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• Economy – Geopolitical disruption in the Middle East has clouded the outlook for growth

• • Joint U.S. and Israeli strikes targeting Iran roiled energy markets in March, effectively closing the Strait of Hormuz which is an important throughway for oil, natural gas, and fertilizers.
  • The oil shock quicky increased gasoline prices and could ultimately drive inflation higher depending on how high and for how long oil prices remain elevated.
  • Real time GDP estimates have fallen since the onset of the conflict. Policymakers will need to grapple with the competing forces of slowing growth and increasing inflation.  

• Equity – March volatility weighed on major indices and especially on growth-oriented areas of the market

• • Volatility spiked after the attacks and hurt markets in Q1. The S&P 500 fell -4.33% for the quarter after drop of -4.98% in March.
  • Market rotation was evident during the quarter as the Russell 1000 Value (+2.10%) outperformed the Russell 1000 Growth (-9.90%), the S&P 500 excluding Mag 7 outperformed the Mag 7 basket, and the Energy sector (+38.25%) far outpaced other S&P sectors.
  • International markets continued a run of outperformance relative to U.S. equities, with the MSCI EAFE (-1.24%) and MSCI Emerging Markets (-0.17%) indices falling less than the S&P 500.

• Fixed Income – Yields and spreads increased during the March volatility, and the Fed signaled uncertainty around future policy

• • Overall, the Bloomberg U.S. Agg had a quiet month and saw a slight decline of -0.05%. The headline number masked some volatility beneath the surface as the 10-year Treasury yield jumped from below 4.0% to above 4.3% in March.
  • Chairman Powell indicated that the FOMC may be reluctant to cut rates from here given uncertain impacts of the Iran war.

• Risks/Other Considerations 

• • It comes as no surprise that for markets, a prolonged conflict in the Middle East could have wide-ranging impacts on commodity prices, growth, and inflation. 
  • More broadly, geopolitical uncertainty tied to the unpredictability of U.S. policy is a recipe for increased volatility in both equity and fixed income markets.

Sources:

1. Morningstar
2. ACG
3. Federal Reserve
4. FactSet
5. JP Morgan

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