Market Commentary Q1 26

Q1 2026 was centered on the idea of an “AI” tech theme and expected interest rate cuts. Now, the Iran war and the oil price shock are the center of focus. The extended sequence of positive returns has paused as the market booked a negative quarter with the S&P falling -4.4%.

The adversity and cost of conflict in the Middle East are challenges that have been imposed on society numerous times. Wars produce spikes in energy prices that lead to broad concern about cost and the spider web of inflation that can ensue. Energy supply to American households is one element of the broad dispersion of costs that can ripple through the global economy. Diesel fuel has the greatest impact as it powers a vast array of commercial distribution systems.

The scenarios that strategists initially project during military conflict are often overestimated. The idea that the global supply of oil could be persistently interrupted by the desperate actions of the Iranian regime is unlikely to play out. The continuous demand for petroleum supply creates monumental economic incentives for the Saudis and other major producers to deliver.

The complexity of global energy markets is far beyond the analytical capabilities of this commentary. It is notable that in 2002, the United States domestic energy production capacity was leaping forward while the George W. Bush administration was eagerly seeking justification to invade Iraq. Innovation has had a greater impact on American and global economics than any military actions. It is likely that the rug pull of incentives for electrification will be looked back on as a blunder of historic proportions. The vast opportunity of electrification will rise in response to another round of Americans being personally outraged at the costs of fueling an oversized SUV.

The 1916 Sykes-Picot Agreement was an agreement between Britain and France, along with Russia, to partition the Ottoman Empire's Arab territories. The agreement allocated modern-day Syria and Lebanon to France, and Iraq and Palestine to Britain. The decree disregarded Arab independence promises, creating borders that have caused decades of conflict and shaped the modern Middle East. The troubled timeline of conflict in the region is filled with dire predictions regarding human and economic catastrophe. The first oil produced commercially was in Persia in 1908. The wealth creation and struggle for control could never have been imagined at the time.

A partial catalogue of modern Middle East conflicts provides perspective:

1948 Arab-Israeli War; 1956 Suez Crisis; 1967 Six-Day War;

1973 Yom Kippur War; 1980-88 Iran-Iraq War; 1987 Palestinian uprising in Gaza /

Intifada; 1990 Iraq invades Kuwait; 1991 America drives Iraq out of Kuwait; 2000 Intifada;

2003 US invades Iraq; 2006 Isreal V Hezbollah in Lebanon; 2011 Syrian Civil War; 2015

Yemeni Civil War; 2023 Hamas attacks Israel; 2026 Multiple attacks on Iran

The outcome of all the regional conflicts shares one common characteristic: oil and related products eventually continue to be sold into insatiable demand. The economic incentive is much more powerful than any disruption that has occurred. The exporting countries cannot do anything with the oil but sell it. The notion that the global economy will be held hostage in implausible. The exporters will not consume the energy themselves.

Military threats in the Middle East are often drastically overstated. There is a long history of underperformance by local militaries when conflicts arise. Norvell De Atkine, a retired U.S. Army colonel, wrote, “Mid East armies have been generally ineffective in the modern era. Egyptian regular forces did poorly against Yemeni irregulars in the 1960s. Syrians could only impose their will in Lebanon during the mid-1970s by the use of overwhelming weaponry and numbers. Iraqis showed ineptness against an Iranian military ripped apart by revolutionary turmoil in the 1980s and could not win a three-decades-long war against the Kurds. The Arab military performance on both sides of the 1990 Kuwait war was mediocre. And the Arabs have done poorly in nearly all the military confrontations with Israel.”

De Atkine suggested that there were cultural explanations for these military humiliations. This commentary would argue that the explanation is likely that kleptocratic theocracies like Iran or tribal regimes like Saudi Arabia have consistently gathered all the bounty of the land. A religious veneer has been constructed to mask the reality that most of the natural resources were being siphoned away by corruption and other forms of shady patronage.

Economic productivity reflects the underperformance of the economies in question. Per capita GDP in Israel is in excess of $50,000; in Iran, it is $4,000. US GDP per capita in 2025 was $85,000. The entire Middle East has struggled to generate activity outside of resource extraction. Economic realities impact military realities. When you have productive economies, they can be militarily prepared. These tragic conflicts are heart-wrenching, and nobody would ever want to see any civilians harmed. As investors, we can rely on economic realities to understand the nature and the threat that we face. The true consequences are minimal as the Death to America, hatred of Israel, and demonization of the West are all part of a sad strategy for those in power to retain control of Iran.

Scary headlines like “Iran Files Missile at Remote UK-US base, suggesting long-range capabilities as previously denied” ignored that one missile missed its target and the other was shot down. On March 27, Iran hit a US base in Saudi Arabia, damaging a sophisticated E-3 Sentry aircraft and injuring 12 service members. This is a strategy that is likely to worsen Iran’s position as it lashes out at nearby countries.

When the Soviets invaded Afghanistan in 1979, the soldiers didn’t have proper shoes because the kleptocracy was stealing all that they could. Economic performance, rule of law, and military sophistication are what drive power and geopolitical success. The dissolution of the USSR was famously attributed to a lack of consumer goods that were universally available in the West. “Imagine a country that flies into space, launches Sputniks, creates such a defense system, and it can't resolve the problem of women's pantyhose. There's no toothpaste, no soap powder, not the basic necessities of life. It was incredible and humiliating to work in such a government.” Mikhail Gorbachev 2001

This war and all its ugly consequences are extremely unlikely to have a material impact of any significant consequence. The Iranians have structured their existence around antagonism towards the West. This idea that resistance to the “great Satan” is something to build a society around has failed, and its military infrastructure is being diminished. Events of lasting importance are much more centered around innovation and development of educational systems, infrastructure, hospital and healthcare resources, and services that really matter to the quality of people's everyday lives. The Iranian theocracy, going back to 197,9 has produced little. Just as there were no legions of followers to the catastrophic nihilists who perpetrated the crimes of 9/11, there will be no waves of fervent believers in some vision of the Iranian supreme leader.

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Markets have been elevated in the face of many difficulties created by the erratic and unusual economic irrationality of the current US leadership. The obvious illegality of the president seeking to punitively target countries across the globe with protectionist tariffs has been met with a market shrug after the initial freakout. Over a year of tariff madness has resulted in a Supreme Court ruling that revealed the reckless behavior of the president to be illegal and unconstitutional.

Horrific images from wholesale roundups by roving ICE goon squads are symbolic of the un-American and economically irrational policies. Spending a vast new budget on the removal of people from the country is not beneficial to the economy or something that makes sense on any level. The ugly vote-gathering mechanism of chanting about building walls is simplistic and counter to the melting pot that has produced an amazing society. Images of naive rally attendees holding up signs that say “mass deportation now” have resulted in small towns and large cities seeing declines in all types of hardworking individuals who could easily become part of the documented workforce and dynamism of America. Instead of goon squads, one day we will see a movement of people with clipboards documenting people into American Society to help support our social safety net, including Social Security and Medicare, along with a crucial expansion of our productivity.

The fact that investors were experiencing portfolio appreciation during this period is a testament to the adaptability and innovative capacity of the US and global economy. The war news has now arrived and will be a distinct challenge that may result in a correction (10% downswing) or bear market (20% or more price declines). It is unlikely that changes to investment structure or strategy at this time will lead to better outcomes over the next three to five years and beyond, as it is impossible to predict when the ceasefire in the Middle East will occur.

Barron’s Noted on 3-27, “The Stock Market’s Bottom Is Closer Than You Think”, pointing out that the S&P is now down 8.5% from all-time high levels while earnings expectations have been moving up. The PE of the market is moving down, closer to a reasonable level. These valuation levels can set up the possibility of the next upswing.

The economic pressure on the president to declare victory or mission accomplished is immense. This by no means indicates any predictability in what course this may take or how long the threats persist. Likely, Iran is fundamentally limited in military options, and the notion of stopping energy flow continuously is unlikely. The best course remains unchanged. Patience, persistence, and remaining invested.

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Equity Investors have consistently been the beneficiaries of quality outcomes for growing wealth. The process does not demand activities of direct business ownership. There are no meetings, expense reports, or any requirements for getting one's hands dirty. In fact, the main requirement is to sit back, remain patient, and do nothing. Investing is also very difficult. The challenges of uncertainty and economic change are relentless. Portfolio ownership is “a hard way to make an easy living”.

Not reacting when negative results occur is the main challenge. Investing perseverance is much more difficult than people anticipate. Frightening narratives, negative predictions, and markets that trade lower have a profound impact on the psyche of portfolio owners. We produce this commentary to create a better perspective on the investing landscape. This material, at its best, can help you consider the investing process with a more balanced and effective mindset.

Down markets can transform long-term investors into the caricature of a panicky investor urgently seeking a new strategy. The most common theme is desire for stability now, and then resumption of the long-term process when “things look better”. At this moment, people are receptive to any idea that can address the downswing. It is as if the scary things that can happen had suddenly appeared. They have, of course, been possible while markets advanced on more optimistic themes.

Successful investment strategies cannot suddenly transform into tactical trading schemes that imagine the possibility of dodging the negative moves and simply being invested when buyers are bidding up share prices. This line of thinking ignores the random and unpredictable nature of any given moment. The obligation that is crucial for investment success is courage and persistence in the environments where the urge to trade, sell, and seek stability can be overwhelming.

The idea of a process that avoids value declines is an illusion, like living a life that excludes risk and negative events. This could entail living exclusively at home, avoiding all external contact, and shunning all that could result in adverse outcomes. For those who remember “shelter in place” during the pandemic, it should be quite clear that we must engage the world to truly live. This is a useful analogy to those investors who understand the requirement for fortitude and perseverance and what it can lead to in all aspects of our lives. We must have a foundational belief system that does not change with the periodic calamities that have recurred throughout human history.

The abstract nature of market-based portfolios leads to strange ideas that owners of profitable businesses would never think of. The owner of a high-quality apartment building or electrical contracting firm would be extremely unlikely to consider selling a portion of their business because events had slowed the economy. The tangible nature of direct business ownership is something that successful owners of diversified portfolios can look to when values decline. Market prices are often whipsawed by traders deploying daily tactical ideas that may or may not produce results over time. These price changes have little to do with the long-term value of consistent ownership that includes collecting dividends and the gradual appreciation that has been consistently realized.

Market moves during scare narratives are profoundly impacted by short-term money seeking profit. Enormous pools of capital enter the competition for gains every morning and then go home to fight the next day for trading gains. These traders have short-term profit intent that is different than the objectives of long-term investors. There is no barrier to those who seek trading riches, and the question of what benefits traders provide to society is beyond this commentary’s expertise, but we must be clear that investors are not able to dodge swings. Look no further than the Forbes 400 to find numerous individuals and families that achieved the greatest results by ownership of quality, not avoiding downswings.

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The incomprehensible scale of our world confuses how information can relate to our personal lives. The “news” is novel information filtered through a process that has evolved continuously since the early activities of human society. The “new” quality is not an indication of importance, and much of what is transmitted fades like a sunset. The speed of information flow has recently risen parabolically as digitization, combined with ubiquitous connectivity, has placed everything, everywhere, all at once, on a screen in pockets.

It is useful to contemplate the unique characteristics of the information that makes the cut. There is often no editor, as the virtue of consideration of what is published has been shattered by the near-zero cost of snapping a pic on a phone and broadcasting in an instant. Context and perspective decline as technology brings a streaming firehose of material into consciousness. The human brain does not naturally cope well with probabilities and large populations. Reactions are much more instinctive than rational as new provocations arrive.

The competition for attention has been sharpened by digital material that is no longer broadly disseminated, but our own unique “narrowcast” arriving on a cellular device screen. Algorithmic “social media” pursues attention with tech that advances constantly. This mediascape is evolving rapidly, while the human psyche takes significant time to adjust. This is the context that we must position our minds to protect against these waves of shiny objects that seek our attention.

There is a human bias to attribute information that we become aware of to our unique situation. Most will never be cast in a movie or perform in a manner of public note, yet the ego is always pushing our personal role. We are simply not a party to most events and will be impacted minimally by what is happening in the wider world.

In any large population, strange things will happen. A large population will produce a million-to-one anomaly more often. Unusual events, violence, and heart-wrenching circumstances are omnipresent. The mind is inclined to create fallacious attributions related to our personal experience. The dynamics of large populations and the randomness that is ever present is notably a very weak area of human thinking.

Quality perception is challenged by the massive pool of events and randomness that finds its way to the news and events of every day. Most of this has no personal relevance. It may be useful to consider novel info life a deck of 52 cards being shuffled. From the 2 of Diamonds to the Jack of Clubs, the cards can be arranged 80 vigintillion ways. This means that any well-shuffled deck is likely unique in all human history. Think of that any time someone says they “knew” what was about to occur. 

The correct response to what is gathered is filtration and distillation. Filtration through historical perspective and distillation via aggregation of multiple sources is only the first step. Our humble self-perception should be likened to a grain of sand on the beach as the storm washes over. Soon, the weather reverts to the mean, and most of the grains are as they were, glistening in the sun. The beach has been experiencing the ebbs and flows for thousands of years.

In the digitized world rational perspective is crucial to employ like walls of a bank vault. Our mindset is precious and delicate. It is the primary characteristic from which our life will be formulated. The impacts of the human struggle may wash over us, but the vulnerability of our emotions and how they can impact all aspects of our existence must be guarded vigorously.

What is happening in the wider world is a tiny fraction of our reality, while our mindset governs 99% and essentially all quality of life. The state of confidence, gratitude, and resilience will be the main arbiter of outcomes. What has happened down the street, or on the other side of the globe, reveals like a wisp of clouds as we focus on what can make our own lives better.