March U-Turn

After strong gains in 2025, markets have faced a combination of geopolitical shocks, higher oil prices, and renewed economic uncertainty in the first quarter of 2026. The conflict in Iran has become the dominant market story, pushing oil prices sharply higher and sparking the first market pullback of the year. However, by the end of March, headlines around a possible ceasefire emerged, and the situation continues to evolve.

Taking a broader perspective, markets have still performed exceptionally well over the past twelve months (as measured by the S&P 500 and other major indices). Beneath the surface, many parts of the market have supported portfolios, including energy and defensive sectors. There will undoubtedly be new market questions in the coming months, including a change in leadership at the Federal Reserve and the midterm election later this year.

It’s natural to draw parallels between the start of this year and the beginning of 2025, since both were driven by global concerns. While last year’s volatility was the result of tariffs and this year’s is due to the conflict in the Middle East, the effect on investor sentiment has been similar. When uncertainty rises, it’s natural for markets to experience short-term swings in response to headlines.

Pullbacks are a normal and unavoidable part of investing. Since 1980, the S&P 500 has experienced an average intra-year drawdown of around 15%, even though markets tend to experience positive returns in more than two-thirds of years. It’s natural for the average year to experience four or five pullbacks of five percent or worse. Last year saw six such pullbacks, even though the S&P 500 finished the year with an 18% total return.

For investors, the key takeaway is that short-term market swings, especially those driven by headline risk, are simply part of the market cycle. Portfolios aligned with long-term financial goals are designed to navigate these periods. This could be especially important as we approach the midterm elections and fiscal concerns reemerge later in the year.

Geopolitics and oil prices are the primary source of uncertainty

The most significant market development of the first quarter was the escalating conflict in the Middle East, which drove oil prices higher. Disruptions to the Strait of Hormuz, which carries roughly 20% of global oil from the Persian Gulf to the rest of the world, led to production cuts across major oil-producing nations in the region.  In March oil prices reached the highest levels since the war in Ukraine began in 2022. Oil will continue to react to geopolitical headlines, including around a possible ceasefire.

While these types of events do affect consumer pocketbooks, economists tend to view these types of “supply-side shocks” as temporary when considering the health of the overall economy. This is because oil prices tend to improve once the geopolitical event has stabilized. This was the case in 2022 when gas prices reached $5 before declining within months. While not pleasant, significant financial hardship is not expected to be an issue for the average American household at current gasoline levels.

History also shows that geopolitical events, while creating short-term instability, have not typically derailed markets in the long run. This includes the U.S. operation in Venezuela in January, which surprised markets but had little lasting impact on investments. While the current situation is still evolving and the humanitarian consequences are significant, investors who made dramatic portfolio adjustments in response to past events often did so at the wrong moment.

Economic growth is slowing but remains positive

Volatile energy prices are just one piece of the broader economic puzzle. Other signs point to an economy that has cooled over the past year, but that is still fundamentally healthy. This is after many years during which investors and economists predicted recessions that did not materialize.

Perhaps the most closely watched area is the labor market.  Today, job seekers now outnumber job openings for the first time in years. As recently as 2022, there were two job openings for every unemployed individual, reflecting an exceptionally tight labor market. That relationship has now reversed.

However, the context around this matters. Fewer people are entering the workforce due to lower immigration and an aging population. In other words, both the supply and demand sides of the labor market are cooling, which has helped keep the unemployment rate near historically strong levels. We’ll continue to keep a watchful eye on the market influences discussed here, in addition to other salient factors, always seeking an effective approach to both growth and risk management.  As always, contact us if you have any questions about how current events may impact your portfolio.

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