The first quarter of 2026 has been a reminder that markets do not wait for clarity. We started the year expecting the typical “new year” pullback after a strong 2025, only to see stocks move higher early and market leadership broaden beyond the small group of mega-cap companies that drove much of last year’s gains. At the same time, policy headlines, geopolitical events, and changing expectations about interest rates have kept volatility elevated and made it difficult to rely on simple narratives.
In our view, this quarter has been less about predicting one outcome and more about understanding what is driving markets in real time: who is spending, what is supporting growth, where inflation pressure can return, and how quickly investors change course when headlines shift.
A Strong Start With Broader Participation
One of the more positive developments early in the quarter was a broader mix of market winners. Smaller U.S. companies and many international markets participated more than they had in prior periods. This suggests investors were looking beyond the narrow leadership that dominated much of 2024 and 2025, when a small group of mega-cap technology stocks, often called the “Magnificent 7,” accounted for a large share of overall gains.
Broader participation matters because it improves the case for diversification. When only a few stocks lead, diversified portfolios can feel like they are constantly lagging. When leadership spreads out, diversification tends to do a better job of balancing risk and improving outcomes across a wider range of investments. We view that as a healthier backdrop and a reminder that diversification tends to matter more when market leadership is not so narrowly concentrated.
Oil, Inflation, and the Iran Conflict
As the quarter progressed, geopolitical risk became a dominant driver, particularly the conflict involving Iran and disruptions around a key global shipping route for energy. A meaningful portion of the world’s oil and gas flows through that corridor, so when access is threatened or disrupted, energy prices can move quickly.
Higher oil prices have ripple effects. They can push inflation expectations higher, change interest rate expectations, and pressure economic growth if higher energy costs persist. By quarter-end, the conflict had contributed to the steepest one-week decline in domestic markets since it began, while longer-term interest rates also moved sharply higher.
This environment can create a difficult mix for traditional portfolios. Stocks can fall due to growth concerns, and bonds can also struggle if inflation expectations rise. We view this as another reminder of why planning and portfolio structure matter. Part of True Wealth Management is building portfolios and financial plans that are prepared for periods like this, including maintaining exposure to alternative strategies that are designed to be less tied to the day-to-day movement of traditional stock and bond markets, with the goal of keeping a portfolio from becoming overly dependent on a single event.
Data Disruption: The Shutdown Effect
This quarter experienced the longest full government shutdown in U.S. history, creating significant challenges for economic analysis. The shutdown fundamentally compromised the data-collection infrastructure that markets, policymakers, and investors rely on to make informed decisions.
The Bureau of Labor Statistics was unable to conduct its usual data collection for the Consumer Price Index, resulting in approximately 30 percent of data points being marked as “no price change” — not because prices actually held steady, but because the information couldn’t be gathered. The consensus among economists is that recent CPI figures likely undershot true inflation levels, with a compensating “whipsaw effect” expected in the coming months as data collection normalizes.
Similarly, employment reports were distorted by the inclusion of roughly 100,000 positions from deferred government resignations and terminations, making it difficult to assess the true state of labor markets. This data uncertainty compounds the Federal Reserve’s already complex task of balancing its dual mandate of price stability and maximum employment.
Housing, Rates, and Policy Influence
We also saw a policy effort aimed at housing affordability. Government-related agencies were directed to buy mortgages at scale, with the goal of pushing mortgage rates lower. Mortgage rates did move down, and the mortgage market reacted quickly.
The longer-term impact is still unclear, but the takeaway is that housing affordability is likely to remain a policy priority. That means mortgage rates may respond not only to the Federal Reserve and the economy, but also to policy decisions. That can create periods of improvement followed by renewed volatility.
The Fed Still Sets the Tone
Jobs and inflation remain the key inputs for investors trying to anticipate the path of interest rates. Early in the quarter, hiring came in weaker than expected, even as the unemployment rate remained in the mid-4% range.
At its March meeting, the Federal Reserve kept interest rates unchanged and noted that the economic outlook remains difficult to read. The Fed also pointed to the Middle East as one factor that could influence the outlook. There was also at least one voting member who preferred to cut rates at that meeting, which shows there is not complete agreement on how quickly policy should shift.
In an environment like this, it is easy to get pulled into day-to-day speculation about the next Fed move. We think the more important question is whether inflation continues to cool, or whether it re-accelerates in a way that keeps rates higher for longer than many investors expect.
A Reminder That Interest Rates Are Global
One of the more underappreciated developments this quarter came from overseas. Bond yields in Japan rose sharply after Japan’s new prime minister floated the idea of large, unfunded tax cuts. This matters because Japan is one of the largest foreign holders of U.S. government bonds.
When large global investors face stress at home, one potential response is to sell assets held abroad. If that includes U.S. government bonds, it can push U.S. interest rates higher even if nothing has changed in the U.S. economy. It is a reminder that interest rates are not purely a U.S. story. Our view is that developments like this are a good example of why we try not to treat U.S. rates as if they move only on Fed decisions or domestic data.
Tariffs and the Cost of Uncertainty
Tariff policy returned as a market-moving topic this quarter. Court decisions forced changes in how tariffs were implemented, and new approaches introduced time limits unless extended by Congress.
The practical market issue is uncertainty: what is tariffed, when, how long, and what comes next. That uncertainty can lead businesses to pull forward purchases, delay shipments, or hold back on investment until the environment feels more stable. Even when tariffs do not immediately change the direction of the economy, the uncertainty around them can shape behavior in ways that show up later in growth and inflation data. Our view is that markets often have an easier time absorbing bad news than constantly shifting rules.
Private Credit: What Happened and What We Are Watching
Private credit generated more headlines this quarter, largely driven by a handful of problem situations where individual borrowers failed or were accused of fraud. In several cases, the headlines centered on publicly traded vehicles that invest in private loans, where prices can move quickly when holdings are marked down.
In any credit portfolio, some level of borrower trouble is expected over time. Managers account for a normal level of defaults and recoveries in their return expectations. A write-down does not always mean a total loss, and recoveries can occur depending on the structure of the loan and the collateral behind it.
We are also watching how credit is priced more broadly. When lenders demand more compensation to take risk compared to U.S. government bonds, prices in many credit strategies can fall in the short term even if there is no major economic downturn. This can create more visible movement in credit pricing than investors have seen in the last couple of years, even without a major change in the overall economy.
Looking Ahead
As we move into Q2, we expect markets to continue shifting between two narratives:
- A manageable inflation shock that fades as conditions normalize, allowing the economy and corporate earnings to remain relatively stable, and
- A more persistent inflation and interest-rate challenge if energy disruption lasts longer than expected or if inflation pressure spreads beyond energy.
Volatility may remain elevated, not because markets are broken, but because markets reprice quickly when the range of possible outcomes widens. Our focus remains consistent: maintain diversified portfolios built to weather different environments, rebalance when opportunities present themselves, and stay disciplined when headlines encourage short-term reactions. Recent market weakness has also begun to create more opportunities for selective rebalancing and tax-loss harvesting, which is a good reminder that volatility, while uncomfortable, can also create planning opportunities. Over time, that discipline tends to matter far more than trying to predict each twist in the news cycle.