By Daniel McGarvey, CFA on behalf of Stonebridge Financial Group advisors
The S&P ended the first quarter with a run of five straight negative weeks, leading to a year-to-date return of -4.3%. The Bloomberg US Aggregate Bond Index experienced a milder drop, returning -0.1% as the 10-Year Treasury Rate rose to 4.3% and credit spreads began widening. These movements were catalyzed by our attacks on Iran and the ensuing shock to energy markets that sent oil prices past $100/barrel.
Our operations in Iran may or may not be winding down by the time this commentary is read, but the repercussions are likely to be felt for some time regardless. The risk premium for oil has increased and should result in an ongoing higher floor for energy prices as the world adjusts towards reduced dependence on the Strait of Hormuz, a chokepoint through which roughly 20% of the world’s oil typically passes. Additionally, the destroyed energy infrastructure in that region will take many years and considerable sums of money to rebuild.
Thankfully, our country is somewhat insulated from the oil shock because we are a net exporter and the world’s largest oil and gas producer by a large margin (see chart below). The closure of the strait also disrupts supply chains for other critical commodities, however, including aluminum, helium, fertilizer inputs, and plastics inputs. These supply pressures are by nature inflationary and flow through to a wide variety of global industries, including agriculture and semiconductor manufacturing. Source of chart below: Capital Group
The inflation concerns, and geopolitical uncertainty in general, caused the market to stop pricing in any more rate cuts this year. There have been some whispers of the potential need to reverse course and hike rates even if recession odds keep rising, but at this point the Federal Reserve seems content to stay in the current range and wait for more data. They did not raise rates when oil spiked in 2008 because they believed that high oil prices could become disinflationary by leading to an economic downturn, and they turned out to be right. In today’s case, economic growth has been adequate to absorb the energy shock so far, but there might not be enough momentum under the surface to weather the impact of higher rates for too long, especially with weakening labor numbers. Since late last year the number of unemployed people has surpassed the number of job openings.
Higher rates and safe haven status led the US Dollar to reverse course and rise over 2% in March. This trend could prove to be short-lived if the war accelerates the trend of distrust and subsequent de-dollarization from both our enemies and allies. The war could also lead to elevated defense spending worldwide, with particular focus on upgrades to more modern warfare technology like autonomous drones.
While technological innovations like artificial intelligence (AI) have been a major support for the stock market and economy in the last few years, investors grew skeptical in the first quarter. The Magnificent Seven (Apple, Amazon, Alphabet, Meta, Microsoft, Nvidia, and Tesla) fell about 11% and most software companies fared worse, partly because of the war and partly because of concerns that agentic AI could make certain business models obsolete. Those concerns are likely overblown at the sector level, but the market will undoubtedly become more selective of which companies to reward going forward.
Many of the software companies that have sold off are significant holdings for the private credit funds that made headlines recently by gating redemptions. The private credit industry exploded in size over the last few years, often resulting in higher-risk companies having more access to capital with less regulatory scrutiny, and now retail investors are learning how liquidity can dry up when the cash flows of these portfolios are threatened. There are still high-quality funds that will surely be able to overcome this period of adverse headlines, but it would not be surprising to see some riskier funds continue to see outflows this year. While this could lead to slowed capital activity in both private and public markets, we doubt it will become a widespread contagion event.
Market pullbacks and higher gas prices make the stimulus from the One Big Beautiful Bill Act quite timely. Through a combination of tax refunds for individuals and enhanced deductions for businesses, Americans on aggregate have begun to receive the largest increase in consumer aid since the COVID era. The extent to which the Supreme Court’s decision decreased the level of tariffs will also act as a form of tax relief. Even though the administration is actively working to replace as much as they can, the effective tariff rate going forward will likely be in the mid-teens instead of the roughly 30% level proposed a year ago. The status of refunds is still up in the air.
A silver lining of all this policy uncertainty is that it tends to be a contrarian indicator for higher equity returns going forward. As shown below, returns in the year after the Policy Uncertainty Index spikes above 200 (which it did after the Iran invasion) have been quite strong historically.
The same can be said when consumer sentiment is low, as it is now. There are certainly other factors at play that could dampen expectations, like the typical volatility of midterm years, but historical precedent and resilient underlying earnings make it difficult to bet against this market.
Investment Allocation
Although our portfolios have not been completely immune from the effects of the war, we have benefitted from our general preference for high quality investments. We certainly believe in secular growth themes like AI adoption, but in times of such elevated uncertainty we are wary of over-speculating and would rather lean towards companies with proven cash flow. The first quarter also proved that hard-asset based sectors like energy, materials, industrials, and utilities still have a vital role to play in today’s economy.
At this point, global events have not caused us to change our weight to international stocks. Both developed and emerging markets fared better than the US in the first quarter, and there are factors at play like stimulus and corporate reform that should support them for some time. The wild card of the Iran situation does make us more hesitant to invest in certain markets which could be exceptionally vulnerable to an ongoing energy crisis, however.
On the fixed income front, we have increased duration as bond yields have risen while remaining underweight to the long end of the yield curve. Likewise, we have marginally increased credit exposure while maintaining our quality bias. Credit spreads have widened over the month but are still relatively tight.
After talking all last year about the incredible rally in gold, we would be remiss not to mention how it pulled back 11% in March, its worst month in over a decade. It was still up almost 9% over the first quarter, however, and the forces which fueled its bull run have not subsided. Its price movements have certainly been more volatile recently, but we still believe a small allocation to it, along with other uncorrelated alternatives, can provide value as part of a diversified portfolio.
Material discussed is meant for general/informational purposes only and it is not to be construed as tax, legal, or investment advice. Although the information has been gathered from sources believed to be reliable, please note that individual situations can vary therefore, the information should be relied upon when coordinated with individual professional advice. Past performance is no guarantee of future results. Diversification does not ensure against loss. The opinions and forecasts expressed are those of the author, and may not actually come to pass. This information is subject to change at any time, based on market and other conditions.
First Quarter 2026 Commentary
By Daniel McGarvey, CFA on behalf of Stonebridge Financial Group advisors
The S&P ended the first quarter with a run of five straight negative weeks, leading to a year-to-date return of -4.3%. The Bloomberg US Aggregate Bond Index experienced a milder drop, returning -0.1% as the 10-Year Treasury Rate rose to 4.3% and credit spreads began widening. These movements were catalyzed by our attacks on Iran and the ensuing shock to energy markets that sent oil prices past $100/barrel.
Our operations in Iran may or may not be winding down by the time this commentary is read, but the repercussions are likely to be felt for some time regardless. The risk premium for oil has increased and should result in an ongoing higher floor for energy prices as the world adjusts towards reduced dependence on the Strait of Hormuz, a chokepoint through which roughly 20% of the world’s oil typically passes. Additionally, the destroyed energy infrastructure in that region will take many years and considerable sums of money to rebuild.
Thankfully, our country is somewhat insulated from the oil shock because we are a net exporter and the world’s largest oil and gas producer by a large margin (see chart below). The closure of the strait also disrupts supply chains for other critical commodities, however, including aluminum, helium, fertilizer inputs, and plastics inputs. These supply pressures are by nature inflationary and flow through to a wide variety of global industries, including agriculture and semiconductor manufacturing. Source of chart below: Capital Group
The inflation concerns, and geopolitical uncertainty in general, caused the market to stop pricing in any more rate cuts this year. There have been some whispers of the potential need to reverse course and hike rates even if recession odds keep rising, but at this point the Federal Reserve seems content to stay in the current range and wait for more data. They did not raise rates when oil spiked in 2008 because they believed that high oil prices could become disinflationary by leading to an economic downturn, and they turned out to be right. In today’s case, economic growth has been adequate to absorb the energy shock so far, but there might not be enough momentum under the surface to weather the impact of higher rates for too long, especially with weakening labor numbers. Since late last year the number of unemployed people has surpassed the number of job openings.
Higher rates and safe haven status led the US Dollar to reverse course and rise over 2% in March. This trend could prove to be short-lived if the war accelerates the trend of distrust and subsequent de-dollarization from both our enemies and allies. The war could also lead to elevated defense spending worldwide, with particular focus on upgrades to more modern warfare technology like autonomous drones.
While technological innovations like artificial intelligence (AI) have been a major support for the stock market and economy in the last few years, investors grew skeptical in the first quarter. The Magnificent Seven (Apple, Amazon, Alphabet, Meta, Microsoft, Nvidia, and Tesla) fell about 11% and most software companies fared worse, partly because of the war and partly because of concerns that agentic AI could make certain business models obsolete. Those concerns are likely overblown at the sector level, but the market will undoubtedly become more selective of which companies to reward going forward.
Many of the software companies that have sold off are significant holdings for the private credit funds that made headlines recently by gating redemptions. The private credit industry exploded in size over the last few years, often resulting in higher-risk companies having more access to capital with less regulatory scrutiny, and now retail investors are learning how liquidity can dry up when the cash flows of these portfolios are threatened. There are still high-quality funds that will surely be able to overcome this period of adverse headlines, but it would not be surprising to see some riskier funds continue to see outflows this year. While this could lead to slowed capital activity in both private and public markets, we doubt it will become a widespread contagion event.
Market pullbacks and higher gas prices make the stimulus from the One Big Beautiful Bill Act quite timely. Through a combination of tax refunds for individuals and enhanced deductions for businesses, Americans on aggregate have begun to receive the largest increase in consumer aid since the COVID era. The extent to which the Supreme Court’s decision decreased the level of tariffs will also act as a form of tax relief. Even though the administration is actively working to replace as much as they can, the effective tariff rate going forward will likely be in the mid-teens instead of the roughly 30% level proposed a year ago. The status of refunds is still up in the air.
A silver lining of all this policy uncertainty is that it tends to be a contrarian indicator for higher equity returns going forward. As shown below, returns in the year after the Policy Uncertainty Index spikes above 200 (which it did after the Iran invasion) have been quite strong historically.
The same can be said when consumer sentiment is low, as it is now. There are certainly other factors at play that could dampen expectations, like the typical volatility of midterm years, but historical precedent and resilient underlying earnings make it difficult to bet against this market.
Investment Allocation
Although our portfolios have not been completely immune from the effects of the war, we have benefitted from our general preference for high quality investments. We certainly believe in secular growth themes like AI adoption, but in times of such elevated uncertainty we are wary of over-speculating and would rather lean towards companies with proven cash flow. The first quarter also proved that hard-asset based sectors like energy, materials, industrials, and utilities still have a vital role to play in today’s economy.
At this point, global events have not caused us to change our weight to international stocks. Both developed and emerging markets fared better than the US in the first quarter, and there are factors at play like stimulus and corporate reform that should support them for some time. The wild card of the Iran situation does make us more hesitant to invest in certain markets which could be exceptionally vulnerable to an ongoing energy crisis, however.
On the fixed income front, we have increased duration as bond yields have risen while remaining underweight to the long end of the yield curve. Likewise, we have marginally increased credit exposure while maintaining our quality bias. Credit spreads have widened over the month but are still relatively tight.
After talking all last year about the incredible rally in gold, we would be remiss not to mention how it pulled back 11% in March, its worst month in over a decade. It was still up almost 9% over the first quarter, however, and the forces which fueled its bull run have not subsided. Its price movements have certainly been more volatile recently, but we still believe a small allocation to it, along with other uncorrelated alternatives, can provide value as part of a diversified portfolio.
Material discussed is meant for general/informational purposes only and it is not to be construed as tax, legal, or investment advice. Although the information has been gathered from sources believed to be reliable, please note that individual situations can vary therefore, the information should be relied upon when coordinated with individual professional advice. Past performance is no guarantee of future results. Diversification does not ensure against loss. The opinions and forecasts expressed are those of the author, and may not actually come to pass. This information is subject to change at any time, based on market and other conditions.
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