Q1 2026 Market Commentary

Markets in Conflict

When most people think about what’s driving markets right now, their attention naturally turns to conflict overseas.

And that’s certainly part of the story.

But there’s also a quieter, less visible conflict unfolding beneath the surface, one that may ultimately have a more lasting impact on markets and the broader economy.

Understanding both is key to making sense of the current environment.

The Visible Conflict: Iran, Energy, and Market Volatility

Over the past quarter, markets have reacted to rising tensions involving Iran. At one point, oil prices surged to nearly $120 per barrel, one of the sharpest moves we’ve seen in recent history.

Events like these tend to capture headlines quickly. But the more important question for investors is not just what happened, but how these disruptions actually work their way through the global economy.

Estimates suggest that damage to energy infrastructure in the region could approach $60 billion. These are not minor setbacks, and more importantly, they are not quick to resolve. Repairing this type of infrastructure requires highly specialized labor and equipment, resources that are often deployed globally and must be relocated from other oil-producing regions. That process alone can delay restoration timelines and create ripple effects across unrelated energy projects.

In other words, the disruption isn’t just immediate, it has the potential to linger.

At the same time, there are signs of increasing strain within Iran’s domestic economy. Currency pressure, rising inflation, and broader economic challenges are beginning to build. Historically, these types of internal pressures tend to push conflicts toward some form of resolution, as the economic cost becomes more difficult to sustain.

There are also logistical constraints to consider. With export channels under pressure, Iran is approaching storage limits for its oil. Unlike many other commodities, oil production cannot simply be turned off without consequence. Shutting down production can create operational challenges and disrupt broader supply chains, adding another layer of complexity to the situation.

Taken together, these dynamics create an interesting balance. In the short term, markets are reacting to disruption, uncertainty, and volatility. But beneath the surface, there are also forces building that may limit how long that disruption persists.

This is often how geopolitical events unfold in markets, sharp, headline-driven shocks followed by gradual stabilization as economic realities begin to take hold.

The Subtle Conflict: Slowing Growth vs. Persistent Inflation

While geopolitical tensions have been front and center, a more nuanced conflict has been developing within the U.S. economy.

Fourth quarter data showed the U.S. economy grew at just 0.5%, well below expectations and a sharp slowdown from the prior quarter’s pace, according to Bureau of Economic Analysis. What’s particularly notable is that the weakness was broad-based, showing up across consumer spending, business investment, and trade.

This wasn’t a single weak data point, it reflected a potential broader deceleration in economic activity.

That said, not all of the slowdown may reflect underlying weakness. Federal government spending fell sharply during the quarter due to the government shutdown, declining at a 16.6% annualized rate and reducing overall GDP by approximately 1.16 percentage points.

That’s a meaningful drag, and an important reminder that some portion of the slowdown may be tied to temporary factors rather than long-term structural changes.

Which leads to a more important question: how much of this slowdown is sustainable?

And that’s where the real tension begins.

Under normal circumstances, slowing economic growth would support lower interest rates as a way to stimulate activity. However, the current environment is not that straightforward. Inflation pressures, particularly those tied to energy, may still remain elevated, complicating the path forward.

This creates a difficult position for the Federal Reserve. Lowering rates too quickly could risk reigniting inflation. Waiting too long could allow the economic slowdown to deepen further.

It’s not simply a question of timing, it’s a question of balance. The Fed is effectively managing two competing risks at once, and the path forward is unlikely to be perfectly linear.

Putting It All Together

When you step back, markets today are navigating two very different types of conflict at the same time.

One is visible, immediate, and driven by geopolitical events. The other is quieter, more complex, and rooted in the underlying dynamics of the economy. Both matter. And more importantly, they don’t operate in isolation. Geopolitical disruptions can influence inflation. Inflation influences interest rates. Interest rates influence economic growth. And all of it feeds back into market behavior. This is why markets in environments like this tend to move in a less predictable, more uneven fashion.

What It Means for You

Periods like this can feel uncertain, particularly when headlines are frequent and narratives shift quickly. But it’s important to recognize that environments defined by uncertainty are not unusual, they are simply part of the broader market cycle.

Rather than reacting to each development in isolation, maintaining a disciplined, long-term approach remains critical. The goal is not to predict every short-term move, but to stay aligned with a strategy that can navigate a range of outcomes. If you have questions about how these dynamics may impact your plan, we’re always happy to have that conversation.

And as always, we’re here to help you stay focused on what matters most.

Rick & Nelson

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