The markets didn’t get a whole lot of good news this past week. The conflict in Iran and the fallout in the energy space don’t look like they’re going to end any time soon. Inflation risk continues to grow and that’s virtually priced out any possibility of a rate cut in 2026. Overall market sentiment could be described as nervous but not panicky. Even though the major U.S indices slipped to 4-month lows, they’ve done so in a relatively orderly fashion.
Tip of the Week
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Market Moves
Weekly Market Snapshot:
- S&P 500: -1.9% – stocks remain under pressure due to events in the Middle East, but the latest inflation readings at home don’t paint a supportive picture for risk assets.
- Nasdaq 100: -1.9% – tech stocks as a whole held up a little better than the broader market, but the overall tone of the sector remains one of caution.
- Russell 2000: -1.8% – higher interest rates are likely to hit small-caps harder than large-caps, which helps explain why the group has lagged over the past month.
- VIX: 26.8 – volatility is still elevated as it has been all throughout March, although we still haven’t seen the big spike that would signal panic from investors.
- Gold: -10.2% – hawkish commentary from several global central banks coupled with higher Treasury yields have weakened the attractiveness of precious metals.
- 10-Year Treasury Yield: 4.38% – this yield touched its highest level since August as the markets priced out Fed rate cuts for 2026 and most of 2027.
Drivers:
Oil prices and the Iran conflict are the primary market drivers. Right now, oil prices have steadied around the $95-100 range for WTI crude, but expect prices to continue trending higher the longer the war drags on. The Fed is in a tough spot. Oil spikes due to geopolitical events tend to be transitory in nature. Raising interest rates to counter the inflationary effects could do more damage than good if you address a short-term problem with a long-term solution. A de-escalation of tensions would very likely trigger a relief rally in both stocks and bonds, but it’s really tough to say when that might happen.
Economic Highlights
A couple of the notable themes that stood out this week:
The Iran Situation Continues to Get Worse
The markets were initially expecting the U.S.-Iran war to be relatively short-lived. So far, it’s been anything but. The strikes continue, the Strait of Hormuz remains virtually closed, and tensions seem to be getting worse, not better. Iran’s willingness to make one of the world’s primary shipping lanes impassable puts a lot of pressure on the United States to find a fast resolution before oil prices rise much further. The Trump administration’s instruction not to bomb any oil infrastructure facilities would seem to be an acknowledgement of this.
The markets still don’t seem to be anticipating this to be a lengthy conflict. This could explain why stock prices haven’t dropped more sharply than they have. That could still very well be the ultimate outcome here, but little progress has been made getting there so far. The United States is relatively energy-independent, so it’s better prepared to handle a supply disruption. Europe, on the other hand, isn’t. The real energy crisis could happen over there first and perhaps drag other world leaders into the conflict in order to broker a solution.
As is the case with the majority of geopolitical dust-ups, conditions will probably begin reverting back towards their pre-war state with a resolution, but it may not get all the way back for a while. The fallout from what’s already happened is unlikely to be unwound quickly. That could keep the pressure on stock and bond prices for a while.
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The Fed (and Other Central Banks) Turn More Hawkish
In a surprise to no one, the Federal Reserve held rates steady for the 3rd consecutive meeting. But the market’s expectation for interest rates for the remainder of 2026 was changed significantly.
Following this past week’s meeting, the futures market is pricing in just a 4% chance of a rate cut this year (this number was at 95% one month ago). The earliest that it’s pricing in a greater than 50% chance of a rate cut is the October 2027 meeting.1
Source: CME Group
As mentioned, it’s unclear if this would be a policy mistake or not. Inflation is clearly still a problem as evidenced by this past week’s producer price index (PPI) report (more on that in a moment). But it might not be a good idea to consider raising rates in response to what could be a temporary event. Raising interest rates beyond what the data currently warrants could actually swing the economy towards recession. If the current stagnation in the labor market and slowdown in GDP growth last quarter are signs of a downturn already in progress, 1-2 rate hikes in 2026 could end up accelerating the pace of deterioration.
This is one of the biggest reasons why a stagflationary economy is particularly damaging to the markets. The Fed can’t address slowing growth (which warrants rate cuts) at the same time as rising inflation (which warrants rate hikes). It has to pick a lane and hope the one they don’t choose doesn’t do too much damage. The U.S. economy today is starting to head in that direction. The markets thus far have largely been able to handle it, but the next 6-12 months could be very telling.
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Inflation Isn’t Slowing Down
Speaking of inflation, last week’s February producer price index (PPI) report shows that pressures aren’t easing. In fact, they may be getting worse. PPI inflation rose by 0.7% month-over-month to bring the annualized rate to 3.4%. Goods inflation was the biggest factor, rising by 1.1% compared to the previous month.2
Source: Advisor Perspectives.
The PPI inflation data is closely watched because cost increases often get passed down to the consumer. We’re see a slight uptrend in consumer inflation measures, but not to the degree that we’ve seen in this dataset. Now that most of the Trump tariffs have been struck down by the Supreme Court, there’s a chance we start to see this number decline starting next month. Given recent trends in prices, I’m not sure I’d expect this to happen.
The PPI report hit the market especially hard this month since it happened in conjunction with the Fed meeting and the latest escalation of events in Iran. Overall, this report strongly hints that the Fed probably isn’t going to be able to lower rates anytime soon.
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The Week Ahead
A few themes to watch next week:
In Summary
Investors are justifiably in a nervous mood. Higher oil prices, sticky inflation, and a Fed that’s in no rush to cut rates could keep volatility elevated and the macro backdrop complicated. The economy is unlikely to get any data that will change the narrative, but the markets will be heavily driven by geopolitical developments. An unexpected resolution to the conflict could create a relief rally, but it doesn’t appear to be imminent.
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