Q1 2026 Investment Update
As the first quarter of 2026 comes to a close, markets have faced a mix of resilient economic growth and renewed uncertainty. While the US economy has remained sturdy, the timeline around interest rate relief has shifted, and the conflict in the Middle East has added new volatility. Stocks experienced more fluctuations during the quarter, and bond markets adjusted as investors recalibrated their outlook. Overall, it’s been a clear reminder that market progress is rarely a straight line.
Economic and Monetary Policy Overview
Federal Reserve outlook:
At the start of the year, markets priced in multiple rate cuts. However, following the March FOMC meeting, the Fed signaled a more cautious stance, with only one cut projected for 2026. This shift is a direct response to a "sticky" inflation rate that hasn't yet hit the 2% target.
Inflation trends:
Progress on inflation has slowed, largely due to "sticky" service costs and a significant spike in energy. The conflict in the Middle East pushed Brent crude oil toward the $110–$120 range this quarter. Because energy is a primary input for everything from shipping to manufacturing, these higher costs are keeping inflation above the Fed’s 2% target.
Global backdrop:
Outside the U.S., economic growth remains uneven. Many international regions are feeling the dual pressure of high energy costs and a strong U.S. Dollar, reinforcing the importance of staying diversified across regions.
Investment Themes and Portfolio Positioning
Portfolio update:
During the quarter, we made a strategic decision to exit our real estate holdings. In an environment where interest rates are staying elevated longer than expected, we believe large-cap U.S. equities offer more resilient earnings characteristics and stronger balance sheets. We have redeployed those proceeds into high-quality companies that we believe are relatively well positioned to navigate this specific phase of the economic cycle.
We also saw our structured note mature in early February. The 3-year note delivered its maximum return of 25% over the period while fully protecting investors’ principal. As a fixed-income alternative, this represents a best-case outcome and a strong positive contribution to client portfolios.
Fixed income:
Bonds continue to offer attractive yields. This provides a potential source of income, depending on market conditions and issuer quality, while rates remain at these levels. They remain an important tool intended to help manage portfolio volatility, given the increase we’ve seen in the equity markets.
International stocks:
We continue to maintain a 25% equity allocation to international equities. Different regions are growing at different speeds, and maintaining global exposure remains an important part of a diversified portfolio.
AI and technology:
We are maintaining our position in artificial intelligence-focused investments. While the sector can be volatile in the short term, we believe AI remains a powerful long-term growth driver across many industries.
Energy impact:
Recent events have highlighted how important energy prices are to the overall economy. Higher oil prices can impact both consumers and businesses, which is why diversification across sectors remains key.
Market Risks and Headwinds
Geopolitical and Rate Uncertainty:
The primary headwinds for Q2 remain the duration of the Middle East conflict and the ambiguity of the Fed's next move. While the market has handled the oil shock relatively well so far, a prolonged disruption to global shipping routes could test market resilience.
Looking Ahead to Q2 2026
As we move into the second quarter, markets will continue to focus on inflation, interest rates, and global events. Q1 Corporate earnings will also give insight into how businesses are handling higher costs and changing demand. While uncertainty has increased, this is a normal part of investing. We will be monitoring opportunities to reduce exposure to small- and mid-cap funds while increasing our allocation to large-cap funds as these opportunities arise based on evolving market conditions. Our priority remains keeping your portfolio aligned with your long-term goals through disciplined diversification.
As always, thank you for your trust and the opportunity to serve as your advisors. We remain committed to supporting your financial goals, regardless of market conditions. If you’d like to review your portfolio or discuss how this outlook impacts your financial plan, please reach out.
Tom Dale, CFP®
