Internally, many would like to see loose monetary policy and a weaker Dollar. Externally, many want to supplant the US as the global hegemon and are actively trying to push more trade away from the US Dollar and develop US Dollar alternatives. If the US Dollar loses its reserve status, the debt problem is exacerbated as borrowing costs would likely spike. While the Dollar is under pressure and its share of global trade has been declining, today it still retains its prominent position (see below). The United States would do well, however, not to take the dollar’s reserve status for granted as the loss of this status would have many adverse effects.
Source: AtlanticCouncil.org
Conclusion
While there is much going on and much to elicit legitimate concern, we are well served by remembering that markets are resilient and that change and trouble have always been with us. In spite of this, markets ever wend their way onward and upward and we believe that in the future this will be no different. We wish you all the best in the coming month and please reach out to us as questions arise.
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