The Last Time the Lights Went Out
In October 1973, the Arab members of OPEC announced an oil embargo against the United States in retaliation for American support of Israel during the Yom Kippur War. Within three months, crude oil prices quadrupled from $3 to $12 per barrel. Americans waited in lines stretching around city blocks to buy gasoline. The New York Stock Exchange lost nearly 50% of its value over the following 18 months.
And economists coined a new word for the combination of high inflation and stagnant growth, stagflation, because no existing word quite captured how the two could coexist.
The Fed, already behind on inflation, had no clean policy response. You couldn't raise rates to crush inflation without destroying jobs. You also couldn't cut rates to save growth without making the inflation worse.
The standard playbook really had no page for this.
Fifty-three years later, the United States launched joint airstrikes with Israel on Iran on February 28, 2026.
By the following Friday, WTI crude sat at $90.90 per barrel, which is its highest level since September 2023. the Strait of Hormuz, through which roughly 20% of global seaborne oil flows, had effectively shut down.
The S&P 500 closed the week at 6,740.02, down 2.0%, its worst weekly performance since October. Japan's Nikkei dropped 5.5% and South Korea's Kospi fell 13%.
The 10-year Treasury yield rose 20 basis points in a single week, the largest jump since April, to 4.17%.
And on Friday morning, the Bureau of Labor Statistics reported that the U.S. economy shed 92,000 jobs in February, the third payroll contraction in five months.
The word that keeps appearing in analyst notes, in Fed governor speeches, and in every conversation worth having about markets right now is stagflation. I don't know if this becomes 1973-style stagflation. Neither does anyone else. But the setup is uncomfortably similar, and the portfolio implications are clear enough to act on now.
What Happened This Week
The US-Israel airstrikes on Iran began on Saturday, February 28, and within the first two days of trading, the market's reaction was clear: buy energy, sell airlines, buy defense, and figure out the rest later. The S&P 500 opened Monday down 1.2%, spent the day whipsawing between sharp losses and partial recoveries, and closed essentially flat. Then the week deteriorated.
The critical variable is the Strait of Hormuz. About one-fifth of global supply normally transits through this 21-mile-wide waterway. Following the strikes, the Iranian Revolutionary Guard Corps announced its closure and threatened any vessel attempting to pass.
Major marine war risk insurers including Gard, Skuld, NorthStandard, and the London P&I Club, canceled coverage for vessels in the Persian Gulf. By Tuesday, traffic was effectively zero. Over 150 ships anchored outside the strait, unable to transit.
The benchmark freight rate for supertankers hit an all-time record of $423,736 per day which is an absurd 94% jump from the prior Friday.
QatarEnergy, operator of the world's largest LNG export facility, halted production after Iranian drone attacks and declared Force Majeure on gas contracts on March 4.
Qatar's energy minister Saad al-Kaabi told the Financial Times that if the war continues, all Gulf energy exporters could be forced to halt production. He also said that the resulting shock "will bring down economies of the world." That is the energy minister of one of the largest LNG exporters on the planet.
U.S. Markets - Stagflation Signal Flashing
The S&P 500 finished at 6,740.02, down 2.0% for the week, its worst since October, and 3.42% below its January 27 all-time high.
The Dow fell 3.0%, its worst week since April. The Nasdaq Composite dropped roughly 2% and the Russell 2000 underperformed at -2.3% on Friday alone.
The sector divergence this week was the sharpest I've tracked in two years.
Energy is the only sector with clear positive momentum in this environment. The SPDR S&P Oil & Gas Exploration & Production ETF (XOP) entered the week already up 29% year-to-date. The VanEck Oil Services ETF (OIH) is up 31% YTD. Defense names surged as Lockheed Martin gained 6%, Northrop Grumman 5%. Palantir hit $143 on Monday as investors rotated into defense-AI names.
On the other side, software continues to be pummeled. The iShares Expanded Tech-Software ETF (IGV) is down 17.6% YTD.
Airlines were demolished as United Airlines and Delta each fell more than 5% on Thursday. The U.S. Global Jets ETF (JETS) is down 7.8% YTD.
But the most important market signal this week was the bond market.
In normal geopolitical crises, investors buy Treasuries as a safe haven, pushing yields lower. That didn't happen. The 10-year Treasury yield rose from 3.96% Monday to 4.17% Friday - a 21 basis point increase, the steepest weekly move since April.
And clearly the reason is energy. Higher oil prices feed directly into inflation expectations. When inflation expectations rise during a supply shock, bonds don't act as a safe haven, they just sell off alongside stocks.
That simultaneous decline in both is the hallmark of a stagflationary environment, and it is the hardest macro backdrop there is to navigate.
International Markets - Asia Gets the Worst of It
The geopolitical logic of who gets hurt first is that countries most dependent on Gulf energy imports face the most direct supply shock. Asia fits that description almost completely.
Japan's Nikkei 225 dropped 5.5% for the week, its worst since March 2020.
South Korea's Kospi fell 13%, including what the Korea Exchange confirmed was the benchmark's worst single-day loss in history on Wednesday, with a 12.1% plunge that triggered circuit breakers and briefly halted trading. South Korea's government announced a 100 trillion won ($68.3 billion) stabilization fund to help manage soaring energy prices. The country imports most of its LNG from Qatar and the UAE, which is all supply that has effectively gone offline.
Europe's Stoxx 600 fell 5.55% for the week. Germany's DAX dropped 5.5%. The exposure here is partly energy because Europe imports about 12-14% of its LNG from Qatar via the Strait. The other issue is economic. Higher energy costs will hit European industrial competitiveness at a moment when the continent was just starting to show growth stability.
China is a more complex case. The country imports roughly 40% of its oil through the Strait of Hormuz and more than 80% of Iranian oil. Its Shanghai Composite fell about 1% for the week, relatively contained.
China's LNG inventories entering March stood at 7.6 million tons (per Kpler data), providing some short-term cover. Beijing also announced a halt on domestic oil refinery exports to conserve fuel stockpiles. If the disruption extends beyond a few weeks, China will compete aggressively for Atlantic LNG cargoes, tightening the global market in ways that would hit European and South Asian buyers simultaneously.
One clear winner in this mess is Latin American commodity exporters.
Brazil, Colombia, and Argentina are net energy exporters. As Middle Eastern supply disappears, U.S., Brazilian, and Canadian producers benefit from higher prices. The iShares MSCI Brazil ETF (EWZ) was largely insulated from the week's selloff, and actually posted a modest gain.
The Jobs Report
Forty-five minutes before Friday's open, the BLS released the February employment situation.
The economy shed 92,000 jobs. The consensus estimate had been +50,000. The unemployment rate rose to 4.4%.
Prior months were revised lower also. December revised from a gain of 48,000 to a loss of 17,000. The three-month average for nonfarm payrolls now stands at fewer than 6,000, effectively zero.
2025 was the first year with five months of payroll contractions since 2010, during the recovery from the global financial crisis.
The household survey painted an even grimmer picture.
The number of employed individuals has declined by nearly 850,000 since November 2025. Labor force participation slipped from 62.5% to 62.0%. Had participation held steady, the unemployment rate would have exceeded 5%.
The Fed meets March 17-18. Markets are pricing a 95.5% probability of no cut, per CME FedWatch data as of March 6.
The reason is not that the economy is strong. The reason is that oil just hit $90/barrel, inflation is already 2.4% against a 2% target after five consecutive years above that threshold, and the last thing the Fed can afford right now is to be seen accommodating an energy-driven inflation surge.
To put it simply, the Fed is between a rock and a hard place. Cut to help the labor market and risk another inflation surge; hold and watch employment deteriorate further.
What to Do With Your Portfolio Right Now
I'll tell you what I'm actually doing.
Energy is the only sector with clear positive momentum in this environment.
XOP and OIH are already up 29-31% YTD. I trimmed XOP slightly on Friday after a 12% single-day gain. I don't chase moves that size. I'm holding my XLE for its exposure to ExxonMobil and Chevron, which combine dividend discipline with balance sheets large enough to weather a prolonged disruption.
Defense is the second clear winner. ITA (iShares U.S. Aerospace and Defense ETF) is the cleanest expression for US defense, although with the global uptick and defense supercycle, I prefer SHLD to capture the buildup in defense infrastructure investment buildup in Europe and across the world. As far as individual US defense contractors, Lockheed, RTX, Northrop, and L3Harris all benefit directly from elevated defense spending that was already rising before this conflict and will not come down when it ends. I've held ITA since last year and am comfortable maintaining it.
I continue to reduce technology exposure, specifically software. The IGV down-17.6% YTD number is not a screaming contrarian buy signal yet. Software is not only under assault by AI, but their margins are also sensitive to energy and wage costs, and the sector still carries elevated valuations relative to its current earnings growth trajectory.
When I see IGV at a forward P/E closer to 25x versus the current ~35x, I'll actually revisit.
For bonds, the "flight to safety" narrative for Treasuries is broken for now.
I'm keeping shorter duration, mostly 2-year T-bills in the 4.0-4.2% range via SGOV or SHV, rather than reaching for the 10-year at 4.17%.
If this becomes an actual recession, the 10-year will rally hard when the Fed pivots. But that pivot requires inflation to fall first, and with oil at $90, that is not yet imminent.
Gold at $5,131 is the asset behaving most logically. It's the hedge you want when bonds and stocks both sell off simultaneously. I added more GLD Friday. If the stagflation scenario deepens, gold is one of the few assets that held its value through the 1970s episode.
What to Watch
March 10 - CPI release for February. This is the critical next data point. January was 2.4%. The energy component in February will be lower than March's print, but the direction matters. If core CPI remains sticky above 3.0%, the case for holding rates in March becomes airtight.
March 17-18 - Fed meeting. No rate cut is expected. The press conference will matter more than the decision. Listen for whether Powell explicitly addresses the stagflation framing! If he does, it signals the Fed has moved to a formal holding pattern.
March 19 - NVIDIA GTC conference, Jensen Huang keynote. Always a meaningful event for the AI trade, which has been under pressure from higher energy costs and rotation out of tech. Weak demand signals would push IGV further into its current downtrend.
Rolling/Ongoing - Strait of Hormuz tanker traffic data (Kpler tracks this in near real-time). This is the single most important variable in the world right now. Qatar's Force Majeure and Gulf LNG disruptions end the moment traffic safely resumes. Watch for a single cargo to successfully transit as the first signal of de-escalation. That vessel will move markets.
The Permanent Lesson
In October 1973, most investors thought the Arab oil embargo was a short-term political event that markets would shrug off in a few weeks. And some of them were right. The S&P 500 was largely flat in the first weeks of the embargo. What they missed was the structural consequence. The U.S. had entered an environment where the Federal Reserve's dual mandate was in direct conflict, and the only resolution required a decade of stagflation, two severe recessions, and 20% interest rates by 1980. Nobody predicted that in October 1973.
I'm not predicting 1973. The U.S. is a net oil exporter today. The SPR exists. The conflict may resolve in days. But also, it might not.
History shows markets recover quickly from geopolitical shocks when the underlying economy is sound. But this economy does not have a sound foundation right now. The three-month average payrolls of 6,000, inflation above target for five years, a Fed that is structurally boxed in, and not to mention a 15% global tariff set to add its own inflationary impulse this week on top of everything else.
The Strait of Hormuz crisis arrived at exactly the wrong time for exactly the wrong economy. That's worth taking seriously even if you think the conflict resolves quickly.
If one thing holds true over time, it is always smart to position for the worst case. So position for a world where it lasts a few weeks longer than the market currently expects. If you're wrong, you give up some upside in tech. If you're right, you've protected yourself from a shock that the 1970s taught us is far more durable than it looks on Day One.
The Earnout Investor provides analysis and research but DOES NOT provide individual financial advice. Jamie Dejter may have a position in some of the stocks mentioned. All content is for informational purposes only. The Earnout Investor is not a registered investment, legal, or tax advisor, or a broker/dealer. Trading any asset involves risk and could result in significant capital losses. Please, do your own research before acquiring stocks.