April 14, 2026
The first quarter of 2026 was defined in March with the Iranian conflict and the accompanying surge in oil prices (Price of WTI Crude oil on 12/31/25 at $57.40, 3/31/26 at $101.38, up 76.6%). The first two months of the quarter had their fair share of market moving events such as the removal of the president of Venezuela, a government shutdown, a new Federal Reserve chairman being nominated and growing private credit concerns. The equity and fixed income markets were pricing in and adjusting to these events and then we added the Iran conflict which repriced risk.
For the quarter, the Dow Jones Index was -3.58% in total return, the NASDAQ was -7.11% and the S&P 500 was -4.63%, however, the equal weight S&P 500 was +0.19%. Why the difference? The S&P 500 is a market weighted index and the top seven holdings are roughly 35% of the index and are technology related. This sector underperformed in the first quarter. The Equity Select strategy at Northwest Criterion returned +0.34% in the quarter and benefitted from value companies outperforming large cap growth companies with high P/Es. The Equity Select strategy has an average P/E closer to 11 (vs 25 for the S&P 500). In addition, exposure to a broad set of sectors based on value contributed to the portfolios weathering the volatility caused by these events.
On the fixed income side, returns were basically flat for the quarter. The fixed income market was initially expecting the Federal Reserve (Fed) to lower the Federal Funds rate by 25 basis points during the quarter as employment was weakening and the Fed put more emphasis on this part of the dual mandate of employment and inflation. However, inflation remained sticky and as the price of oil rose, inflation expectations increased so the Fed decided to leave the Fed Funds rate unchanged at 3.5% to 3.75%. The range of a neutral Fed Funds rate is somewhere between 2.625% and 3.75% and this raises the bar for economic data to justify more rate reductions. What was notable though is that short term inflation expectations rose 1% during March to 3.25% while longer term expectations stayed around 2.25% which indicates that the conflict will not have longer term effects on inflation and expectations are that disinflationary forces (AI effects) will help offset commodity price volatility. Treasury rates did rise across the maturity spectrum during the quarter, led by two-year notes higher by 33 basis points while ten-year notes were higher by 15 basis points but did reach a high of 4.43%. We still believe if ten-year notes stay below 4.5%, risk assets such as equities should continue to perform.
Our strategies did benefit from exposure to oil-related equities and some financials. What underperformed were the business development companies (BDCs) that have exposure to Private Credit. Those equities have dividend yields of 13.8% and 10.5% which certainly can offset some price depreciation seen in the first quarter. We continue to closely monitor developments in the BDCs as well as the underlying parent equities.
The equity market is trading at 25 times earnings coming after three strong years of returns. Earnings growth expectations are 14.3% which should contribute to healthy, underlying momentum for stocks as the market faces daily news on the Iran conflict. Consumer spending remains robust and tax refunds should add to this, but keep in mind prices are higher. Mortgage rates, gas prices and food for the home are at high levels. This puts the Fed in a tug of war position between inflation and growth. The Iran conflict is five weeks old, so a bit soon to see long term effects, yet the Administration feels confident in a short conflict and minimal price change.