The Hormuz Regime

From mid-2024 through early 2026, markets operated under a coherent macro regime: falling inflation, a patient Fed, and AI productivity that justified multiple expansion. In this regime, a 60/40 portfolio worked — equities rose on earnings optimism, bonds recovered as rate expectations peaked, and correlations behaved.

That regime is now under structural stress. The Hormuz closure — even a partial, temporary one — is not a geopolitical event that markets can absorb with a one-day correction. It is a supply-side shock transmitted through three channels simultaneously. When all three fire at once, the math of standard diversification breaks down.

The first shift is the geopolitical shock itself. The Strait of Hormuz carries approximately 21 million barrels of oil per day — roughly 21% of global petroleum liquids consumption. Even a partial disruption reprices global energy in hours, not weeks. Energy-importing economies (Europe, Japan, India) face terms-of-trade deterioration. Energy exporters get an unexpected windfall that reshuffles relative equity performance globally.

The second shift is inflation retransmission. The Fed spent two years reanchoring expectations. A sustained oil price spike — Brent sustained above $80–90 — threatens to retransmit inflation through transportation costs, industrial inputs, and consumer energy bills simultaneously. Core CPI and headline diverge, but the Fed can only see the headline. The market has to price the policy response before it happens.

The third shift is correlation collapse. In a geopolitical-driven oil shock, the usual equity-bond negative correlation breaks down. Bonds sell off as inflation expectations rise. Equities sell off as margin compression hits energy consumers. Cash outperforms both. The portfolio that was "60/40 diversified" discovers it was a single bet on inflation staying low.