Market Report, 2026-03-20

Oil prices are up more than 45% just three weeks into the Iran war, weighing on stocks again this week. While Fed Chair Jay Powell pushed back on stagflation terminology following Wednesday’s FOMC meeting, the sharp rise in oil prices, with the Strait of Hormuz still closed, has many market participants concerned.

The Dow Jones Industrial Average, Nasdaq, and S&P 500 all fell about 2% during the latest trading week. The energy sector remains the only area of the market posting gains recently, with the surge in oil and gas prices lifting energy shares 2.8% this week and 32% year to date. We continue to emphasize the energy sector in our portfolios as a useful hedge against geopolitical risk. Aside from financials, which found some support from easing capital requirements, most other sectors continued to decline this week, with even defensive shares coming under pressure amid higher shipping costs and rising interest rates.

In fact, Treasury yields moved sharply higher across key maturities. The U.S. 2-year Treasury yield rose 16 basis points to 3.89%, the 5-year yield climbed 14 basis points to 4.01%, and the 10-year yield finished 11 basis points higher at 4.39%. Gold, which is sensitive to interest rates, fell nearly 11% to around $4,500 per ounce.

This week’s economic growth data was relatively benign, with initial jobless claims falling to their lowest level since January. Even so, higher-than-expected wholesale inflation, which showed up before the military operation and energy shock, helped fuel stagflation headlines. We believe comparisons to the 1970s Arab oil embargo are misplaced. The U.S. economy is very different today. It is far less energy dependent, and the wage-inflation feedback loop is much less powerful. In our view, that gives the Fed more flexibility to take a balanced approach in responding to this energy shock.

Jay Powell said as much after Wednesday’s meeting, where the Fed left its target rate unchanged. Still, he indicated the committee is leaning away from rate cuts this year. The fed funds futures market is now pricing in no cuts through 2026, with rising odds of a rate hike later this year.

Even so, it is still far too early to know how the war in the Middle East and higher oil prices will affect growth or inflation in the months ahead. Several Fed officials are scheduled to speak next week, which should provide more perspective.