Oil is the energy lifeblood of the global economy and ~20% of global supply goes through the Strait of Hormuz. The world and the market are looking very closely. (map courtesy of marinevesseltraffic.com) | | Market Update - March 2026 | |
- Stocks fell slightly during February. Energy, Utilities and Consumer Staples did quite well; Financials, Consumer and Technology were weak. There is a massive rotation taking place underneath the relatively placid calm of the market. Long-time winners are getting sold and money is flowing into traditional stable sectors.
- Bonds rose during February, with long-term Treasuries and Investment Grade bonds doing well, while High Yield bonds did poorly. Both bonds and stocks are acting in a defensive manner.
- Inflation remains muted but the Fed elected to keep interest rates stable at the meeting in late January. Their next meeting is March 17-18, but the market is not expecting the Chairman Powell to cut rates.
- The market will be watching the Iran situation very closely.
| | Table 1: Market performance estimates as of 2/27/2026 (LIMW) | | |
While the markets quietly churned sideways, a lot happened below the surface in February. Money seemed to be rotating out of previously hot areas such as software and into sectors that typically do well in late-cycle economies. Energy, Consumer Staples, Health Care and Utilities are commonly labeled "late cycle" because they outperform the broad indexes as an economy enters recession. That is where the strength was in February.
Just to be clear, there is no sign of recession in the air: employment, earnings, and economic growth appear to be on an upward trajectory. Tax cuts and Fed rate cuts are stimulating growth. However, investors are nervously watching developments with Iran and the ongoing economic problems in Europe.
Let's look first at the broad stock and bond indexes. Stocks chopped sideways for weeks as the bond market continued to strengthen.
| | Figure 1: S&P 500 2019-2026 (LIWM) | | Figure 2: Aggregate Bond Market ETF 2019-2026 (LIWM) | |
The Strait of Hormuz
The reason many investors are nervous about Iran is that about 20% of global supply flows through this tiny passage near the Persian Gulf. Can you imagine what will happen to the oil markets if a major war breaks out and Iran disrupts the transport of oil through this part of the world? Nothing good.
Many of us over 60 remember the oil embargoes of the 1970s. Oil prices spiked causing many countries to ration gasoline supply to the population. These higher oil prices caused 2 major recessions in 1973 and 1977. Additionally, higher energy prices aggravated the inflation problems created by the western central banks. The risk here is that a major escalation of the Iranian situation could significantly disrupt oil supplies, hurting the global economy.
With a new bombing campaign on Iran, many are wondering what the endgame is here. There are two options with different likely market outcomes:
- Strategic bombing campaign to trigger regime change.
- Invasion and involvement by US Army and Marine Corps.
A strategic bombing campaign is easy to stop and will have limited loss of life. However, an invasion along the lines of the Afghanistan and Iraqi campaigns will be costly and bloody. Iran is a big country with 90 million people making it hard to control and guide. Based on our limited success with other countries, invading Iran will be the worst outcome from the market's perspective.
Let's hope cooler heads prevail.
Figure 3: The Straits of Hormuz (Bloomberg)
| | Rotations within the markets | | |
The heavy sell-0ff in software stocks in December and January became a catalyst for investors to move into sectors other than technology. Even Warren Buffett admitted that Berkshire Hathaway is reducing its enormous Apple Computer position.
Where is this money going? That's the million-dollar question.
Shrewd investors choose among several strategies when rotating:
- Sell the hot sector, buy the cold sector (like utilities, staples or healthcare).
- Sell the hot sector, buy a new asset class (like small cap, mid cap or international).
- Sell the hot sector, hold bonds or cash.
There is some evidence of all three strategies in the market. Those choosing #1 believe large companies will continue to outperform, so they rotate into other large-cap sectors. Those choosing #2 believe the nature of the economy is changing, creating new opportunities. Those choosing #3 believe a slowdown is developing and there is significant downside potential in the equity markets.
Here are some charts to give you the intuition behind these thoughts.
Figure 4: Energy stocks have been the best performer since the pandemic bottom (LIWM)
| | Figure 5: Communications and Technology stocks have been the best sectors since the 2022 bottom (LIWM) | | Figure 6: Technology and Energy stocks have done very well since the 2025 Tariff Tantrum (LIWM) | | Inflation is falling, as are interest rates | | |
Despite the $2 trillion budget deficit and the resumption of Federal Reserve quantitative easing, inflation remained quiescent over the last few months. Along with weaker inflation, we saw interest rates falling as bond investors became more optimistic.
Figure 7: Inflation Swap versus 10-year Treasury Yields 2024-2026 (Bloomberg)
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If we look at the broad components of inflation, we saw that the longest lasting inflationary pressure caused by service industries was starting to ease in recent months.
Figure 8: Key components of inflation 2016-2026 (Bloomberg)
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Despite falling inflation, rate cut expectations have not changed. The market is still looking for 2 more rate cuts in 2026.
Figure 9: Implicit Fed funds rate (Bloomberg)
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Falling inflation also means less currency destruction. The high inflation caused by the pandemic response caused the US Dollar to fall compared to other currencies. If inflation remains low, the dollar may begin to rise again, further easing inflationary pressures.
Here is a fun chart of the US Dollar from TrendLabs that highlights four magazine covers that are potential contrarian signs going forward. Note that when the dollar was high, magazine covers advertised the invincibility of the currency. Now that it is low, the covers lament its fall. In both cases, they are mirroring current sentiment.
Perhaps a change is imminent? We shall see.
Figure 10: US Dollar Index versus magazine covers (TrendLabs)
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Despite the chop, February was a relatively calm month. The economy is growing, interest rates are falling and tax cuts are promoting economic growth. In our view, the equity markets are likely to grind higher as we work through the year, barring any fireworks in the Mid-East.
Within our equity portfolios, we rotated out of energy, technology and communications into small-caps, mid-caps and software stocks. The small and mid-cap indexes are dominated by industrials, financials and other sectors with lower valuations than the large cap benchmarks.
Monday morning's open will reflect a calculus that balances a few key variables:
- Bombing campaign only (bullish)
- Oil transport disruped in the Strait of Hormuz (bearish)
- The administration announces an invasion (bearish)
As always, we welcome your feedback and are happy to discuss our research and how it applies to your situation.
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Rob 281-402-8284
Chris 281-547-7542
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Christopher Lloyd, CFP ®
Vice President and Senior Wealth Planner
Lloyds Intrepid Wealth Management
1330 Lake Robbins Dr., Suite 560
The Woodlands, TX 77380
281-547-7542
Chris.Lloyd@lloydsintrepid.com
www.lloydsintrepid.com
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