March was shaped by a rapid repricing of geopolitical risk. The conflict involving Iran, and especially the disruption surrounding the Strait of Hormuz, quickly became the central force moving global markets. Oil prices surged, inflation concerns picked up again, Treasury yields moved higher, mortgage rates followed, and equities spent most of the month under pressure. A sharp rebound at the very end of March improved the tone, but it did not change the broader result: March was a difficult month for both stocks and bonds and a reminder that supply-driven inflation shocks can still have a meaningful effect on markets.
For the month, all three major U.S. stock indexes finished lower. The Dow Jones Industrial Average fell 5.4%, the S&P 500 declined 5.1%, and the Nasdaq Composite lost 4.9%. Even with a strong rally in the final days of the month, the damage from earlier selling was significant. Through April 2, the S&P 500 remained down 3.8% year to date, while the Nasdaq was down 4.8%. The late-month rebound helped sentiment and offered some relief after a punishing stretch, but it was not enough to erase a month dominated by risk reduction and renewed inflation fears.
Energy has been the clear standout, benefiting directly from the move higher in crude oil prices. Traditional defensive areas such as utilities and consumer staples have held up quite well year-to-date compared to the broader, while more growth-sensitive sectors such as technology and communication services came under heavier pressure. Though in March, areas of the market sensitive to higher shipping and fertilizer costs—such as consumer staples and industrials—came under significant pressure. Financials also remain a weak point. That has reflected not only the rise in rates, but also the market’s growing focus on signs of strain in private credit with heavy exposure to software companies.
That private-credit issue is becoming more important. For a long time, private credit benefited from the perception that it offered attractive income with far less day-to-day volatility than public fixed income or public equities. March put some pressure on that assumption. Reports began to surface that certain funds were limiting or managing elevated withdrawal requests, and investors started paying closer attention to the underlying exposures within these strategies. Software appears to be one of the more vulnerable areas. Some highly leveraged software businesses are facing a more difficult backdrop as artificial intelligence continues to reshape the economics of coding, workflow automation, and enterprise productivity. In plain terms, AI’s growing ability to handle coding and related tasks may weaken parts of the traditional software business model, especially where valuations had assumed durable pricing power and steady growth. That does not mean software as a whole is broken, but it does suggest that lenders and investors may need to be much more selective going forward.
The bond market reflected the same inflation concerns that weighed on equities through most of March. Treasury yields rose sharply over the course of the month as investors adjusted expectations for Federal Reserve policy in response to the energy shock. The 2-year Treasury yield climbed from 3.38% at the end of February to 3.79% by March 31. The 5-year yield rose from 3.51% to 3.96%, and the 10-year Treasury yield increased from 3.95% to 4.32%. Those are meaningful moves in a single month, and they help explain why both equity and fixed income markets struggled at the same time. Investors were not primarily reacting to recession fears. Instead, the message from rates markets was that inflation risks had become more pressing again and that the Fed might have less room to ease than many had expected earlier in the year.
Mortgage rates moved higher alongside Treasury yields. After already rising throughout the month, the average 30-year mortgage rate ended March at 6.43%. That matters in a housing market that was already dealing with affordability pressures. Clearly, higher mortgage rates work like a brake on housing activity, especially when home prices remain elevated and buyers have little room in their budgets. If rates stay near these levels for an extended period, the housing market could lose some of the stabilization it had been trying to build.
Commodities sat at the center of the month’s market story. Brent crude and other oil benchmarks surged as traders reacted to the risk that shipping through the Strait of Hormuz would remain heavily impaired. Even after some easing late in the month, oil still finished March over $110 per barrel—up 94% year-to-date—more than enough to keep inflation concerns front and center. The move in energy prices was one of the main reasons markets became more worried about a second-round inflation effect, particularly in transportation, shipping, and consumer-facing energy costs. Oil’s rapid ascent also helps explain why energy stocks were one of the few places investors could find meaningful gains during the month.
Gold moved in the opposite direction from what many would normally expect during a period of elevated geopolitical stress. Rather than
rallying, gold declined through much of March. The main reason was the sharp rise in yields. When real interest rates move higher, gold often loses support because it does not generate income and becomes less attractive relative to yield-bearing assets. A stronger dollar and general profit-taking likely added to the pressure. There was also discussion that some central banks were active sellers, either to reduce reliance on dollar-based transactions, lock in gains, or support domestic currencies.
The Federal Reserve offered little immediate reassurance during March. Chair Powell pushed back against the more dramatic stagflation comparisons, and we agree that direct analogies to the 1970s are too simplistic. The U.S. economy today is far less energy intensive, and the wage-price spiral that defined that era is much less entrenched. Even so, the Fed’s tone suggested increasing caution. As oil prices rose and inflation expectations became more unsettled, markets began to scale back hopes for rate cuts. By the end of March, investors were spending less time debating when the first cut would arrive and more time discussing whether the Fed might remain on hold for longer than expected—or even hike rates—if inflation proves sticky.
Economic data through the month painted a mixed but not collapsing picture. Earlier in March, the February employment report raised concerns after payrolls declined and the labor market appeared softer than expected. But the picture improved by month-end. March nonfarm payrolls increased by 178,000 and the unemployment rate edged down to 4.3% from 4.4% the month before. The three-month average does not suggest a booming labor market, but it does point continued resilience and supports the view that the economy still has underlying support. Inflation readings that covered the pre-shock period did not capture the pressure that higher energy prices may create going forward, which made them feel somewhat stale almost as soon as they were released. Growth data was also uneven, and consumer sentiment softened as inflation worries began to build again. In other words, the economy did not appear to be at immediate risk of recession, but the market was clearly becoming more worried about the combination of higher prices, tighter financial conditions, and less policy flexibility from the Fed.
From an investment standpoint, this environment has reinforced the value of how we have positioned portfolios. Our approach has emphasized diversification both globally and domestically, along with tactical tilts and disciplined security selection. That has mattered a great deal in a market like this one. In particular, our outsized exposure to energy stocks has been an important cushion against the broad market’s downside pressure. Combined with our broader diversification and selective positioning, that has helped keep our strategies flat to positive year to date, even as the S&P 500 has fallen 3.8% and the Nasdaq has experienced an official correction after having been down nearly 12% from its high last October.
Looking ahead, our view remains constructive. We continue to see underlying economic fundamentals and corporate earnings as supportive enough to create opportunities once the current market stresses begin to fade. While geopolitics, energy prices, and interest-rate volatility may continue to pressure sentiment in the near term, periods like this often create attractive entry points when the underlying economy remains intact. Our expectation is that, as these pressures begin to subside—in fact, we took profits on some of our energy exposure. We think investors will refocus on still-healthy earnings power, resilient labor conditions, and the broader capacity of businesses to adapt. That is why we view the recent volatility less as a reason to retreat and more as a buying opportunity for patient, selectively positioned investors.