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A Volatile Q1 

In our February market update, we discussed how volatile the first two months of the year were; March has been no different. To take a step back, the broad stock market indices (S&P 500 and Nasdaq) have returned a whopping 0% in the last six months. Over that time, we saw massive moves up in various asset classes and sectors and massive moves down. On net, the stock market is sitting exactly where it was in mid-September, as seen below (the darker blue line represents the S&P 500 and the lighter blue line represents the Nasdaq).  

Year-to-year, the S&P 500 and Nasdaq have declined approximately -4%. From their peak, their declines are just a couple percent shy of a -10% technical correction. Most areas of the stock market are sitting solidly negative for the year led by software and Big Tech (aka the Magnificent 7), down -10% to -20%.  The precious metals – which appreciated significantly last year and into early 2026 – have suffered two large pullbacks this year. Gold has entered a bear market pulling back -20% from its peak and gold miners -30%. Worse yet, is silver down -40% from its peak. Still, gold and silver are about flat year-to-date. The notable winner this year has been crude oil. A barrel of crude started the year at $57 and rallied as high as $115 before settling around $91 as of this writing. Of course, dramatic rallies in crude are typically negative for stocks and this episode has been no different.  

The Elephant in the Room: Iran  

Of course, the story of the month has been the joint operation between the United States and Israel against Iran, known as Operation Epic Fury. The ‘excursion’ commenced on February 28th with coordinated airstrikes & missile barrages framed as seeking to prevent nuclear weapon development, eliminating threats to allies, and potentially encouraging regime change. Since operations began, Iran’s Supreme Leader Ali Khamenei was killed in an Israeli-led strike along with several other senior officials of the IRGC and dozens of military and infrastructure sites have been eliminated. Given the situation is fast moving, we will not further comment on its ongoing operations. Rather, we will address its primary implication for the global economy: oil. 

As many of you can recall, in times where oil spikes dramatically, stocks tend to perform poorly. The logic is two-fold: 1) higher oil prices create a drag on economic activity as personal consumption is hit by higher gasoline prices (2/3rd of economic output, or GDP, is consumer spending), and 2) because oil is an input to many products, higher oil prices cause general prices to go up (i.e. it is inflationary).  

We note a chart below by Pictet Asset Management where they review previous energy spikes to find what level proceeds recessions. Based on history, brent crude oil above $104/barrel has proceeded all recessions since 1970. Today, Brent is approximately $100/barrel (down from a brief spike to $115/barrel). So, based on history, we are right around the level where oil prices likely become recessionary. Of course, if oil were to fall from here (i.e. the Straight of Hormuz were to open and/ or the military operation were to wind down), likely this would not be recessionary.  

Additionally, the US economy has not been impacted negatively as a whole due to higher energy costs, or for any other reasons, as of now. Frequent readers of ours know we look to EconPi (www.econpi.com) as our preferred gauge on the US economy as it scatterplots various economic metrics and does not get skewed by one piece of data or recency bias. Through last Friday, the economy is in Expansion and has been every week of this year except for the first week of March. By contrast, the economy was solidly in Decline for much the second half of 2025. This is constructive and supports strong underlying fundamentals, despite what you may hear on the news.  

Re-emerging Inflation  

Last Wednesday morning, the February Producer Price Index (PPI) was released which came in much hotter than expected. The index is a key economic indicator that measures the average change over time in selling prices received by domestic producers for their output; effectively, it is a measure of inflation at the wholesale level. PPI rose +0.7% month-over month and +3.4% year-over-year versus the +3.0% estimate, the largest annual gain since last February.  Food prices jumped +2.4% month-over-month with vegetables surging +49% accounting for the majority of the food price gain. Energy related items were the second largest contributor to the monthly figure, rising +2.3% month-over-month.  

Notably, the gain in both food and energy largely occurred before the Iran conflict began on February 28th; therefore, we can almost surely expect the March PPI to come in much hotter reflecting the dramatic rise in crude oil during the month from approximately $70/ barrel to $100/ barrel. 

Just hours later, the Federal Open Market Committee (FOMC) concluded its two-day meeting where they continued their pause on interest rate adjustments keeping the federal funds target rate unchanged at 3.5% to 3.75%. They cited economic activity expanding at a solid pace with resilient consumer spending and business investment, though housing and job gains remained weak. While the market did not expect the Fed to cut interest rates this meeting, the market was disappointed by Chairman Powell’s cautious and hawkish tone on inflation given the uncertainty of the ongoing Iran conflict. Stocks sold off significantly as the market completely priced out all hope for any interest rate cuts this year (as seen in the chart below).  

Bonds, which decline in price as interest rates move higher on inflation, have gone straight down -3% this month as measured by the iShares Aggregate Bond ETF (AGG). As such, we continue to hold no bonds in portfolios as we have discussed their lack of attractiveness in an inflationary world for the last several years. Lately, we have started increasing our exposure to alternative investments – namely, managed futures – which invest in different types of market globally (stocks, currencies, commodities, etc.) and tend to perform positively when stocks are under pressure. 

Inflation up, Gold down 

As oil continued its torrid climb for the month of March and PPI came in hotter than expected, US 12-month inflation expectations surged to 5.2%, the highest level since March 2023 (chart below). This is up approximately 2x since the start of the year and up from 3.5% from the pre-Iran conflict at the end of February. Yet, precious metals are in a bear market as gold declined by over 10% just last week, its largest weekly decline since 1983. So, what gives?  

While many think of gold as an inflation hedge, and it is (over longer periods of time), it is more of a hedge on the central bank’s ability (or inability) to manage inflation. Said another way, as inflation expectations increased, the market priced out Fed rate cuts and might even be pricing in some rate hikes to deal with this reemergence of inflation. So, in the short term, the market is assuming the Fed will enact tighter monetary policy to combat inflation.  

We see this market logic as accurate, in the short term. Certainly, the market previously thought the Fed would cut rates and now the expectation is that the Fed will not cut at all. As assets are priced on the margin, this is short-term bearish for precious metals. If the Iran conflict becomes protracted and oil prices continue to climb, the market will assume the Fed will be forced to raise interest rates to combat inflation. This is a possibility and bearish for stocks and precious metals. As such, we greatly reduced our positioning in precious metals and mining stocks.  

Now, over the long-term, precious metals do act as a hedge on inflation. As we wrote in detail last month, the US fiscal situation is still untenable. The US just crossed $39 Trillion in total debt, increasing approximately $1 trillion every 90 days, with $1 trillion of annual interest expense which is greater than the annual defense budget, and the US government is operating at annual deficit of at least $2 trillion (i.e. government spending exceeds all tax revenue which gets added to the total debt). Moreover, the Congressional Budget Office (CBO) recently forecasted that the US national debt is set to rise $2.4 trillion a year for the next 10 years. This would take our current national debt from $39 trillion to approximately $64 trillion in 2036, a 78% increase in a decade. This is our own government’s base case and irrespective of any recessions or ‘once in a lifetime’ events such as pandemics or financial crises. Therefore, the long-term bull case on precious metals is still intact and rather is just fighting a short-term headwind surrounding a less loose, or tighter, Federal Reserve.  

Equally important, the Fed is not in position to drastically increase interest rates to combat inflation a la Volker in the early 1980s. When Volker began his rate hike campaign in 1979, US Debt to GDP was under 40%. Today it is 4x higher at approximately 125% (~$39T of debt/$31T GDP), as seen in the chart below by Azuria Capital. If the Fed were to continue to raise interest rates with today’s level of indebtedness, it would have enormous fiscal cost that would likely lead to a crisis.  

Specifically, higher interest rates would increase the government’s cost of borrowing which would increase the already $1 Trillion of annual interest expense and further increase the debt. Keep in mind, almost $10 Trillion of Treasury debt will mature in the next 12 months and must be refinanced. Also, raising rates would slow economic growth which would decrease GDP and further increase the debt-to-GDP ratio. So, precious metals will continue to be challenged if the Iran conflict escalates and oil remains high. But as soon as this is not the case, eyes will revert to the long-term US fiscal situation.  

A lot of negativity  

The toughest part of investing is handicapping how much of the fundamentals, and future expectations, are currently ‘priced-in,’ or reflected in the market prices. We just outlined a lot of negativity: war with Iran, oil prices up considerably, lagging inflation metrics going up, future inflation expectations going up, and a hawkish Federal Reserve. This is decidedly bearish. As such, we have raised a material amount of cash both from stocks and precious metals. That said, both stock prices and precious metals are down rather significantly. Stocks are just shy of correction territory and precious metals are worse yet, in a bear market. Therefore, a significant amount of this is likely already reflected in the current prices. Of course, the situation could deteriorate further and worsen already weak prices.  

Clients of ours know we stress the importance of market sentiment & positioning and our preferred gauge to measure this is CNN’s Fear & Greed Index. Currently, the index is at 17 (out of 100), an Extreme Fear reading. Therefore, this confirms a lot of negativity is already priced in. While we could see this going lower on Iran escalatory news-flow, the next largest move from here is likely higher. We remain cautious yet ready to re-deploy capital.