Q1 Market Recap: Navigating Geopolitical Volatility

Hi everybody and welcome to our latest edition of the McCabe Building Your Wealth Bridge podcast. You know, after the end of Q1 2026, Will and I just wanted to, you know, take some time and put together a video kind of covering the markets and what happened in the first quarter. I guess we are recording this on April 1st of 2026. And there's just been, you know, a lot of different headlines going on. And we wanted to just, you know, give everybody some thoughts on that. So with that, I'm going to share my screen.

We prepared a few different slides here to illustrate some different points that we thought you all might find useful. Hi everyone. Thanks, Zach. So, what we've got here is a chart showing investment performance for the first quarter. So, January 1st, 2026 to March 31st, yesterday. And we've got five asset classes and kind of going in order from best performing to worst performing. The purple bar is the Russell 2000. That's the small cap index, followed by the Bloomberg US Aggregate. It's the bond index. Below that, we've got emerging markets, which countries like Brazil, China, India, followed by the MSCI EAFE, which is the developed international index.

Think European countries, Asian countries like Japan. And then lastly, the S&P 500, which is the, you know, US, a good gauge of the US stock market, the US large cap index. So, in order, you can see there, they all took different paths. They're different markets, but together, you know, we would consider this like, you know, a pretty basic asset allocation that might reflect a combination of these might reflect our client portfolios. And as you can see, you know, we kind of first 2 months of the year started off pretty strong and then, you know, no surprise, you know, things took a dip in March, you know, after the bombing of Iran and the oil shock that happened shortly thereafter.

So, if we go one more slide, I think it paints a little bit of a better picture what people, you know, is more top of mind about the first quarter of this year. There was a sell-off. So, we had a shock, you know, Operation Epic Fury on February 28th, US, you know, attacked Iran with bombs and that led to the closure of the Strait of Hormuz and created a global energy shortage, particularly oil, like the price of oil spiked up and what's kind of interesting, you know, on the first slide, throughout the whole quarter, Q1, we saw the S&P 500 as the lowest performing of the five that we listed, which is the US stock market.

And then, if you look at just the last month, so February 27th to March 31st, not including January and February, you can see how like the international indexes where the MSCI EFA the developed countries or the emerging markets have sold off about twice as much as the US market and I think, you know, it's easy to understand that like those countries like non-US, non-North America are more reliant on the oil that comes out of that street, out of the Gulf, so naturally those stock markets and economies are a little bit more sensitive to the to the oil shock resulting from that.

Yeah, and I think it is really interesting like if you look at previous slide showing the full quarter returns, you know, you see what flat for emerging markets, the US was down 5% or so. It definitely feels a lot worse than that, but I think that has to do with, you know, January, February were pretty heavily positive, especially in those international markets. And then you can see here kind of what happened in April that there was, you know, such a steep drawdown. But yeah, I think those are really clear showing, you know, what happened over the quarter.

We've got a couple more slides that we wanted to show you to kind of illustrate some history. Yes, so what we're looking at here is a bar chart of sell-offs tied to oil shocks. So going back to the Persian Gulf War in 1990, there's been seven, you know, oil shocks that, you know, have kind of had a similar path as far as the stock market. This is the S&P 500 returns after a shock. And on average, you can see 2 days after we get a shock, it's down a half a percent followed by 2 weeks, you know, maybe that on average down 1% 2 months later, it's positive on average a year and then 2 years you can see 12% and 32% and that's the S&P 500 and you know, let's see 1 month after we had the oil shock, the S&P was down five.

If you take away yesterday which there was, you know, some positive news about a possible resolution, the S&P 500 was down about 7%, 7 and 1/2% peak to trough. And you know, today, April 1st, here we are. You know, it seems like it's sort of recovering and just an example that, you know, the market will, you know, potentially bottom before there's a final, you know, resolution to a conflict on a shock. So it's a it's a forward-looking thing. Very difficult to time. But yeah, that's what this chart shows.

Yeah, in you know, in all of these show, you know, averages of those like seven different times that there's been oil shocks over the last 34 years. And if we're looking just so far, you know, we're in this you know, between 2 weeks and 2 months period. But the 2-week return for the S&P 500 this time around was like minus 2 and 1/2% or so. So we'll see where we're at, you know, 2 months from the start. We'll see where we're at 1 year, 2 years, but you know, if history's any indication, the long term is what we you know, care the most about and those are positive and we wanted to show

Oh, sorry. Yeah, go ahead. What were you going to more to add?

Just going to say historically these haven't been extremely long-lived in the market at least. You know, we'll see how long the conflict actually goes on, but the stock market doesn't wait around too long historically. Yeah, and even just I mean, between yesterday, the 31st, and today, we've had some positive news of, you know, all parties wanting this to end because, you know, at the end of the day, it's not good for anybody. Oil prices being higher, you know, lives are being lost. Like this is, you know, there are people that are really being affected by this.

So everybody wants to see a resolution and this is another chart showing, you know, not just oil shocks, but other things that have happened and kind of the long-term return implications of it and I think everybody has kind of seen the returns of, you know, the S&P 500 or the US stock market, you know, over the last 20 or 30 years and the chart is for the most part like up and into the right. And there's been so many events that have happened that have you know, caused, you know, anxiety and concern and it just, you know, scared people about what the future has in store and this chart does a really good job of illustrating some of those events, you know, from I see 9/11 in there, I see the Iraq War, you know, the Reagan shooting, you know, Kennedy's assassination back in 1963 and you can see, you know, 3 months afterwards there's a lot of, you know, negative numbers out there.

And then 3 months afterwards, you know, have, you know, allow a little bit more time for the markets to do their thing, allow, you know, companies maybe to report their earnings. And then 1 year there's, you know, even less negative returns and, you know, the really thing that matters the most is the 3-year after number. Those are all positive. Granted, they're all, you know, different levels of positive. You know, the lowest one I see there is 1.8%, the highest one being what is it? 20.7%? So, you know, over the long term, you know, markets do tend to recover.

And I think we want to make sure that, you know, we kind of keep that in mind that over the long term markets tend to work. And, you know, that's kind of the whole reason why we build diversified portfolios. You know, bonds tend to sell off less than stocks, which we saw in that that second slide in the in the first quarter. Bonds, you know, lost money but lost a lot of less than stocks did. And bonds allow us to fund distributions from those while we, you know, give stocks, you know, more time to recover.

And I think there's one more thing we kind of wanted to point out here, just showing, you know, once again, things like this, you know, drawdowns in the market is not anything new. You know, we fully expect them to happen from time to time. I don't think anybody can predict exactly when or how they're going to, you know, happen. But they do happen and, you know, over the last 72 years, you know, we've seen 53 overall positive years even with some big drawdowns. And on average, we you can see on the left for 5% move on average that happens in about twice every year.

And then a 10% fall in the S&P 500, we see happen about once every year and a half or so. And then 15% is about once every 3 years, 20% you know, once every 6 years or so. So, you know, things like this do happen from time to time. It doesn't make it any easier. It's still tough for all of us to kind of get through, but you know, we know we've experienced this before and you know, hopefully you're going to be investing for a long time in the future and we are going to you know, see this you know, many times hopefully not that many, but I'm sure it'll happen again in the future, but this is you know, things that we plan for especially as we build portfolios.

And I think with the last chart and this one, similar messaging, but the challenge is each event that happens in real time or what you think is going to happen in the future as a result of this particular conflict is that each one seems more dire and current and if you think about the last 6 years, you know, we've had three of this kind of shock with like an oil or supply constraint shock. And people you know, naturally want to extrapolate what this is going to do to the future and you know, let yesterday and today be an example of how quickly the market can rebound, recover even when you know, it's not necessarily resolved because it's a forward-looking indicator of events and the other challenge would be I think a lot of people who've been long-term investors are potentially, you know, in their own portfolio at an all-time high point in January and February after three strong years in the market.

You've been invested for a long time. Compounding has worked for you. And now you see, you know, flat to you know, small percentage down moves and it's it can be big dollar moves. So, we emphasize these points just to really, you know, hammer home like the importance of not letting, you know, current events, news headlines, or short-term pullbacks disrupt your longer-term financial plans. Yeah, and well, I think you kind of said something there that really caught my attention of, you know, we I was talking in terms of like percentages of, you know, 5% or 10% and you know, it means a lot more when it's when it's dollars.

And like a 10% loss on a million-dollar account is $100,000, which is yeah, it's a tough pill to swallow. It's tough to get through, but we know, you know, we got to sit tight and get through it. And after, you know, a few years of really strong returns, you know, portfolios have grown considerably and, you know, that 10% losses on a, you know, larger dollar amount. So, it's definitely a tougher to get through. And you know, I was looking back historically, this is the first negative quarter that we've had at least for the US stock market since Q1 of 2025 when we had, you know, we'll call it a terror four around Liberation Day.

So, we've seen things like this before and well, I feel like we've been kind of you know, doom and gloom a little bit here in this. Maybe we'll end this with some positive things and, you know, things that we kind of expect to continue on for the rest of year. And I think this is a really interesting chart showing, you know, overall the US market kind of contributors. Everybody's has heard of the Magnificent Seven names, those big technology names. You can see that divergence in returns from, you know, 2023, the Magnificent Seven on that left-hand bar chart.

You know, returns 112% where the rest of the S&P 500, the other 493 companies there averaged about 24%. And you can see 2024 was the same thing just to a lesser extent where Mag Seven outperformed in 2025, you know, similar to a lesser extent. But 2026, you know, we saw what we call like a broadening of the market. Where, you know, maybe the S&P 500 was lagging a little bit, but the rest of the names in the index were performing well, which is something we've kind of been, you know, expecting to happen for a number of years here.

And, you know, it happened in January and February of this year. You know, things in March obviously got a little sidetracked with what's going on in the Middle East. But I think that's a trend that we would expect to continue. And also in that that first quarter in January and February, we saw you know, international markets do a little bit better than the US. And I think there's a number of different reasons why. I know we've talked about a little bit before, you know, Europe is now spending a little bit more on their defense than maybe they once did.

You know, companies or countries like Germany are contributing more towards, you know, infrastructure spending, which is increasing their overall GDP, which is is great for the international markets. In the emerging markets, we've seen, you know, more, you know, companies that are having more like, let's call it like shareholder advocacy where, you know, the like there's Japan, their stock market, you know, sent letters to every company saying, all right, what are your plans over the next, you know, 3 to 5 years to increase shareholder value. So, we're seeing, you know, different things happen there.

More spending in Japan as well from fiscal spending from the government. So, there's a lot of different things that are contributing to, you know, what we would expect positive returns for markets over the long term. There's a lot of good things happening out there as well. Yeah, and here in the US, you know, there's some really big themes that are playing out, you know, with this shock aside. You know, deregulation is something that we've talked about in the past and what we were seeing, you know, or expecting to be here, you know, whether it's SpaceX launching their IPO.

I think they just filed like they did a like more private filing, but you know, you can expect that company is going to be a big part of the US stock index here shortly. And then later this year, companies like OpenAI and Anthropic, some of the big AI names that have been private this whole time are probably going to be added to the index this year and you know, maybe that they've strategically waited for a good opportunity, the right market, you know, you name it, technology grid, a lot of factors go into that.

Another positive for the market this year that we're seeing is the tax law that was changed last year, potentially adding about $200 billion in stimulus for taxpayers. So, higher gas prices maybe offset with lower tax bills could be a huge thing for consumers. And then the other thing would be monetary policy. So, you know, the Fed was on track to cut rates maybe twice this year. I think this oil shock, you know, had changed inflation expectations in the near term, maybe pricing in now one rate cut this year and more the following year, but that's still unknown.

The Fed has a dual mandate, you know, as we know, maybe you've heard that on the news before where inflation and price stability is one part of it, but it's an equal importance with the labor market and we've seen some weakening, which is normal cuz it was coming from a really strong place after the COVID recovery. So, dual mandate, you know, and there's going to be a new Fed chair this year who, you know, maybe is a little bit more forward-looking and not as data-dependent can influence the other members.

So, things that can lift markets and promote more growth here in the United States as well as overseas. Yeah, so I think that there's, you know, I would say a lot of concern going on right now with everything that happened in March and in the war in the Middle East, but you know, as Will just said and some of the items I said, like I think these long-term trends are still intact. And you know, companies are out there spending billions if yeah, tens of billions of dollars on AI.

I hundreds of billions. Hundreds of billions. I wasn't sure if surely was the right word. I don't think so. So, hundreds of billions of dollars. And you know, we would expect, you know, all the companies to benefit from that at some point down the line. And you know, at the end of the day, we are investing at companies whose sole purpose is to increase their earnings and increase their stock price for the shareholders. So, I think there's a lot of exciting things going on around that.

But yeah, I think that kind of covers everything that we had planned to talk about. If you have any questions about, you know, what we spoke about, please feel free to reach out to your advisor. You know, we're here to answer any questions. Perfect. Thank you all. Take care.

Hey.

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