U.S. markets started the year on a positive note with the S&P 500 reaching a peak of 6,978 in January, up 1.95% from the 2025 close. Sector rotation was the most notable market activity in the first quarter as investors exited software and Magnificent 7 stocks in favor of old economy sectors such as energy, materials, and industrials. As a result, the Dow Jones Industrial Average delivered much better results, reaching a peak of 50,188 in early February, up over 13% for the year.

The U.S. economic outlook anticipated increased consumer spending after tax refunds, strong earnings growth due to corporate tax cuts, stable inflation, and falling interest rates, all positive elements for stock prices. But, in March, the war in Iran changed everything. Rapidly rising oil prices in response to energy infrastructure bombings and the closure of the Strait of Hormuz raised inflation fears for the global economy, and stocks fell worldwide. By the end of March, the S&P 500 was down 4.6% for the year and down 6.6% from the January highs. For now, the markets remain in a watchful waiting mode.

Our portfolios were up nicely for the first two months of the year, and even the significant reversal in March was not enough to erase all of those gains. The recent two-week ceasefire plan, if it holds, may help stocks in April.

The current global backdrop leaves us with a familiar dilemma. The sharp moves in markets reflect the tensions we see in geopolitics: it is difficult to be fully invested when further escalation of the Iran war remains a real risk. With generally sticky inflation and oil prices likely to stay elevated, cash and bonds are less effective hedges than they once were. Stocks and bonds are no longer reliably inversely correlated. Professor Jeremy Siegel of Wharton has recently noted that 70/30 portfolios may be the new 60/40 for this reason. Gold, which we have long used as an uncorrelated asset, has also become correlated with equities more recently. Its historic rise, brief meme-like status, and the very real need for countries to sell gold to pay for war have all affected its safe-haven role in the current conflict. 

Faced with uncertainty, divergent outcomes, and few reliable stabilizers, what are we thinking?

We have tried to make sure our clients have enough cash on hand for the next two to three years to support withdrawal requirements without needing to sell stocks. That cash is invested in very short-term instruments so it can still earn a return without taking undue price risk.

In our mutual fund and ETF portfolios, we reduced software, gold, and S&P 500 index exposure in early January. We put the proceeds into industrial materials, Asian and Emerging market equities instead. To date, those markets are outperforming the S&P 500. In March, we took gains in individual stock portfolios where single positions had become too large or had risen an extraordinary amount. Paying taxes is preferable to losing money.

Market Sectors

Materials - We increased our exposure to materials, especially copper and food-related commodities, and we continue to hold a large position in a physical gold ETF and gold equities. While gold is currently outperforming stocks and bonds, we recognize that another correction is always possible. We remain concerned about inflation and the U.S. dollar declining in its status as the global reserve currency, so gold is a core long-term investment. 

Energy - We remain overweight energy stocks. We do not believe oil prices are going back to prewar levels any time soon. It will take many months to recover from the halt in oil shipments and even more time for Qatar to get their natural gas infrastructure up and running again. For years, we have argued that oil supply/demand is less elastic than even the IEA has suggested. In time, solar, wind, nuclear, and battery storage may truly help insulate us from oil price shocks, but the recent conflict has shown that we are not there yet. Many parts of the world are far behind in alternative energy, and policy decisions, such as shutting down nuclear plants in Germany and refinery regulation in California have made the situation worse.  We have never owned refineries, but plan to as opportunities present themselves. The current war has severely damaged refinery capacity in a number of countries, and many believe it will take years for that capacity to come back online.

Consumer Discretionary - We have lowered consumer discretionary exposure because of the effects of war and the threatened job loss from artificial intelligence.

Financials - We remain selective in financial exposure because we are wary of the risks in private credit funds. Today, the problems in private credit seem to be contained, but wandering into that minefield is meant for braver folks.

Technology - We remain underweight technology, specifically software, as AI threatens to reshape that space. No doubt there will be winners, but they will take time to emerge. While the Magnificent 7 have lost their luster, we still like Apple and Google. 

International

We continue to look for ways to increase our international exposure. The need for energy in some parts of the world has complicated this desire. We like Brazil because it has inexpensive energy, cheap land near major cities, and the country’s commitment to data centers make it especially interesting. We have long loved Korea for its exposure to semiconductor manufacturing outside Taiwan. Its dependence on the Middle East for energy has made us more cautious in the near term.  

Bonds

Earlier this year we changed our bond exposure to shorter maturity investments that have low price risk. Inflation remains sticky, Treasury issuance continues to run high, and the supply of government debt must find buyers in a market that is increasingly sensitive to fiscal strain and term premium risk. In this environment, the duration risk of long-dated bonds makes them a poor fit for our portfolios. We prefer to preserve flexibility, maintain liquidity, and reduce the potential damage from further rate volatility.

Our hearts and thoughts go out to those who have lost friends and family members in this conflict, the Iranian people, and others oppressed throughout the unstable world we live in. We long for the days when people look for what we have in common rather than hating our differences. Diversity can be a strength, both in portfolios and in people.