For those who were looking for a calmer 2026, the first quarter quickly dashed all hope. The US has kicked off the year with a burst of geopolitical activity which promises to carry large implications for not just US markets going forward, but the world order more generally.
This began with an early January operation to capture the Venezuelan President, Nicolas Maduro, and bring him to the US for narco-trafficking charges, among others. The US at the same time largely took control of Venezuelan oil exports and began working with leaders within the country. Because Venezuela is a large supplier of oil to Cuba, this action also resulted in the US embargoing oil shipments to Cuba. The Cuban government appears to be near collapse and is reportedly having talks with the US government.
As if this wasn’t enough, the US has now launched a major offensive, in alignment with Israel, against the Islamic Republic of Iran. The stated goal is to destroy the military, naval, missile, and nuclear capabilities of Iran, and to establish a more friendly government. Iran has responded by closing the Strait of Hormuz to most oil shipments, causing oil and gas price spikes and economic strain across the globe.
The closing of The Strait has been the largest contributor to the uncertainties surrounding this war. It is widely accepted that Iran’s military cannot compete with the US’s military. However, it would require a more sustained campaign including troops on the ground in order to fully open The Strait without Iran’s agreement. Whether the US ultimately decides to take this step is a source of great uncertainty.
We’ll leave the merits of the current actions to the political sphere. For our purposes, we want to know how this will affect markets going forward. In our view, the market fallout is partially dependent on the length of duration for the hostilities, and in particular, the length of the closure of The Strait. The longer it lasts, the more potential harm is done to oil and gas supply lines, and thus the higher oil and gas prices may climb, thus crimping economic activity elsewhere.
All of this comes at a time when economic data has generally been coming in soft. We’ve seen the jobs picture slowdown, with a couple of months even showing negative job growth recently. Retail sales growth has also slowed recently and consumer sentiment is still low by historical standards. Mortgage rates have ticked up slightly over the past month.
The low consumer sentiment may be attributed to the continued inflation pressures in the economy. While inflation has cooled since the highs immediately following the COVID pandemic, it still remains above the Fed’s stated target. This will hamper the Fed’s ability to lower interest rates to help support a slowdown in the economy as they continue to weigh their dual mandate of full employment and stable prices. This is something to watch as the Iran situation continues to develop.
Even before the hostilities in Iran, we have seen some growth categories, such as technology stocks, cool off towards the end of 2025 and into the beginning of this year. Higher energy prices will generally not help this sector. On top of the traditional pressure this brings, we also believe that the further down the AI and data center road that technology companies travel, the higher their energy needs, and thus, the more important energy prices become to their performance. Elevated interest rates can be an additional drag on economic growth, so the continued persistence of inflation works against being able to lower rates and further support the economy.
On the other hand, if hostilities wrap up within the next few weeks, with the Strait of Hormuz open for business, then we believe the financial market impact will be relatively short-lived. It’s important to note as well that the additional oil and gas production growth the US has experienced over the past 15 years has greatly helped to limit the impact on financial markets. Let us all hope these actions can end quickly, and to the benefit of the US.
- Federal Reserve Policy. The Fed left its key interest rate benchmark unchanged at 3.50-3.75% in March. The Fed has signaled quite a bit of discomfort with their choices, and is currently split on whether it should continue lowering rates or pausing. This concern arises from the fact that inflation is still stubbornly above their 2% target, while at the same time job growth has cooled noticeably. Much will depend on whether the Fed leans towards addressing jobs or inflation. Our guess is that the Fed chooses to focus on jobs and continues to ease financial conditions moderately through 2026.
- Economic Growth – GDP. Q4 GDP growth came in well below expectations, +0.7% on the 2nd estimate. With this final reading for 2025, the full year growth was 2.2%. The US economy experienced substantial changes during the course of 2025, particularly as it relates to deregulation, trade and tariffs. Growth is now also at risk due to the ongoing tensions with Iran.
- Labor Markets. The jobs picture has continued to be murky in 2026. January surprised big to the upside, followed by a large negative print in February. As of this writing, when factoring in revisions, we’ve seen negative job growth in 2 of the last 3 months (December and February).
- Inflation. Headline inflation has moderated a bit over the past few months, but the Fed’s Core inflation gauge has actually ticked up. This has presented a complicated picture of inflation which is causing the Fed to look more carefully at whether they should continue to lower interest rates going forward. Expectations are for inflation to at least temporarily tick up further with the recent runup in energy prices.
- Consumer Sentiment & Spending. Consumer spending growth has slowed in recent months. Month over month, retail sales were unchanged in December and -0.2% in January (while still up ~2.5-3% year-over-year). At the same time, while inflation is eating into spending power, we’ve seen real income growth pick up slightly in recent months.
- Housing & Real Estate. The housing market is still eagerly waiting for interest rates to come down. We’ve actually seen rates tick up slightly over the past few weeks. While some are adjusting to higher rates, many are still locked into their current homes with very low rates. This is creating gridlock in the market. It appears lower rates may be further away given the recent hostilities in Iran and the impact on oil and gas prices.
- Business Investment & Manufacturing. We have once again seen the manufacturing sector emerge from contraction territory in the ISM survey. Both January and February were positive, at 52.6 and 52.4, respectively. We saw this early in 2025 as well, so we’ll have to watch to see if this will be a more sustained trend. Over the course of the past year, while there has been a lot of investment in the manufacturing space, we have yet to see that translate into actual employment growth. This will continue to be a challenge going forward as factories continue to automate.
- Regulatory Environment. The Supreme Court ruled that the Trump Administration’s use of IEEPA to impose sweeping tariffs was unconstitutional. That has removed much of the tariff regime put in place in 2025. While the administration will likely try to utilize other authorities to impose tariffs, those authorities come with much more strict language and specifications on how they may be implemented.
- Global Economy. Hostilities in Iran have upended the global apple cart for the time being. The Strait of Hormuz is closed. While the US doesn’t have to worry as much about oil supply, many Asian countries are dependent on the Strait for 80% or more of their energy supply. The overall impact will partly depend on the length of the hostilities.