Q1 2026
Dear Client,
Happy spring! We’ve rolled straight from an unfortunately warm winter into a beautiful early spring here in the mountains. Much like the markets, we can’t control the weather, so we adapt to what we are given. We have been in touch with many of you and your tax-preparers over the last month or two. If you need tax documents, want to make retirement contributions, or have questions as we approach the tax deadline, please reach out. Many of us did receive corrected 1099 reports on March 27th, so be sure to check if you are included in that number.
We have found ourselves incessantly checking news sites and apps recently (even more so than usual). The tightrope we are walking in the geo-political sphere, and the resulting volatility in markets has been unsettling. There are various scenarios that could play out from here, and very little basis on which to lean our expectations one way or the other. Policy conducted by social media posts and dictated by the temperament of an inconsistent and volatile president doesn’t offer much confidence in prognostications. The Iran war has obviously been at the forefront for the past month.
Given our mandate to try and understand the economic and financial implications of otherwise human issues, we are most concerned with the price of oil and to some extent fertilizer inputs and other trade goods, which are being affected by the (mostly) closed Straight of Hormuz.
There is a strong correlation between spikes in the price of oil and recessions in the US and around the world. Roughly speaking, if the price increase is large enough and long enough, it usually is followed by a recession. While there is no hard and fast formula, past experience leads us to expect that if the price of oil increases by 10% or more for 3 consecutive quarters and reaches a new 3-year high, then the probability of recession following within 4-6 quarters is better than even. ( [i], [ii],[iii])
The dissonance we are trying to reconcile is that the markets are surely not reflecting this probability. In fact, the current outlook for earnings of the S&P 500 is quite strong. 4th quarter 2025 earnings showed growth of around 14% and marked the 5th consecutive quarter of double-digit growth. Further, expectations as we enter First quarter 2026 earnings season are still quite strong, approximately 13%. Admittedly, these are backward-looking indicators, but they are real, and therefore better fodder for future expectations than guessing what might come out of Washington. ([iv], [v])
Although the news flow felt quite negative and there were significant declines in some share prices, the total drawdown in the indices during the first quarter ended up being fairly modest. Additionally, the declines were mostly felt in the previously highest flying, largest, and most liquid areas of the market. As a result, the overall valuation of the S&P 500 moved nearer to historically normal levels. Actual index changes during the quarter were as follows (calculated from www.stockcharts.com):
S&P 500 change: -5.08% Q1
S&P 500 Equal Weight Index change: 0.19% Q1
Nasdaq Composite change: -8.05% Q1
Nasdaq Composite Equal Weight Index change: -4.45% Q1
Dow Jones Industrial Average change: -3.67% Q1
Ten Year Treasury Yield change: 3.6% Q1
Light Crude Oil Spot ($WTIC) change: 76.9% Q1
Gold Spot ($GOLD) change: 7.54% Q1
Takeaways include:
· Obviously, the spike in the price of oil was quite large and will likely filter through and cause bigger problems if the trend continues.
· The spread between market-cap weighted and equal-weighted indices was significant. In this case that meant that the largest companies were the hardest hit. Further, 82% of the drawdown in the market-cap weighted S&P 500 was explained by the 10 largest companies (calculated by us). The benefit to the lopsided selling is that the indices are less top heavy now than they have been since Q4 of 2023 for the Nasdaq and Q1 of 2025 for the S&P 500 (again according to our calculations).
· Gold did continue to climb for the full quarter. However, surprisingly it sold off for a portion of the quarter at the end of January and again around the initiation of the war in Iran. This is a bit counter-intuitive, as gold is usually considered a safe-haven asset during times uncertainty.
· In a similarly unusual move, US Treasury yields climbed, meaning prices fell during the quarter. In the past, US Treasury notes and bonds were considered safe haven assets, meaning money would flow to them during times of uncertainty. However, that would have meant prices and yields would have moved in opposite directions from what we experienced.
We think both the move in gold and US Treasuries are not conclusive statements about anything systemic, but rather evidence of the consistently inconsistent and contrary cross currents functioning in financial markets right now.
Altogether, the outlook for our economy and markets remains numerically positive, but with considerable subjective uncertainty.
Now more than ever we are making changes (or not) specifically relative to each of your individual situations and portfolios. As such, it is difficult to make broad statements about them in this note meant for all. That said, you can rest assured we are paying very close attention to the changing currents in the world and the markets, and doing our best to adjust your investments according to your individual needs.
Please follow up with us directly if you would like to discuss your particular situation and how we feel it is best addressed in this environment.
We wish you all the best as we move into the further into the spring and summer months!
Take care,
Bo and Lesley
[i]https://econweb.ucsd.edu/~jhamilto/oil.pdf
[ii]https://www.policyarchive.org/download/1529
[iii]https://www.federalreserve.gov/pubs/ifdp/2014/1114/ifdp1114.pdf
[iv]https://advantage.factset.com/hubfs/Website/Resources%20Section/Research%20Desk/Earnings%20Insight/EarningsInsight_022726.pdf
[v]https://advantage.factset.com/hubfs/Website/Resources%20Section/Research%20Desk/Earnings%20Insight/EarningsInsight_040226.pdf
