Ripple Effects

When we think about the many dynamics at play in the current economic environment, it is amazing to think about how each factor creates an impact with its own ripple effects, and how these factors interact with one another. It is a whole system at work, with complex interactions, connections and dependencies. When we talk about the economy, it is so easy to steer the conversation toward a singular topic or concern -  inflation, GDP, interest rates, labor statistics, etc. It can be interesting and important to also understand how these factors influence one another.

The S&P 500 was down 4.6% for the first quarter of 2026. This number may seem deceiving though, given the fact that we saw market volatility during the quarter that resulted in about a 9% decline from the peak. February gave us the Supreme Court ruling on tariffs and the start of the war in Iran. The topics weighing heavily on clients’ minds at the time were global instability, tariff uncertainty, energy prices, and an AI bubble.

The war in Iran began February 28th, 2026, creating nervousness among investors and inflating oil prices. According to the US Energy Information Administration as of 2023, Iran accounted for only 4% of the world’s total oil production,[1] but around a quarter of the world’s crude oil passes through the Strait of Hormuz’ according to a recent article by the World Economic Forum.[2] With the significance of this area and the recent war, it is easy to see why there has been such an impact on oil prices, which have surged past $100/barrel, up over 40% from before the start of the war. These elevated prices have caused a slight increase in inflation, and a pause by the Fed in any additional rate cuts. If oil prices remain elevated, this could continue to add to inflation and potentially negatively impact demand. Nearly every product we consume is affected by oil prices.  

Like the volatility we saw in early 2025 with the initial tariff deadline, these events caused nervousness among investors that initially created an emotional response that has since subsided slightly. Though there are still many risk factors that could create additional volatility, uncertainty can create emotions that become irrational as we move through volatility. Investors are very cautious during times when the market is flipping back and forth like a pendulum. The up-to-the-minute news adds to their wall of worry. During these unsettled times it is best to focus on how portfolios are allocated to ensure that the risk is appropriate and in alignment with lifestyle needs.   Asset allocation is the key to providing investors with peace of mind. The heightened concern is why we as investors need to understand our risk tolerance.  Investors never like the downside.

To alleviate some of the potential downside, we began shifting profits in client accounts at the end of last year as markets finished their third consecutive double digit returns. This enabled us to rebalance portfolios, and in some cases, shift slightly more conservative. These changes have helped to reduce volatility and any over-exposure to specific categories. We have been in an environment where technology has advanced substantially over the last several years, and has recently become more volatile due to tariff sensitivity, AI spending and concerns around valuations. We continue to see opportunities in international investments and believe that a balanced allocation tailored to your risk tolerance and time horizon will help to reduce volatility over time.  The quarter ahead may continue to see the pendulum swinging until investors see more certainty in the short term.  

We appreciate your trust and confidence during these changing times.  We welcome your thoughts and feedback.  Summer is just around the corner. Enjoy it with family and friends.  If you have any questions or concerns just let us know.  We will look forward to our upcoming meetings with you.   

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_{[1] US Energy Information Administration - https://www.eia.gov/tools/faqs/faq.php?id=709&t=6} 

_{[2] World Economic Forum - https://www.eia.gov/tools/faqs/faq.php?id=709&t=6}