MARCH 2026 MARKET INSIGHTS

By: DOUGLAS A. RILEY, CFA, PORTFOLIO MANAGER

The old saying “in like a lion, out like a lamb” to describe March certainly applies this year. The March 1^st joint US/Israeli strike on Iran kickstarted a ferocious air/sea battle in the middle east. It seems far too early to draw any conclusions at this point, but it appears to be a high-stakes (albeit calculated) gamble to topple the Iranian Theocracy. Iran accounts for roughly 4% of global oil supply, 80%-90% of which they sell to China, so the loss of sanctioned oil is not a major disruption to global energy markets. But roughly 20% of global oil and gas passes through the Strait of Hormuz in the Gulf of Oman. That is the potential supply disruption that has markets on edge.

Earlier that week President Trump delivered the State of the Union Address, which was the longest in history at over 1 hour and 47 minutes. He took credit for many accomplishments, some deserved some not so much, mostly laid out an optimistic scenario for the nation but broke little new ground. While he mentioned ongoing negotiations with the Iranian Regime regarding nuclear weapons, there was no sense that action was imminent. Prior to that was the Supreme Court ruling on the use of the IEEPA to justify broad global tariffs.

As many people expected, the court ruled against the administration in a 6-3 decision declaring the executive action unconstitutional. Two things stand out, however. First, they were silent on the matter of refunds, leaving that an open question for the courts, potentially creating a legal morass that could last years. In the 2026 fiscal year that began last October, US Customs collected $118 billion in Duties through January, four times the comparable period in the prior year with (so far) no economic collapse and no runaway inflation^[1]. More significantly, the majority could not agree on the reasoning for their decision, with two (maybe three) different arguments between the majority and concurring opinions. Associate Justice Kavanaugh, in layman’s terms, wrote a very straightforward and logical dissent that exposed the shortcomings of the majority ruling.

The bond market was mostly well-behaved in February despite some budding concerns. The US 10-year treasury yield fell -30 basis points, ending the month below 4% at 3.94%^[2]. The Bloomberg Catholic Values US Aggregate Bond Index returned 1.63% and the Bloomberg Catholic Values US 1-3Y Gov’t/Credit Index returned 0.52% compared to 1.82% for the Bloomberg US Treasury Total Return Index^[2]. Investment grade spreads rose a few basis points but remain near multi-decade lows^[2]. The primary driver of spread widening is a significant increase in supply, driven by technology and utility companies as they raise funds for data center buildouts. The impact was most pronounced in the high yield market, where spreads popped by 40 basis points as more evidence that private credit funds had a concentrated exposure to software firms, many of which (public and private) have been pressured by rising fears of disruption from AI. A tipping point may have been reached when Blue Owl Capital halted redemptions from one of its private credit funds, validating concerns about elevated risk of rising default rates.

Equities also felt some pain from rising fears of AI disruption, notably in the growth space. It was a mixed month for performance with cyclicals and small caps outpacing large growth names. Non-US stocks continued to lead, with the Bloomberg World ex-US Catholic Values Index returning 4.97% in February compared to a decline of -0.72% for the Bloomberg 1000 Catholic Values Index^[2]. Value performed substantially better than growth as the Bloomberg 1000 Value Catholic Values Index returned 3.16% versus a decline of -2.02% in the Bloomberg 1000 Growth Catholic Values Index^[2]. Small caps fell in the middle, rising 1.08%^[2]. Much of the fallout from AI disruption fears was seen in the software space, where the iShares Tech Software ETF fell -9.68% for the month, including a -21% drop in IBM shares, and is off -22.82% year-to-date^[2]. Financials similarly experienced bouts of selling. Regardless of how rational it may be, we seem to have entered a period of rolling sector corrections based on a spreading threat to jobs and entire business models from AI. UBS strategist Matthew Mish referred to the risk as "AI-driven disruption to leveraged technology and business services models, with potential spillovers into leveraged loans (LL)."^[3]

On the economic front, the labor market continues to show little sustained directional movement. Initial Claims jumped at the end of January but have fallen back and the 4-week moving average continues to run just under 220k^[2]. The Final Non-Farm Payrolls benchmark revision wiped out 862k previously reported new jobs through March 2025, but that was mostly expected^[2]. January Non-Farm Payrolls came in double the consensus forecast at 130k, up from 50k in December^[2]. The Unemployment Rate is holding steady at around 4.3% and, importantly, Average Hourly Earnings for January rose 3.7% (1.9% real) year-over-year^[2]. Inflation measures have been mixed as well, perhaps with an upside bias. Core CPI at 2.5% YoY for January was in line with forecasts but down a tick from December^[2]. The January Core PCE Index, at 3.0% YoY, was ahead of expectations and was up from December^[2]. Last week, Producer Prices Ex Food and Energy rose 3.6% YoY, well ahead of the 3.0% forecast, up from 3.3% in December and trending steadily upward for several months^[2]. Finally, on March 2^nd, the February ISM Prices Paid Index jumped to 70.5 versus 59 in January and was well ahead of the 60 expected^[2].

With earnings season mostly over and the tariff ruling behind us, the conflict in Iran takes center stage and will be top of mind for investors, until such time as there is greater clarity. The Trump administration claims it will be a short engagement of 4-5 weeks, but who knows? Investors entered the year cautiously optimistic with a positive view on earnings and the economy but now must reckon with a period of heightened volatility. Let us hope the month goes out like a lamb.

[1] Source: Monthly Treasury Statement January 2026

https://fiscaldata.treasury.gov/datasets/monthly-treasury-statement/summary-of-receipts-outlays-and-the-deficit-surplus-of-the-u-s-government

[2] Source: Bloomberg

[3] Source: https://www.zerohedge.com/markets/most-important-number-market-25-days