The human body is made up of 60% water. You don’t need to lose all of it to die. Lose around 20%, and the system starts to fail. The global economy isn’t that different. You don’t need to lose all the oil supply to break it. You just need to lose enough, and that’s what we may be about to find out.
There is an energy shock building beneath the surface. It hasn’t fully hit yet, which is why markets appear to be calm. For weeks, shipments that left the Strait of Hormuz before the disruption have continued to arrive. On the surface, it looks like business as usual. But that’s changing as those final shipments clear, and countries move from incoming supply to drawing down reserves. That is when the real effects begin to show. As supply shortages emerge, pricing pressure hits, and ultimately economic activity slows down.
In that sense, the event has already happened. We just haven't felt it yet. That disconnect creates a kind of cognitive dissonance. Investors can see the risk, but they can’t yet feel the impact, so they hesitate. They wait. They look around at each other for confirmation. This is the phase I think of as the window of opportunity. It’s a short, finite period where a serious problem is visible but not yet fully reflected in markets. Everyone knows something could go very wrong, but investors tend to simply wait. After all, that's what long-term investors are meant to do.
In early 2007, cracks were already forming in the U.S. housing market. Subprime lenders were failing and credit conditions were tightening. It was clear to those watching closely that something was wrong, yet the S&P 500 continued to push higher, ultimately peaking in October 2007. The prevailing narrative at the time was that the problem was contained. It wasn’t. By the time losses spread through the system and that view was proven wrong, markets had already begun to reprice.
A similar pattern played out during the COVID-19 pandemic. By January 2020, the data coming out of China was already concerning. Case numbers were accelerating and the implications for global supply chains and economic activity were obvious. Yet markets continued higher into February. It wasn’t until the reality became undeniable that the sharp sell-off began. The pattern is consistent. First comes the signal. Then the debate. Then the recognition, and finally the repricing.
We are somewhere between the first and second stages now. Part of the delay comes down to how the financial system processes information. Large institutions don’t react to instinct, they react to data. So, economic forecasts need to be revised; company earnings need to be updated, and guidance needs to be cut. That takes time. By the time the data confirms the problem, the market has usually already moved.
In the meantime, narratives fill the gap and optimism persists. Analysts perform all sorts of mental gymnastics to explain why this time might be different. A ceasefire. A deal. A quick resolution. It’s possible, and I hope it happens. But with each passing week, it becomes less probable that we see a real long-term solution. So markets hold up, partly because they want to, and partly because until the impact is tangible, it’s easy to assume it won’t be as bad as feared.
But there are moments where you don’t need a model. You can apply simple logic. You cannot remove around 20% of global energy supply and expect the system to function as it did before. The modern economy runs on energy. Disrupt the flow, and everything downstream is affected.
This has the hallmarks of one of those moments. A situation where the risk is visible, the implications are significant, and the response is delayed. Where investors of all types look at the market not falling and conclude that maybe it won’t. Until it does. When the window of opportunity closes, it usually closes quickly, and decisions become reactive instead of proactive.
In many of our client portfolios, we’ve been using this period to gradually reduce exposure in areas most sensitive to a global economic slowdown and build a cash buffer. Not wholesale changes, but recognising that when the balance of risk shifts, positioning should too. Should the problems materialise, we have funds to deploy. Because by the time everyone agrees there’s a problem, the window to act has already closed.