War is devastating for all parties involved and for many who are not directly involved. The current war in the Middle East is no exception. Civilian and military casualties, widespread destruction of infrastructure and rising fertilizer and food prices are leaving behind psychological and physical suffering. In comparison, the economic consequences are marginal. And yet they are one of the important channels through which local military conflicts can have global impacts.
This is precisely the kind of situation we are currently facing. For example, the American war against Iran has had a major impact on the US. Above all, US households are shaken in their confidence. The latest figures on consumer confidence show that sentiment is worse than ever before. American consumers have been surveyed since 1953, reaching an all-time low in March.
This comes at an unfortunate time for the US economy. The United States barely recorded any growth in the fourth quarter of last year. According to the latest revision of the data, national income, adjusted for inflation, rose by just 0.1 percent quarter-on-quarter. There seems to have been little growth in the first quarter of this year either: just 0.3 percent, according to the US Federal Reserve’s real-time estimate.
The labour market also sends a clear signal. In February and March, an average of just 29,000 new jobs were added. That’s obviously not enough to generate optimism amongst consumers. Not surprisingly, the war has also worsened the inflation outlook. A barrel of oil now costs just under 100 US dollars. Before the war, prices were still below 60 US dollars.
This has brought the inflation rate up to 3.3 percent, and core inflation, adjusted for energy and food prices, has also risen again. At 2.6 percent, it is now well above the US Federal Reserve’s target of 2 percent. This means cuts in interest rates, which, due to the slowdown in growth, the markets had been speculating on at the start of the year, are now off the table.
These hard facts, in addition to the political turmoil, are a burden on financial markets. It is therefore understandable that the 2026 investment year has so far been a disappointment in most asset classes. The only real exceptions as yet are gold, which has still yielded around 10 percent since the start of the year, despite a major war-related correction, and emerging market equities. The investments we manage have benefited from both developments because we have actually overweighted them in our investment solutions.
Overall, however, we remain cautious. In the US in particular, we can imagine that markets will be more restrained than elsewhere. So far, only risk and leading indicators suggest weakness. If this materializes, US investments could remain unattractive by comparison.
However, we remain constructive despite our caution. Before the outbreak of war, there were signs of an improvement in the economic situation in Europe and continued strong growth in Asia. If economic activity in these regions increases, investors should be positioned there.
