Weekly Investment Update (03/13/2026)

The Strait of Hormuz remains the critical variable for global markets. While tensions have escalated and crude briefly moved above $100 per barrel, the strait has not been completely shut down. Tankers linked to China have continued to transit the waterway, and India is reportedly in discussions to secure safe passage for additional cargoes. At the same time, advanced economies have begun releasing strategic reserves to buy time for potential naval escort operations, a strategy that proved effective in prior episodes of maritime disruption. In 1987, during the Iran-Iraq War, the U.S. launched Operation Earnest Will to escort tankers through the Gulf, supported by allied naval forces, and maritime traffic ultimately continued despite active conflict.

Turning to markets, sustained equity drawdowns have historically required prolonged oil shocks combined with tighter monetary policy or recessionary conditions, none of which are firmly in place at this stage. Entering this period, our portfolios were overweight defense stocks and had increased exposure to energy and cybersecurity companies. We’ve maintained an overweight to U.S. equities, which have historically provided relative stability during global shocks. While risks have risen, our base case remains constructive, supported by steady demand, easing price pressures (outside of energy), fiscal support, and broader sector leadership beyond narrow market concentration.

Price Pressures Moderate in February Though Energy Risks Rise

What is happening: The February consumer price index (CPI) rose in line with expectations, increasing 0.3% month-over-month, with core prices (excluding food and energy) up 0.2%. That left overall inflation stable at 2.4% year-over-year and core inflation unchanged at 2.5%. Strength in grocery prices persisted, with food inflation still running near 3%. Goods prices excluding food and energy rose just 0.1% for the second consecutive month, largely due to falling used-car prices, which are expected to pick up in coming months. Excluding used cars, goods inflation remains elevated relative to pre-tariff and pre-Covid levels, even though tariff passthrough is nearly complete. Services prices rose a moderate 0.3% month-over-month, driven by higher healthcare costs and airfares. Shelter prices — a core driver of inflation — remained modest and in line with softer growth seen in new lease prices.

Core PCE inflation (the Fed’s preferred inflation gauge) is running above core CPI, with the January print rising 0.4% month-over-month and 3.1% year-over-year, though in line with expectations. February core PCE, not yet released, could again rise 0.4% month-over-month, with the year-over-year pace at 3.0%. The divergence between CPI and PCE should begin to normalize after April.

Why it matters: The rearview on inflation is that price pressures remained broadly benign. Despite tariff-related volatility in certain goods categories, core CPI has not exceeded consensus expectations in the past 12 months, including since the Liberation Day tariff announcement in April. It is difficult to argue for a reflationary scenario absent consistent positive inflation surprises, particularly against a backdrop of previously tame energy prices. However, the recent surge in oil prices against an environment of broader commodity pressures — including food inflation, pipeline pressures in producer prices, and ongoing tariff costs — leaves us more cautious on inflation going forward. Following the conflict in Iran, gasoline prices are up 17% to date in March, which should push CPI inflation toward 3%. Even if oil prices stabilize, inflation is likely to remain near that level in the coming months.

The Fed tends to focus more on core inflation, looking through temporary energy price spikes. That said, policymakers face an uncomfortable balance: weak job growth against the optics of firmer core (PCE) near 3% and elevated oil prices. This backdrop is sufficient to push rate cuts into the second half of the year. If uncertainty persists, the Fed is likely to put more weight on its inflation mandate than employment.

If energy prices retreat toward previous levels, labor market conditions should once again become the more prominent driver of policy. However, much will depend on how quickly price pressures and supply bottlenecks normalize. Inflation may remain a concern, particularly if the labor market is normalizing on less cautious hiring and low layoffs. As a result, rate cuts are still likely to be pushed out to the second half of the year even in a short-lived conflict.

Latest Five-Year Plan Lowers GDP Growth Target While Focusing on High-Quality Growth

What is happening: China’s National People’s Congress unveiled its 15th five-year plan during its “Two Sessions” meeting, the country’s largest annual political gathering. The plan outlines the government’s medium-term priorities and reiterates China’s strategic focus on industrial modernization, innovation, and social stability.

Notably, the plan included a real GDP growth target of 4.5% to 5% for 2026, the lowest in decades and down from the 5% target for 2025. The plan prioritizes investments in cutting-edge sectors, such as AI, supercomputing, semiconductors, robotics, 6G, and biotechnology, as part of a broader drive for technological self-reliance amid intensifying strategic competition with the U.S. It also includes measures to support domestic demand amid ongoing property market stress, including raising basic living standards, strengthening social services, and enhancing consumer protections.

Why it matters: The economic implications of the new five-year plan are multifaceted. The lower GDP growth target signals a willingness to transition toward a more sustainable economic model. Traditional growth engines such as infrastructure and real estate are likely to play a more diminished role going forward. In contrast, the plan places greater emphasis on innovation and high-value-add parts of the economy. Sectors aligned with digital transformation, advanced manufacturing, and robotics are likely to attract increased investment going forward.

The U.S.-Iran conflict adds an additional layer of uncertainty to China’s near-term outlook. China remains the world’s largest crude oil importer, averaging 11.6 million barrels per day in 2025, with imports accounting for more than 70% of the country’s total consumption. A significant share comes from the Middle East, and China is the biggest consumer of oil that transits the Strait of Hormuz. However, China’s GDP growth sensitivity to oil shocks is lower than import volumes might suggest, at least in the short term. Current estimates indicate that a $10-per-barrel increase in oil prices would reduce China’s GDP growth rate by 0.1% to 0.2%, which is only slightly more than its estimated impact on U.S. GDP growth. This reflects the likelihood of government intervention through fuel tax adjustments, pricing controls, and credit easing to cushion domestic industries. However, in a scenario of prolonged Middle East oil supply disruption, China is likely to be more adversely affected than the U.S.

Separately, President Trump is expected to meet with President Xi Jinping in Beijing from March 31 to April 2. The summit is expected to focus on stabilizing trade relations and managing strategic competition. So far, there have been few preparatory meetings, which could limit the agenda to transactional trade issues such as rare earths and agricultural purchases. The ongoing Iran conflict adds further complexity to the talks, reducing the likelihood of major long-term agreements.

The MSCI China index has slightly underperformed the S&P 500 index so far in 2026, after outperforming in 2025. Bessemer’s equity portfolios are maintaining an underweight to China as we continue to take a cautious approach to investing in the country amid ongoing geopolitical uncertainty.