I realize many (most?) readers don’t like this framing, and in a lot of important respects I don’t either, but considering the circumstances — i.e., stepping back and asking, “What is it Donald Trump’s actually done here?” — things could be going a lot worse for markets.

Two caveats are in order. First, and most obviously, saying things could be going worse isn’t the same thing as saying things are going well. “It could always be worse,” after all, as the old adage goes.

Second, things may well take a turn for the worst (with a “t”) in fairly short order. Logisticians insist the true impact of the disruption to maritime traffic through the Strait of Hormuz hasn’t yet hit — that we’re not really “feeling” it yet, but that we will soon, and that once we do, we’ll realize how untenable the current situation actually is. (And, relatedly, why we screwed up by creating the conditions for Iran to run a successful test of its capacity to shut the Strait.)

I should probably include a third caveat to account for the strawman hiding in the opening paragraph: Who said we’re witnessing the worst possible market outcome? Nobody. I’ll let you in on a little editorial secret. If you impose a strict ban on strawman arguments, discourse becomes almost impossible. We all use strawmen every day, we just don’t realize it.

With all of that “out there,” so to speak, what actually happened to markets in March, a month of war? Below’s the simplest snapshot from a US perspective.

US equities fell 5% at the index level, and long-end US government bonds 4.5%. That’s pretty rough, but it’s not a disaster by any stretch. If you were (inexplicably) running a 50/50 portfolio, you would’ve done just as bad in December of 2024 (when bonds were routed on the fiscal read-across from Trump’s reelection), but we don’t typically remember that month as being especially arduous.

Note the subtitle on the chart. If you ask me, the in-tandem selloff in stocks and bonds during March was more notable for the extent to which it underscored the portfolio allocation implications of the “New Roaring ’20s” macro zeitgeist than for the size of the losses.

The war with Iran was yet another reminder that we’re living in a post-Great Moderation, post-neoliberal world defined by, among other things, the return of “great power” politics, the demise of multilateralism, competition for (instead of cooperation around) finite resources and de-globalization. All on the heels of the pandemic fiscal expansion across the developed world.

That’s an inflationary cocktail or, at the least, it’s conducive to recurring bouts of inflation — inflation volatility. That, in turn, means bonds aren’t the foolproof, negatively-correlated hedge for equities they used to be.

It also means central banks are operating in a much trickier environment, with ramifications for front-end rates. The updated figure below speaks to that point. It shows the repricing in full-year 2026 Fed cut expectations since the assassination of Ali Khamenei.

At the extremes on or around March 26 and March 27, traders briefly priced better-than-even odds that 2026 would end with Fed funds 25bps higher. In mid-February, by contrast, that same pricing reflected better-than-even odds that Fed funds would end this year 75bps lower.

Headed into the holiday weekend, markets were priced for no change in rates from the Fed this year. That seems both eminently reasonable and laughable all at once.

Reasonable in the context of an economy where, at least according to government-tallied aggregates, Americans are still spending and getting hired. And reasonable in the context of core inflation running ~3% and a likely higher neutral rate, both short- and long-term. In those conditions, and assuming the war impact on headline CPI/PCE won’t stick around long enough to work its way into underlying price growth, slightly restrictive policy settings (i.e., no change to the current settings) seem appropriate.

But laughable in the context of a jobs market that “feels” like it wants to fall off a cliff, a spending impulse that’s concentrated in the upper-half of the “K-shaped” economy (and thereby depends quite heavily on the wealth effect from inflated asset prices), a US president hell bent on rate cuts and a wholly unpredictable geopolitical environment that’s produced two acute supply shocks in four years. That’s a lot of two-sided tail-risk. When both tails are fat, the odds of a middle-of-the-road outcome are commensurately smaller.

And that’s all to say nothing of the fact (and with apologies to my right-leaning readers, it is a fact) that continuing to insult Mother Nature is to invite more pandemics and more natural disasters, the fallout from which will become increasingly unmanageable in a world that’s abandoned cooperation and lacks leadership.

Coming full circle (and rather quickly as my articles go), things could be worse for markets after a month of war with Iran. But the 30,000-foot macro read-across isn’t comforting.

Policymakers and asset allocators are once again confronted with evidence to suggest we’re not going back to “the new normal.” Rather, we’re reverting to the “old normal,” cretinous species that we are.

I’ll indulge a penchant for quoting myself and leave you with a passage from a piece published here on September 15, 2022, when I said it’s “imperative we consider the disconcerting possibility that in fact, nothing has changed.”

“‘The Great Moderation’ was no epoch,” I wrote, three and a half years ago. “The great macro peace was merely an interlude. It’s possible — likely, even — that we forgot what ‘normal’ actually is. Normal is volatility. Normal is rancor. Normal is war.”