"Like a hitchhiker caught in a hailstorm on a Texas highway, I can't run, I can't hide and I can't make it stop." - How Trump can avoid the nightmare of Vietnam War v.2 and encourage economic growth

As we edge closer to the midpoint of the year, the world is still dealing with the ramifications of the U.S. and Israel bombing of Iran. A ceasefire is currently in effect, and now seems like a good time to discuss our outlook for the military campaign and the overall macro-economic picture.

There is a good chance the President is likely to avoid further escalation and instead declare success in short order. A prolonged engagement would likely involve ground forces which would increase uncertainty and risk a drawn‑out conflict with limited control over the outcome. Historical experience, particularly the gradual escalation of U.S. involvement in Vietnam (from 3,500 soldiers in country in March of 1964 to 500,000 by early 1969), underscores the political and strategic costs of such entanglements. The challenges of the Vietnam war for example were best summed up by President Johnson himself in an August 1964 comment to aide Bill Moyers, "I feel like a hitchhiker caught in a hailstorm on a Texas highway, I can't run, I can't hide and I can't make it stop." For these reasons, we expect the administration to view the degradation of Iran’s nuclear infrastructure, leadership capabilities, and missile program as sufficient grounds to conclude the campaign. Recent market strength suggests investors are responding positively to this outlook.

During the first half of the year, markets were doing well for several reasons:

1)    Economic signals around the world showed indications of a pickup in growth;

2)    Inflation was moderating;

3)    Hiring in the US was slowing.

The confluence of these events was putting the Federal Reserve on track to continue to cut interest rates in 2026 between 2 and 3 times. The cut in US rates would also allow other central banks to follow suit with inflation expectations dropping in much of the rest of the world as well. While many of those trends are still in place, as we discussed earlier, the length and breadth of the US military campaign and the corresponding impact on energy prices could start impacting those longer run assertions. While the second half of the year will continue to be bumpy, we expect oil prices to moderate as tensions decrease, which would support our base case of slow but continued growth with inflation moderating.

The big wild card is the Strait of Hormuz. The location of the Strait and the energy challenges involved need no introduction, but we will expand on our view that while the mid-point of the year will be bumpy for energy prices we still believe that energy prices will come down despite the Strait being essentially closed. Our rationale is that almost all parties in this conflict benefit from oil continuing to flow. Specifically, in the United States, oil prices and the corresponding impact on gasoline prices are major pocketbook issues, particularly during an election year. For Iran and the Gulf States, the continued flow of oil is an economic necessity. Documenting the economic necessity for Iran in particular explains why Iran is allowing more ships to pass that pay a fee, usually in Chinese Renminbi or Cryptocurrency. While, in theory, issues of sanctions could come up, we would not be surprised if the United States and the collective West ignore this issue since high oil prices are a major political liability. Our base case is that the United States walks away after claiming victory with the mindset that we import little from the Middle East so a fee for transiting the Strait of Hormuz is not our problem.

Investing often involves periods of stability with bouts of volatility. Experience affirms our perspective that most major volatility events pass. Investing is multifaceted involving looking for opportunities, of course, but also understanding the psychology necessary to manage through periods of uncertainty. The first half of the year was one of those moments. We think this will pass but as always, we remain vigilant and focused.