Back
Financial markets have always had to contend with uncertainty. What is different now, however, is not its presence but its source. For much of recent history, investors have interpreted markets primarily through the lens of cyclical economic forces: growth, inflation, interest rates and earnings. These variables, while complex, are at least observable, measurable and, to some degree, modellable.
Today, that framework is being challenged.
Geopolitics has reasserted itself as the dominant force shaping markets. The escalation of conflict in the Middle East has shifted the fulcrum of risk away from the relatively predictable cadence of the economic cycle toward a far more opaque and fluid set of variables. In this environment, information is incomplete, narratives shift rapidly, and outcomes are inherently difficult to assess with confidence. We are operating, quite literally, in the fog of war.
At present, markets are being pulled between two distinct scenarios.
Scenario one: Resolution and reversion
The first is a scenario of relatively swift de-escalation. Diplomatic efforts gain traction, hostilities subside, and the risk of sustained disruption to global energy supply begins to fade. Oil prices, while volatile in the interim, settle back below $100/barrel as supply concerns ease and trade flows move back towards normal.
In that environment, financial markets would likely respond positively. The underlying fundamentals of the global economy remain reasonably supportive, where corporate balance sheets are sound, earnings growth is still healthy, and consumer demand remains resilient. Inflation pressures would also begin to ease, allowing central banks greater scope to maintain and, in time, possibly extend a more supportive policy stance.
This would represent a return to the economic cycle model. Markets would once again focus on growth, earnings and liquidity. Risk assets – like equities and commodities – would likely perform well, while valuations could remain supported and potentially extend further.
Scenario two: Escalation and entrenchment
The second scenario is more troubling, not only because of its severity, but because of the way it evolves.
This is not a binary outcome triggered by a single event. It is a path-dependent process in which both escalation and the passage of time matter. Each day that the conflict continues without resolution, it incrementally raises the probability of a more adverse outcome.
In this scenario, energy markets remain structurally stressed. Oil prices stay well above $100/barrel, reflecting both physical supply risk and an elevated geopolitical premium. The consequences for the global economy would be significant. Higher energy costs act as a tax on consumption, pressure corporate margins, and reintroduce inflationary stress at precisely the wrong time.
Central banks would then face an uncomfortable constraint. Their ability to support growth would become more limited just as growth begins to weaken. The result is a classic stagflationary impulse: slower growth, higher inflation, and tighter financial conditions.
If that dynamic were to persist, the risk of global recession would rise materially. In that environment, risky assets would face a much more difficult backdrop as earnings expectations are revised lower, risk premia widen, and volatility rises.
The critical variable: Time
What makes the current environment especially challenging is that these are not simply two static, competing outcomes. They are linked through time.
The probability distribution is not fixed; it evolves by the day.
Unlike traditional macro scenarios, where probabilities can be assigned with some confidence from observable economic data, the key variable today is duration. The longer the conflict remains unresolved, the greater the likelihood is that the more adverse scenario begins to dominate. Time, itself, becomes a transmission mechanism through which risk compounds.
That is what makes this environment so delicate. Markets are recalibrating continuously, responding not only to new information, but also to the absence of resolution. Periods of optimism, often sparked by headlines hinting at de-escalation, can quickly reverse when those hopes fail to translate into durable progress.
Navigating the fog
For investors, this presents a profound challenge. The traditional tools of macro analysis remain necessary, but they are no longer sufficient. When outcomes are driven more by geopolitical developments than by economic data, conviction must be tempered and flexibility becomes essential.
In such an environment, Peregrine Wealth’s role is not to predict the exact path of the conflict, it is to understand the range of plausible outcomes, assess their implications for asset prices, and position portfolios so that they remain robust across different scenarios.
At present, the balance of risks remains finely poised. The upside for risk assets in the event of resolution is meaningful. But the downside associated with prolonged conflict is equally significant and grows with time.
Conclusion
The defining feature of this moment is not uncertainty alone, but the fact that the probabilities themselves are shifting as events unfold.
That is the fog of war.
In periods like these, discipline, patience, and respect for risk matter more than conviction unsupported by evidence. Markets will ultimately regain clarity. Until then, prudence and flexibility remain among the most valuable assets an investor can hold. At Peregrine Wealth, our multi-scenario approach is designed for precisely these environments. We participate in opportunity, but we do not rely on a single outcome.
I hope you enjoy this edition of Peregrination.