- The first quarter of 2026 was marked by significant volatility as geopolitical tensions upended a strong start to the year.
- Despite the late-quarter turmoil, total losses were somewhat mitigated by strong January performance.
- The surge in energy costs (with gas prices jumping from $3 to $4 per gallon in March) has reignited inflationary fears.
A Challenging Start to The Year
Investment momentum from 2025 extended into the beginning of 2026 but quickly reversed in late February following the U.S.-initiated strikes on Iran. Since that time, stocks experienced their worst performance since 2022. Oil prices skyrocketed while stocks, bonds and gold fell in value. Concerns about higher oil and gasoline prices, broader inflation and a global recession sent the markets into a tailspin, particularly given the recall of inflationary effects not too long ago in 2022.
While stocks experienced material declines starting in late February, their strong performance earlier in the year helped to mitigate their year-to-date returns as of March 31st. An incredibly strong rally on the last day of the quarter also helped to trim some of the losses.
2026 first quarter returns were as follows:
Bloomberg U.S. Aggregate (U.S. bonds) -0.05%
S&P 500 Index (large U.S. stocks) -4.33%
Russell 2000 (small U.S. stocks) 0.89%
MSCI All Country World Index ex-US -0.71%
(International Stocks)
War with Iran
While there are always variables that impact investment performance, the single largest present-day variable is the war with Iran. Historically, international conflicts have often borne little impact on the investment markets. However, the current situation is different due to the dramatic rise in oil prices, creating a cascading economic shock to world economies and investment markets.
Iran’s closure of the Strait of Hormuz disrupted a major oil distribution channel. Approximately 20 to 30 percent of global oil is transported through this waterway that was virtually closed other than a nominal number of ships granted passageway.
The last time Iran disrupted the flow of ships through the Strait of Hormuz was in the 1980’s. A dramatic rise in oil prices at that time caused severe inflation, high unemployment, and a recession. Fortunately, the United States is more energy independent today. We are now a net exporter of oil and only import less than 10% of our oil consumption from the Persian Gulf. While this helps us to be more insulated compared to other countries and regions, such as Europe and Asia, we are still feeling the financial pain of higher oil prices. This is because oil is traded as a global commodity and is priced based upon worldwide supply and demand versus only U.S. supply and demand. Hence, the fact that we have greater energy independence does not mean that our gas pump prices are fully protected.
Fortunately, the two-week ceasefire that was announced shortly after the quarter’s end has opened the door to a possible resolution. It is premature to make any assumptions, but the surge in stocks and the dramatic 14.8% drop in oil prices the day following is an indicator of the type of investment recovery that could ensue when a resolution is achieved.
Inflation, The Fed & Interest Rates
Prior to the Iranian conflict, U.S. Consumer Price Index (CPI) annual inflation was holding at a fairly moderate rate of 2.4% as of the end of February. That rate ticked up to 3.3% in March. The sharp increase was largely due to higher fuel prices that rose from roughly $3 per gallon to $4 per gallon during the month of March. Consumers and businesses are feeling the pinch of higher gas prices and other price increases rippling through the economy. Key sectors of the economy that are most impacted include transportation and aviation, manufacturing, agricultural and food production, and consumer goods.
It is yet to be seen how the economy and job market will be affected if war and inflationary effects persist. Over the past year, the unemployment rate has increased from 3.9% to 4.3%, with more modest moves in recent months. Other economic data has generally been strong with respectable gross domestic product (GDP) figures and healthy corporate earnings.
The current mixture of inflationary pressures and a softer employment market place the Fed in a precarious position. The Fed typically increases rates to combat inflation. Conversely, the Fed often lowers rates to stimulate the economy and job growth. These two goals are competing with each other. The general consensus is that the Fed will pause any near-term rate adjustments, allowing time for a possible improvement in the geopolitical landscape and a potential decline in oil prices.
Absent any changes by the Fed, interest rates have been on the move. The 10-year Treasury yield climbed from 3.962% to 4.31% from February 27th through March 31st. Likewise, mortgage rates rose from just under 6% to over 6.4% in a matter of a few weeks.
Headline and Market Rotations
Headlines are constantly changing about how long the war will last, the status of ceasefire negotiations, whether the U.S. will end the war with or without the reopening of the Strait of Hormuz, etc. Realistically, no one can predict when the war will end or when oil supply chains will return to previous levels. We could be facing an extended conflict, or we could be nearing a resolution. There are many countries and moving parts involved.
The markets also remain fluid. Market rotations reminded investors that today’s hot investment could go cold tomorrow. As an example, several stock market rotations occurred in March. Investors sold out of technology and growth-oriented stocks into more value-oriented companies, particularly in the energy, materials and financial sectors. There was also a swift selloff of gold as investors flocked to oil.
We remind investors that rash reactions in an attempt to mitigate market losses or time the markets can quickly backfire if you sell too low or fail to re-enter the markets in time to catch the recovery wave. Missing a single day of recovery rally can significantly erode long-term gains. Here are examples of the past two downturns in 2020 and 2022:
2020 Covid Market Downturn
Investors who stayed in the S&P 500 through the 2020 downturn (which was the shortest in history) enjoyed a 92.8% return through March 31, 2026. Those who missed the first day of market recovery forfeited 9.38% in one day.
2022 Inflationary Downturn
Investors who stayed in the S&P 500 through the 2022 downturn enjoyed a 36.1% return through March 31, 2026. Those who missed the first day of market recovery forfeited 5.54% in one day.
Looking Forward
We understand that current world events are disconcerting on many levels, including relative to your finances. While market downturns are unpleasant, we would like to remind our clients that we carefully review your investment positioning relative to foreseen cash needs with the objective of protecting your portfolio during market downturns. This allows you to maintain a long-term approach with a greater sense of comfort and the ability to take advantage of investment opportunities as they might present. As always, please feel free to contact us about your investments, finances or questions.
SageVest Wealth Management
