While many in the US spent a good deal of last month watching the annual NCAA “March Madness” basketball tournament and agonizing over their brackets, those of us knee deep in the investment world were far more focused on the “Market Madness” unleashed by the joint US-Israeli military action against Iran. Much of the madness stems from President Trump’s frequent (often contradictory) commentary causing whipsaw action across the investment asset landscape; not just in oil prices (crude is up 80% since the start of the conflict) but diesel, gasoline, and jet fuel. Agricultural commodities, precious metals, bonds, and stocks have all experienced substantial day-to-day and even intra-day swings. Investors were and are rightly concerned about the global economic impact resulting from a substantial reduction in the flow of oil and gas due to the closing of the Strait of Hormuz. Moreover, considerable damage has been inflicted on production, storage, and transportation assets in the Gulf Nations that will impact supply well beyond the end of hostilities, whenever that may be.
Given the circumstances, financial assets’ response has been contained. Though all the major equity and bond indices fell in March, none were down by even -10% year-to-date[1]. The Bloomberg 1000 Catholic Values Index and the Bloomberg 3000 Catholic US REIT Index were both positive year-to-date as of March 31st, as was the Bloomberg Catholic Values US 1-3Y Gov’t/Credit Index[1]. The US dollar gained 2.36% in March (up 1.0% YTD)[1]. The big losers were precious metals, with gold falling by more than -11% and silver off nearly -20%[1]. There is some merit to the thought that gold and silver were sold to fund the purchase of oil contracts, given the huge runup precious metals had in the early part of the year. Finally, the private debt market began to show some serious cracks in March, especially those heavily exposed to software companies but even some consumer-oriented funds holding “buy-now-pay-later” loans are seeing pressure. Several high-profile funds (Blue Owl, Blackrock, Apollo) are limiting investor withdrawals as redemption requests soar into double-digit percentages.
Bonds sold off, but not dramatically so. The US 10-year treasury yield rose 30 basis points in March to 4.32%, up from 4.17% at the start of the year[1]. After briefly rising above 30 basis points with a pickup in volatility, investment grade spreads finished the month at 28 basis points, remaining near historic lows indicating minimal corporate stress[1]. Top public companies have been able to raise debt to fund data center investments. High yield spreads followed February’s rise with additional widening, topping 300 basis points for the first time in nearly a year but nowhere near worrisome levels[1]. The Bloomberg Catholic Values US Aggregate Bond Index returned -1.76% and the Bloomberg Catholic Values US 1-3Y Gov’t/Credit Index returned -0.46% in March, bringing their YTD total returns to -0.04% and 0.29%, respectively compared to -0.04% for the Bloomberg US Treasury Total Return Index[1].
Energy stocks soared in March, but most equities were weak. Software stocks continued to feel the pain from AI disruption, but investor concern emerged in other areas like financials and even some consumer groups. An announcement by Google that they had solved a memory bottleneck in Large Language Model (LLM) processing saw previously hot memory and storage stocks get hit. Given those dynamics, it is no surprise that value stocks outperformed growth stocks in both the large cap and the small cap space, the former in particular. The spread between value and growth was not huge in March, but YTD the Bloomberg 1000 Value Catholic Values Index was up 6.44% compared to a decline of -7.80% in the Bloomberg 1000 Growth Catholic Values Index[1]. Non-US stocks were hit particularly hard in March, with the Bloomberg World ex-US Catholic Values Index (WLDXUCV) dropping -10.57% compared to -4.87% for the Bloomberg 1000 Catholic Values Index (B1000CV)[1]. Still, international equities remained ahead YTD, (-0.62% for WLDXUCV vs -4.41% for B1000CV)[1]. Small caps are right in the middle, with the Bloomberg 2000 Catholic Values Index up 1.59% YTD after a -4.20% drop in March[1].
Economically, the consensus forecast is for a reacceleration in GDP growth to 2.3% in Q1 2026 from a shutdown-impacted 2.0% in Q4 2025[1]. That may be optimistic, as the Atlanta Fed GDP Now Q1 estimate is 1.3%. February Nonfarm Private Payrolls came in well below expectations, at -86k, a sharp drop from 172k in January, while March was just reported at 186k, highlighting the month-to-month volatility[1]. The 4-week moving average of Initial Claims fell slightly in the final week of March and the March Unemployment Rate ticked down to 4.3% from 4.4%, but Average Hourly Earnings, at 3.5% YoY, were down slightly from February[1]. Consumer spending remains steady, and the tax benefits of the OBBA are beginning to kick in. The main issue of concern is prices, as the latest Producer Price Index data showed a notable uptick, as did the April 1st ISM Prices Paid Index[1]. It is only a matter of time before the energy impact of the Iran conflict shows up in consumer prices beyond the gas pump. Current market expectations for any Fed rate cuts this year have fallen to near zero.
First quarter earnings reports will start rolling in soon. We expect the numbers to be encouraging, but more importantly the management comments on how the Iran conflict and supply chain effects shape the outlook for the remainder of the year. Ceasefire negotiations are ongoing, but then so are missile strikes and sorties. The two sides are far apart regarding acceptable terms. Regime change in Iran was not one of the primary military objectives communicated by the administration. However, it is difficult to believe that is not the ultimate goal of the conflict. If so, things could escalate further and our involvement may last significantly longer than originally planned. Let us hope for positive developments towards peace by the time this reaches publication.
[1] Source: Bloomberg