New Iran Hostilities Will Introduce Long-Term 'Tax' on U.S. Consumers

The PCE Report Shows Far Less Progress on Inflation

The markets staged a huge and predictable rally on Wednesday following the announcement of a two-week ceasefire late on Tuesday.

Equities had their best daily performance since the walk back from "reciprocal tariffs" last April, almost one year prior to the day. Both the Dow and NASDAQ rose just over 2.8% on Wednesday, while the S&P 500 moved forward by 2.5%. Oil plummeted by the most it has in a day in six years. Equities added slightly to the big gains from Wednesday into Thursday's trading action even as both Brent and WTI benchmarks advanced after Wednesday’s huge selloffs.

I have not chased this rally as I noted that I wouldn’t in my column on Wednesday. I did roll a few of my covered-call positions forward. The truce is a fragile one at best, and it will take months for traffic to be fully restored through the Strait of Hormuz. And there are going to be long term ramifications from this event that investors need to work through.

If it wasn’t obvious after more than four years of the conflict in Ukraine, cheap drone technology and AI are radically changing the battlefield. And while using multi-million-dollar interceptors to bring down $25,000 drones might be great for the profits for RTX Corporation (RTX) and Lockhead Martin (LMT) , it is not a sustainable way to fight a prolonged war.

There is going to be a lot of investment going to much cheaper air defense options like interceptor drones and laser-based systems in the years ahead. The war will also trigger the latest burden for the already straining federal budget as well. The administration is planning to ask for a whopping $1.5 trillion for defense in the FY2027 budget. And, unfortunately, this same cheap drone technology combined with AI dramatically increases the potential for terrorism throughout the globe. Data centers, refineries, chemical plants and other key facilities being possible targets.

And this outbreak of hostilities came at a particularly bad time on the inflation front. The effort to get inflation down to the Federal Reserve’s 2% target had already stalled out in recent months. It will take months and perhaps through the summer to get gasoline, diesel and jet fuel prices "normalized" in the U.S. All of which will be a new "tax" on consumers until then.

Repairs to key energy facilities throughout the Gulf region will take months and in some cases years to fully implement. Investors can expect tens of billions to be allocated to new pipelines, ports and other facilities throughout the area to be able to bypass the Strait of Hormuz in the future. The pipeline complex Saudi Arabia built during the 1980 to 1988 "Tanker War" between Iran and Iraq to do just that, played a big role in mitigating the damage from the effective closure of this global chokepoint during this conflict, it should be noted.

Energy is not the only key product that was impacted by this impasse. Food inflation is going to increase in coming quarters given the spike up in fertilizer prices thanks to this regional war. An analyst at Goldman Sachs was out this week noting that Asian manufacturing is already seeing a huge impact from the curtailing and higher prices for petrochemical based inputs. This is pushing up cost of goods sold for things like furniture, textiles, bedding, medical equipment and other products by 15% to 20%.

Combined with tariffs, import inflation for many key goods for U.S. consumers will be going up in coming months.

So, while the markets might have staged a huge relief rally on Wednesday, the negative ramifications from this conflict are just starting to be felt and will be a headwind on the economy for many months, if not through the rest of 2026. And that is assuming a permanent resolution to this war can be reached in the weeks and months ahead.

At the time of publication, Jensen had no positions in any securities mentioned.