2026 Q1 Market Results
The first quarter of 2026 wasn’t a good one for investors. The S&P 500 was down -4.33% for the quarter, and international stocks were down a bit less at -1.87%. Emerging Markets were up a surprising +3.86% for the quarter. Intermediate bonds were down slightly at -0.05%. Short Treasuries were up +0.28% for the quarter.
Portfolio Thoughts
The S&P 500 and most other markets declined fairly steadily throughout the quarter. Bonds continue to struggle and show no signs of the recovery we still believe is coming. Given that the Federal Reserve (Fed) held interest rates steady in March, we did not expect any significant changes in bond yields.
2026 Q1 Notes
In a repeat of what happened a year ago when President Trump announced his “Liberation Day” tariff policy, the U.S. has once again inflicted a self-wound by initiating the Iran war. Markets are justifiably concerned about this action, as access to global oil supplies is stalled due to the closure of the Strait of Hormuz. Beyond just oil markets, there are worries that the Iran war could spill over into other economic stress, such as shortages of fertilizer and helium from the Middle East. Although markets seemed to adjust to the Trump tariff regime, the Iran war has created a new problem that the markets have not yet dealt with. We hope the war will end soon, and the global economy can start whatever adjustments are needed to get back to normal. In the end, the market narrative is definitely negative right now.
Interest Rates
As we stated previously, the Fed held interest rates in March, and we feel this is a completely reasonable stance. Given that the war in Iran was raging and oil prices had risen significantly, inflationary pressures had to be considered. The U.S. inflation rate in March 2026 was slightly lower at an annual rate of +2.4%, which is positive for the U.S. economy, but the effects of the Iran war could change that quickly. We’ll see what the April inflation reading looks like. We see possible interest rate reductions as we get further into 2026, but we don’t expect one at the next meeting in April. Political rhetoric in both parties is heating up as we move toward the November elections. Currently, it doesn’t look good for Republicans with the many self-inflicted wounds they are suffering. But there is still plenty of time until the elections, so we’ll see how it all goes. We don’t have a strong opinion here.
Global Outlook
It would be impossible to talk about Global events or outlook without covering the Iran war. Operation Epic Fury, as it is known, was launched on February 28, 2026, by the United States and Israel. This operation has been nothing short of stunning, given its breadth and scope. According to U.S. Central Command (CENTCOM), the operation has employed B-1, B-2, and B-52 bombers, F-15, F-16, F-18, F-22, and F-35 fighter jets, and A-10 attack jets. Along with a long list of intelligence, cargo, reconnaissance, and refueling aircraft, and various helicopters. Even the V-22 Osprey tilt-rotor aircraft has been used.
Effects of Operation Epic Fury
As of the CENTCOM March 23 report, over 9,000 targets have been struck and over 140 Iranian naval vessels damaged or destroyed. Imaging from Iran is very hard to get, given the Internet lockdown employed, but the few images seen show a country that has been utterly devastated by the combined effort of the U.S. and Israel. Iran continues to respond by firing ballistic missiles and drones at U.S. bases, Israel, and even the civilian infrastructure of neighboring countries such as the United Arab Emirates and Saudi Arabia.
Iran Continues to Launch Attacks
Iran has expected this kind of bombing campaign for many years, although mostly from Israel and not necessarily from the United States. They have hidden many drones and ballistic missiles across the country, along with a mosaic communication system that allows them to launch these even when their larger infrastructure and communications systems have been damaged or destroyed. This has proven a real challenge for Epic Fury, as no matter how many targets are struck, Iran continues to launch responsive attacks. Granted, those attacks are fewer now than at the start, but they still come, and they create real problems for those targeted. Iran’s neighbors, except Israel, have not invested heavily in air defense, so many of the missiles and drones hit their targets with devastating results.
Closure of the Strait of Hormuz
Probably the largest effect of the Iranian retaliatory strikes is the closure of the Strait of Hormuz. The Strait of Hormuz is a slim maritime corridor between Iran to the north and Oman and the United Arab Emirates to the south. It connects the Persian Gulf to the Arabian Sea and thus to global markets. About 1/5 of the global oil supply and 20 percent of liquefied natural gas travel through the Strait on a normal day. Nearly 3,000 ships transit the Strait in a normal month. Given this, if the Strait is significantly interrupted, global energy supplies are adversely affected. From a legal standpoint, closing a waterway is illegal under agreements adopted by the United Nations (U.N.) in 1982 and the Geneva Convention in 1958. But Iran doesn’t care about the legalities. All they want to do is create as much trouble as possible for their attackers and the rest of the world.
How the Strait of Hormuz is Closed
Iran closes the Strait using a variety of tools. Underwater mines are one of the most difficult to prevent and remove. Mines can be deployed by submarines or fast-attack boats, and specialized ships are required to find and remove them. Missiles and drones are also used to damage or destroy ships trying to travel through the Strait. Fast-attack boats can also harass ships by detaining or even seizing them. Probably the most damaging aspect of these tactics is that, as the Strait becomes more dangerous, insurance to protect ships becomes unbearably expensive, deterring many ships from even entering the Strait. All this combined essentially closes the Strait to global trade. As damaging as other Iranian attacks have been on other countries, none of that damage is as existential as the closing of the Strait of Hormuz.
Goals of the Trump Administration
The Trump administration has outlined its goals for engaging in Operation Epic Fury. Those are, in order as best we can tell: Eliminate Iranian Nuclear Capacity, dismantle their Military Power, Protect Regional Allies, Secure the Strait of Hormuz, and finally, install a new Iranian government regime. Israel has generally been considered to focus more on the regime change component of the U.S. goals. This is a long list of goals for the U.S., and so far, we’ve seen significant progress on the first two, with some progress on the third.
Public Support of the War is Weak
The Strait of Hormuz remains closed as of today, and although there is talk of a new regime emerging in Iran, that has not been confirmed. Donald Trump finds himself in a difficult position. Not all his intended goals have been met, but gas prices in the U.S. are up over 30%, and public support for the war is weak. Not to mention the long list of global leaders who feel the war is either not legal or justified. His most recent comments have suggested the war will end in two to three weeks.
What’s to Come?
From what we’ve read, the military is running out of targets to go after, so another two or three weeks will likely mean targeting mobile missile and drone launch sites and opening the Strait of Hormuz. President Trump has deployed more soldiers to the Middle East, but it is unclear whether any ground operation will take place. A ground operation in Iran will not be supported by U.S. citizens or the world, and the number of wounded and killed will go up dramatically. Trump knows the downside, but he may feel he can’t move on without attaining more of his military goals. Only time will tell.
Disclosure: Past Performance is no guarantee of future performance
Reference Links
Federal Reserve Meeting
Operation Epic Fury
U.S. Inflation
Strait of Hormuz
Iran War Goals
