Volatility Through Seasonal Transition

Spring often arrives gradually, in stages, and rarely without some mud and slush in the process. As the days turn warmer, snow begins to melt, causing rivers to overflow, and the frozen ground turns to loose mud beneath our feet. Oftentimes, this process is interrupted by winter’s return with the arrival of a sudden cold front, late season frost, or unexpected snowstorm. While spring does always eventually take hold, it can be a volatile transition. 

The first quarter of 2026 shared much of that same volatile nature. Markets entered the year with momentum and investors with optimism; however, they quickly encountered abrupt reminders that risks were still prevalent. Geopolitical tensions flared, causing energy prices to surge and inflation concerns to reignite. Much like a promising early thaw interrupted by the return of cold weather, the original sense of calm was jarred by renewed volatility, forcing investors to reconsider just how certain they were of the improving economic backdrop that was anticipated at the year’s start. 

As Spring’s transition matures, the runoff eventually clears away winter’s cover and carries with it the loose ground, the earth dries, and the terrain becomes predictable and the paths navigable. Similarly, periods of volatility help to distinguish what was loosely supported by momentum and what is supported by the firmer footing of strong underlying fundamentals. 

For long-term investors, seasons like this are less a reason to retreat and more a reminder to remain steady. When the ground is soft and the weather can still turn without warning, the wisest course is not to press ahead too quickly, but to stay balanced and remain attentive to where the footing is firm. That strategy continues to guide our approach. We believe strong portfolios are structured with the intent of withstanding the sudden chills and muddy pitfalls so as to enjoy the bright and easy days that follow. 

Let’s take a closer look at how markets navigated the first quarter and what this unsettled seasonal transition may mean in the months ahead. 

Market volatility spiked in the first quarter of 2026 as a surge in geopolitical tensions combined with stress in private credit markets and growing concerns that AI may pose threats to certain industries to push the S&P 500 moderately lower to start the year.  

Geopolitical surprises started immediately in 2026 as on January 3, the U.S. military performed a daring raid in Venezuela and arrested Venezuelan President Maduro, causing a temporary pop in market volatility given uncertainty around the country’s vast oil supplies. The action proved limited, however, and the new Venezuelan leader pledged to work with the U.S., easing market tensions. Shortly after markets recovered from that initial surprise, we received another one, as the U.S. Attorney for the District of Columbia issued two grand jury subpoenas to Fed Chair Powell surrounding the renovation of the Federal Reserve building. That action renewed concerns about attacks on Fed independence, which, if compromised, could lead to sustainably higher inflation. In response, several prominent Republican Senators pushed back against the subpoenas and voiced support for Fed independence, easing market concerns. While these surprise headlines caused short bursts of market volatility, stable economic data and a generally solid fourth-quarter earnings season helped keep economic and earnings growth forecasts intact, while the Fed reminded investors at the January meeting that it still planned to cut rates again this year. Despite the headline volatility, the S&P 500 ended the month with a solid gain.

Volatility continued in early February, but this time it was more focused on specific sectors of the market such as tech and financials. AI company Anthropic released a Claude Cowork app that caused a steep decline in the software sector, as fears surged that AI advancements could ultimately eliminate the need for entire sectors of the economy. That idea jolted investors’ previous opinions that AI was nearly all beneficial to the markets and economy. Meanwhile, underlying fears of credit risks in private credit funds grew, as numerous large alternative asset managers limited redemptions from specific funds, fueling concerns there was a bubble in the industry. Finally, on the last day of February, geopolitical risks surged as the U.S. launched a massive attack on Iran, sparking a war between the two countries that effectively closed the Strait of Hormuz and drastically reduced available global oil supplies, which caused oil prices to surge overnight. These factors combined to push the S&P 500 slightly lower for the month but the index remained positive for the year.      

The market declines accelerated in March as hopes for a quick resolution to the U.S./Iran war faded. While the U.S. and Israel dominated the conventional military conflict, Iran and its proxies attacked neighboring Gulf states’ energy infrastructure and oil tankers in the Persian Gulf, causing the price of oil to surge above $100/bbl and increasing pressure on the global economy. The S&P 500 fell modestly on the surge in geopolitical risks, although hopes of a ceasefire late in March did help limit losses. The S&P 500 declined moderately in March and finished the quarter in solidly negative territory.           

The first quarter of 2026 saw volatility surge, as military conflicts combined with more traditional market concerns of overvalued assets (in private credit) and potentially negative impacts of AI to pressure stocks moderately, although still-stable economic growth and corporate earnings helped to support markets throughout the quarter.  

First Quarter Performance Review

Market internals and performance in the first quarter were driven primarily by the U.S./Iran war, but also by concerns about private credit and potentially negative impacts from AI.  

On an index level, the three major large cap stock indices finished the quarter with losses. The Nasdaq was the worst performer among them thanks to weakness in AI-related tech and software stocks. Small caps, however, relatively outperformed large caps as the Russell 2000 finished the first quarter with a small gain, as small-cap stocks are generally viewed as more insulated from the headwinds of the first quarter (i.e., geopolitical tensions, private credit worries, AI concerns).  

Turning to value vs. growth, value massively outperformed growth in the first quarter and managed a modest gain, as value-focused strategies benefited initially from a rotation away from tech and towards sectors less exposed to AI. Additionally, late in the quarter, value styles benefited from the surge in the lower-multiple energy and materials sectors, which rallied following the outbreak of the U.S./Iran war. Tech-heavy growth strategies finished solidly lower for the quarter.  

On a sector level, performance was mixed as six of the 11 S&P 500 sectors finished the quarter with a positive return. The best-performing sector in Q1, by a large margin, was energy, which surged more than 30% in the first quarter thanks to rising oil prices. The materials sector, which includes companies with heavy commodity exposure, also was a solid performer on rising natural resource prices following the U.S./Iran war. Finally, consumer staples and utilities also finished the first quarter with strong gains, as investors rotated to less volatile, more defensive parts of the market.  

Looking at sector laggards, the financial sector was the worst-performing S&P 500 sector in Q1 and suffered solid losses, thanks to aforementioned private credit concerns. The consumer discretionary sector also posted a moderately negative return on worries that higher oil prices would reduce consumer spending. Finally, the technology sector dropped on weakness in software stocks and AI-linked technology stocks.  

Source: YCharts

Internationally, foreign markets relatively outperformed the S&P 500 and ended the quarter with only a small decline, despite the surge in geopolitical risks. Emerging markets outperformed both developed markets and the S&P 500 and registered only a fractional loss despite the strong dollar, as the surge in commodity prices was seen as offsetting the rising U.S. dollar. Foreign developed markets declined in Q1, but only modestly, and solidly outperformed U.S. markets thanks mostly to the smaller weighting of tech shares in foreign indices.       

Source: YCharts

Commodities were generally speaking, sharply higher in the first quarter thanks to the surge in the geopolitical risk premium following the outbreak of the U.S./Iran war. Oil prices hit the highest levels since 2022 thanks to the U.S./Iran war and following Iranian attacks on Gulf oil infrastructure, which further reduced global supply. Gold, meanwhile, hit a new all-time high above $5,000/oz. early in the quarter but finished with just a moderate quarterly gain, as the surging dollar pressured gold prices late in Q1.    

Source: YCharts/Koyfin.com

Switching to fixed income markets, the leading benchmark for bonds (Bloomberg Barclays US Aggregate Bond Index) finished the quarter with a slight loss as bonds were solidly higher mid-quarter but declined in March on rising inflation concerns, as surging oil prices and hotter-than-expected inflation readings reduced expectations for Fed rate cuts. Short-term bills modestly outperformed longer-duration bonds and logged a positive return as they are less sensitive to rising inflation risks compared to longer-duration debt.  

Turning to the corporate bond market, both high yield and investment grade corporate bonds declined slightly in the first quarter as the U.S./Iran war and spiking oil prices raised concerns about an economic slowdown. Reflecting general investor anxiety about economic growth given the war and rising oil prices, both lower yielding but higher quality investment grade corporate bonds and high yield bonds (which have a better yield but also more credit risk) experienced similar small losses for the quarter.        

Source: YCharts

Second Quarter Market Outlook

Stocks begin the second quarter facing three distinct market headwinds: Higher oil prices (a result of the U.S./Iran war), credit concerns (emanating from private credit funds) and worries that AI, while a transformative technology, could have unanticipated negative impacts on important market sectors. Each of these concerns will need to be resolved if the market is going to fully rebound from the Q1 declines, although it’s important to note that economic growth and corporate performance remained solid in Q1 and that is helping to support markets.  

Starting with geopolitics, the focus for markets remains on the price of oil. Elevated oil prices pose a risk for the markets and economy in multiple ways including 1) No Fed rate cuts as the Fed worries higher oil prices may spur inflation, 2) Depressed consumer spending as higher gas prices reduce disposable income and 3) Tighter corporate margins given increased transportation and infrastructure costs. Ultimately, that could lead to stagflation in the economy, which would be negative for most assets. For geopolitical risks to fully recede, we will need to see a credible ceasefire agreement between all parties (the U.S., Israel and Iran), transit through the Strait of Hormuz return to something close to pre-war levels and a decline in oil prices back towards pre-war levels.  

Private credit, meanwhile, is evoking memories of the financial crisis amongst more tenured investors, fueling fears that the recent influx of investor capital into private credit funds led to poor investing standards and overvaluation. While analogies to the financial crisis are understandable, it’s important to realize the private credit market is much, much smaller than the markets that caused the financial crisis and Fed officials have recently said they see no indication of a systemic problem. While that is reassuring, private credit concerns are still weighing on the financial sector, which is the second-largest sector in the S&P 500 by weight and an important market leader. An easing of private credit concerns and a rebound in the financials is needed to help the market further stabilize in the second quarter.

Finally, turning to AI, opinions on the impact of AI on the economy and markets have shifted from mostly positive to that of increased skepticism, and there are two main concerns associated with AI currently. First, that massive spending on AI infrastructure by large tech companies may ultimately have a poor ROI and depress future earnings. Second, that AI advancements may disrupt entire portions of the economy (such as the software sector) and lead to large job losses that hurt overall economic growth. Both of these concerns need to be addressed and countered for AI and the tech sector to fully rebound in Q2.  

Bottom line, the first quarter did contain several negative surprises for investors and we begin the second quarter with uncertainty over geopolitics, credit and AI. But there are also positive factors at work that must be considered, including a still-resilient economy, strong corporate earnings growth and a Federal Reserve that is still signaling rate cuts. Those factors supported stocks and bonds in the first quarter and despite the volatility and elevated uncertainty, the outlook for the economy and markets is not universally negative and as we saw firsthand in Q1, the geopolitical and corporate landscape can change quickly.     

At Professional Planning Group we have experienced these types of markets before and are committed to helping you effectively navigate this challenging investment environment. Successful investing is a marathon, not a sprint, and through both bull and bear markets, we will remain focused on the diversified approach we have designed to support your long-term goals. 

Therefore, it’s critical for you to stay invested, remain patient, and stick to the plan, as we’ve worked with you to establish a unique, personal allocation target based on your financial position, risk tolerance, and investment timeline.

We remain vigilant towards risks to portfolios and the economy, and we thank you for your ongoing confidence and trust. Please rest assured that our entire team will remain dedicated to helping you navigate this market environment.

Please do not hesitate to contact us with any questions, comments, or to schedule a portfolio review.

On Behalf of the Investment Committee,

David Aballo, CFA

Financial Advisor
Director of Investments and Trading

Professional Planning Group
9 Granite St.
Westerly, RI 02891
401-596-2800

The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market.

One cannot invest directly in an index. Bond prices and yields are subject to change based upon market conditions and availability. 

If bonds are sold prior to maturity, you may receive more or less than your initial investment. Holding bonds to term allows redemption at par value. There is an inverse relationship between interest rate movements and bond prices. Generally, when interest rates rise, bond prices fall and when interest rates fall, bond prices generally rise. International investing involves special risks, including currency fluctuations, differing financial accounting standards, and possible political and economic volatility. Investing in emerging markets can be riskier than investing in well-established foreign markets. Investing involves risk and investors may incur a profit or a loss.

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The Russell 2000 Index measures the performance of the 2,000 smallest companies in the Russell 3000 Index, which represent approximately 8% of the total market capitalization of the Russell 3000 Index.

The S&P MidCap 400® provides investors with a benchmark for mid-sized companies. The index, which is distinct from the large-cap S&P500®, measures the performance of mid-sized companies, reflecting the distinctive risk and return characteristics of this market segment. The MSCI EAFE (Europe, Australasia, and Far East) is a free float-adjusted market capitalization index that is designed to measure developed market equity performance, excluding the United States & Canada.

The EAFE consists of the country indices of 22 developed nations. 

The MSCI ACWI ex USA Investable Market Index (IMI) captures large, mid and small cap representation across 22 of 23 Developed Markets (DM) countries (excluding the United States) and 24 Emerging Markets (EM) countries. With 6,211 constituents, the index covers approximately 99% of the global equity opportunity set outside the US.

The MSCI Emerging Markets is designed to measure equity market performance in 25 emerging market indices. The index’s three largest industries are materials, energy, and banks. 

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The Bloomberg Barclays US Aggregate Bond Index is a broad-based flagship benchmark that measures the investment grade, US dollar-denominated, fixed-rate taxable bond market. The Bloomberg Barclays 1-3 Month U.S. Treasury Bill Index includes all publicly issued zero-coupon U.S. Treasury Bills that have a remaining maturity of less than 3 months and more than 1 month, are rated investment grade, and have $250 million or more of outstanding face value. In addition, the securities must be denominated in U.S. dollars and must be fixed rate and non-convertible. The ICE U.S. Treasury 7-10 Year Bond Index is part of series of indices intended to assess the U.S. Treasury market. The Index is market value weighted and is designed to measure the performance of U.S. dollar-denominated, fixed rate securities with minimum term to maturity greater than seven years and less than or equal to ten years. The ICE U.S. Treasury Bond Index Series has an inception date of December 31, 2015. Index history is available back to December 31, 2004. The Barclays Capital Municipal Bond is an unmanaged index of all investment grade municipal securities with at least 1 year to maturity. The Bloomberg Barclays US Mortgage Backed Securities (MBS) Index tracks agency mortgage backed pass-through securities (both fixed-rate and hybrid ARM) guaranteed by Ginnie Mae (GNMA), Fannie Mae (FNMA), and Freddie Mac (FHLMC). The index is constructed by grouping individual TBA-deliverable MBS pools into aggregates or generics based on program, coupon, and vintage. The Bloomberg Barclays U.S. Corporate High Yield Bond Index is composed of fixed-rate, publicly issued, non-investment grade debt, is unmanaged, with dividends reinvested, and is not available for purchase. The index includes both corporate and non-corporate sectors. The corporate sectors are Industrial, Utility and Finance, which include both U.S. and non-U.S. corporations. The Bloomberg Barclays U.S. A Corporate Bond Index measures the investment-grade, fixed rate, taxable corporate bond market. It includes USD denominated securities publicly issued by US and non-US industrial, utility, and financial issuers. Gold is subject to the special risks associated with investing in precious metals, including but not limited to: price may be subject to wide fluctuation; the market is relatively limited; the sources are concentrated in countries that have the potential for instability; and the market is unregulated. The LBMA Gold Price and LBMA Silver Price are the global benchmark prices for unallocated gold and silver delivered in London. SS&P GSCI Crude Oil is an index tracking changes in the spot price for crude oil. Investing in oil involves special risks, including the potential adverse effects of state and federal regulation and may not be suitable for all investors.

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Additional information, including management fees and expenses, is provided on our Form ADV Part 2 available upon request or at the SEC’s Investment Adviser Public Disclosure website. www.adviserinfo.sec.gov. Diversification and asset allocation do not ensure a profit or guarantee against loss. Past performance is not a guarantee of future results.