Spring 2026 Market Commentary
By Marc Usem and the Affiance Financial Investment Committee
The war in Iran started on February 28th and has rattled markets, sending the S&P 500 sliding by about -5% and international markets down -8% since the start of the war. Full quarter performance was a loss of -4% for the S&P 500 and a gain of 2% for international markets. The quarter’s volatility has been largely driven by war-related headlines, including a message by the President on March 31st that signaled the war may be over in two to three weeks. Markets responded sending both the U.S. and international markets up nearly 3% that day. The peak-to-trough drawdown during the quarter avoided a correction (defined as a -10% drop) in the U.S., but fell -11% from the international market highs of late February.
Bonds were flat during the quarter, providing some support from stock market losses, but were not sought out as a safe haven as is common during global political crises and market downturns. Gold, also often seen as a safe haven, was up 8.5% for the quarter but fell by -10% from the start of the war. The implication is that investors do not seem overly concerned about a prolonged downturn. Interest rates had been trending down prior to the war, but spiked from the time the war started, rising about 0.3% to end the quarter at 4.3% for the 10-year treasury bond. Rising rates led to a nearly -2% decline in the Aggregate Bond Index and -4.5% drop in long-term treasury bonds.
The first quarter was clearly an unsettling period for investors as the war impacted a myriad of economic issues with the most significant being energy prices. The price of West Texas Intermediate oil gained more than 80% from $60 per barrel at the beginning of the year to $104 at quarter end – the highest since the post-Covid spike in 2022. Iran closing the Strait of Hormuz shut down about 20% of global petroleum consumption, while attacks on oil infrastructure in other gulf states has added to supply concerns. Although the United States is energy independent, the price of oil is set based on global markets in dollars. Gas prices have jumped 40% this year to an average of $4.12 per gallon, impacting consumers directly.
The inflationary influence of higher energy prices has also put pressure on interest rates and led to a reduced expectation for Federal Reserve rate cuts this year to one or none. Prior, markets had been expecting one to two rate cuts in the second half of the year. Amid the greater economic uncertainty posed by the war, the Fed is also in the midst of a change in leadership with Jerome Powell’s chairmanship formally ending in May. The President has nominated Kevin Warsh who was a prior Fed board governor and has been a vocal critic of Powell. However, Senator Thom Tillis has threated to block the approval process until a criminal investigation into Fed Chair Jerome Powell is resolved. A delay in confirmation would keep Powell in charge with a statutory limit of January 31, 2028. We would also note that while the chairman has the power to guide Fed policy, there are 12 Fed governors that vote to set the course of interest rates. There have been no changes this year and only one dissent regarding keeping rates stable at the prior meeting in March.
While current conditions are challenging, we remain cautiously optimistic: technology stocks have shed most of their price/earnings ratio premium and are now the cheapest they have been in six years; the Fed estimates Q1 GDP likely in the 1.6% range; and manufacturing and services Purchasing Managers’ Indexes are expanding. Markets have weathered Middle East conflicts in the past, and in each of the 5 prior cases have moved higher by an average 15% in the following 12 months (Gulf War 1990, Iraq War 2003, Libya NATO Intervention 2011, War against ISIS 2014, Russia Intervenes in Syria 2015).
Stock market volatility in the first quarter was similar to last year when tariff headlines were driving market returns. The lesson remains clear, market timing is dangerous. Missing the best days can significantly impact returns, such as a single 9.5% day last April and a 3% day this March. We remain focused on the things we can control, including our disciplined investment processes designed to provide well-designed, tax-efficient, globally diversified portfolios that suit our clients’ investment planning needs.
Thank you for your continued confidence in our work.
Sources: U.S. Energy Information Administration, Charles Schwab, TEXPERS, PBS, CNBC, MarketWatch, Federal Reserve Bank of Atlanta
The views represented in this commentary are not meant to be construed as advice, testimonial or condemnation of any specific sector or holding. Investors cannot invest directly in an index. Unmanaged indexes do not reflect management fees and transaction costs that are associated with some investments. Different types of investments involve varying degrees of risk. Past performance and detailed processes do not guarantee future results. Please remember to contact Affiance Financial if there are any changes in your personal/financial situation or investment objectives. Asset allocation, rebalancing, and diversification will not necessarily improve an investor’s returns and cannot eliminate the risk of investment losses.
