A Reminder That Markets Can Change Quickly

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VOLUME 18 | ISSUE 2

The first quarter of 2026 was a useful reminder that markets rarely move in straight lines.

Coming into the new year, investors were focused on familiar questions. Was inflation continuing to cool? Would the Federal Reserve begin cutting interest rates? Could the economy slow without falling into recession?

By the end of the quarter, those questions still mattered. But a more immediate concern had taken center stage: rising geopolitical tension and what it could mean for energy prices, inflation, and financial markets. The result was a difficult quarter for both stocks and bonds.

U.S. stocks did stage a rally at the tail end of the quarter as investors responded to signs that tensions in the Middle East might ease. Even so, that late rebound was not enough to erase the quarter’s earlier losses. For the first quarter of 2026, the S&P 500 Index was down 4.6% and the Dow Jones Industrial Average was down 3.6% on a price-return basis[1], making it the weakest quarter for these broad market indexes since 2022.

One of the clearest drivers of the quarter was energy. As conflict intensified in late February and March, oil prices climbed sharply. Brent crude rose above $100 per barrel, and energy markets became much more volatile. Gasoline prices also pushed higher.

That matters because energy costs reach well beyond the oil market. They affect transportation, manufacturing, household budgets, and overall business confidence. When oil rises quickly, investors begin to worry that inflation may stay higher for longer, even if other parts of the economy are cooling.

That shift also shaped the bond market. In periods of stress, investors often move into U.S. Treasuries, which can help support bond prices. This time, higher energy prices and renewed inflation concerns limited that usual pattern. The 10-year Treasury yield moved higher during the quarter, which pushed bond prices lower. For balanced investors, bonds provided less of a cushion than investors often expect during periods of stock market weakness.

The Federal Reserve did not make any major policy changes in March, but its message remained cautious. The Fed said economic activity was still expanding, job gains had remained low, and inflation was still somewhat elevated. In practical terms, rate cuts may still be possible later this year, though the timing appeared less certain by quarter-end than it had earlier in the year.

Economic data available by quarter-end showed some signs of slowing, but overall still pointed to a relatively resilient economy. The labor market showed some signs of softening, but not enough to suggest a major downturn. The most recent consumer spending data suggested that household demand had remained reasonably firm. Taken together, the data pointed to an economy that was still on stable footing, even as the outlook became a bit more fragile.

That may help explain the market’s discomfort. Investors were likely no longer assuming a smooth soft landing. But they do not seem to be fully expecting recession either. Instead, markets were left to navigate a narrower path: slower growth, stickier inflation, and more uncertainty around the timing of future Fed policy moves.

Sector performance reflected that shift. Energy held up well as oil prices rose, while many growth-oriented parts of the market came under pressure. It was also a reminder that headline index returns do not always tell the full story. Leadership in the market can change quickly, especially when inflation and commodity prices move back into focus.

So what should investors take away from the first quarter?

First, short-term market moves are often driven by events that are hard to predict. Second, diversification still matters, but it should be viewed as a long-term discipline, not a guarantee against every difficult quarter. And third, the market remains highly sensitive to three connected forces: energy prices, inflation, and Federal Reserve policy.

As the second quarter begins, several important questions remain. Will higher energy prices prove temporary, or will they feed into broader inflation? Will the labor market continue to cool gradually, or more abruptly? And will the Fed gain enough confidence to begin lowering rates later this year?

Those answers will shape the next phase of the market story. But if the first quarter offered one clear lesson, it is that conditions can change quickly, and markets can adjust to a new set of risks faster than expected. That is why patience, discipline, and a well-structured portfolio remain so important.

We know quarters like this can feel unsettling, especially when both stocks and bonds come under pressure at the same time. That is why we stay focused on long-term planning, thoughtful diversification, and disciplined portfolio construction. At the same time, we believe it is important to be clear about the limits of any investment approach: market declines and volatility cannot be avoided entirely, and diversification does not guarantee a profit or protect against loss. Our job is not to predict every short-term move, but to help clients make thoughtful decisions within a plan built around their goals, time horizon, and tolerance for risk.

[1] Source: S&P Dow Jones Indices and Dow Jones Market Data, as of March 31, 2026.

Index performance is shown for general market context only. Indexes are unmanaged, do not reflect fees or expenses, and cannot be invested in directly.