MICHAEL J. HALLORAN, CFA | Equity Strategist of Janney Montgomery Scott
Wyncote Wealth Management Group

Highlights for this week include:

• March manufacturing conditions improved, consistent with continued economic growth, but higher inflation was driven by the Iranian conflict and rising energy prices.
• Weekly jobless claims and other labor market indicators suggest a still healthy labor market.
• Stocks and other assets remain – but with a conflict that lasts weeks rather than months.
• Also included below are key talking points as the Iranian conflict continues to unfold.

Incoming March Economic Readings Remain Consistent with Further Economic Growth

Now a month into the Iranian conflict, we are following the incoming March economic readings for potential impacts from the conflict. So far, the economic readings remain consistent with further economic growth, but signs of inflationary pressures are emerging.

The ISM manufacturing survey is widely followed and provides a timely look at manufacturing conditions. The just released March survey came in better than expected and moved further into expansion territory. Over 70% of industries surveyed reported growth in March, up sharply from just 11% in January. However, the input prices index showed a strong increase, suggesting fast rising input prices, amid the Iran war and associated oil price increases.

Respondents’ comments suggest continued expansion but point to the geopolitical instability and the
conflict in Iran as contributing to rising manufacturing supply costs and weighing on sentiment. Other
comments suggest economic policy uncertainty remains a concern, despite the recent Supreme Court ruling striking down International Emergency Economic Powers Act (IEEPA) tariffs.

S&P Global also provides a timely survey that showed improvement in March manufacturing conditions, with business confidence in the year ahead so far holding up well. This survey also showed higher inflation pressures and supply chain stresses linked to the war.

The Conference Board’s consumer confidence index rose in March, suggesting the early weeks of the Iranian conflict had minimal effect on consumers thus far. The increase reflected a more optimistic assessment of current economic activity that offset a weaker view of future activity. Unsurprisingly, given the Iran War-driven surge in fuel prices, consumers’ inflation expectations moved up in March, remaining high and sticky.

We are also paying close attention to weekly jobless claims, which provide a timely and accurate barometer of the labor market. Weekly jobless claims remain at historically low levels, consistent with a still healthy labor market. Challenger layoff announcements and hiring plans for March were also released this week, and for the first time since Oct 2024, hiring plans outpaced layoff announcements.

Key Talking Points for The Impact of The Iranian Conflict on The Economy and Markets

1) Uncertainty remains high around how events will unfold, and the impact on the economy will depend
on the length of the disruption to energy flow through the Strait of Hormuz and the extent of
damage to energy infrastructure. The longer traffic is halted, and the more damage is done to
infrastructure, the higher energy prices will climb, and the more harm that will occur to the economy
and stocks.

2) The direct impact of modestly higher oil prices on economic growth and inflation should be limited.
U.S. benchmark crude oil prices have jumped from $65 per barrel before the conflict to $110 per
barrel as of this writing. A rough rule of thumb is that a sustained $10 per barrel increase in oil would
reduce 2026 economic growth by about 0.10%. The consensus is currently calling for 2.3% economic
growth in 2026, which suggests the economy can absorb the current spike in oil prices.

3) The major risk to stock prices is a sustained period of severe oil disruption and price spikes that
weigh on economic growth. A sustained increase in oil prices and uncertainty would also threaten
equity valuations, corporate confidence, and the current rebound in industrial activity that has stocks.

4) The U.S. economy was healthy entering this conflict, and the current economic readings suggest it
remains so. Importantly, the U.S. was a major oil importer during previous oil price spikes that
pushed the economy into recession. Today, the U.S. is energy independent and a net exporter of
energy and is a much more balanced economy as a result of the shale oil and gas revolution. While
high oil prices are still a tax on the consumer, many industries benefit from U.S. oil and gas
production, while significant wealth that was transferred to other oil-producing nations now stays in
the U.S.

5) In addition, the energy intensity of the U.S. economy is much lower today. The amount of oil
necessary to produce one unit of U.S. economic output has fallen by about 70% since 1980.

6) Since 1980, the average year has had a 14% intra-year decline in the S&P 500 stock index while
ultimately producing a positive return of 10% for the full of 19% while the full-year return came in at 16%.

7) We further note that stocks remain a key element for portfolio growth and maintaining long-term
purchasing power, with stocks outperforming other major asset classes and inflation during long
periods of time.

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