ECONOMIC AND FINANCIAL MARKET UPDATE - MARCH 2026
- 7 days ago
- 9 min read
Updated: 3 days ago
Recent Market News
In recent weeks, equity indices have experienced heightened volatility as the markets grapple with the potential duration and economic impact of recent geopolitical events. As of March 23rd, the S&P 500 and Nasdaq have extended their year-to-date declines, now down -5.70% and -8.40% from their respective highs, while a strengthening U.S. dollar — supported by rapidly rising oil demand — has compounded the downward pressure on foreign markets.1 Unsurprisingly, the Federal Reserve voted to hold interest rates steady at 3.5%-3.75% in March following a flurry of geopolitical events and mixed economic data signals which further clouded the economic outlook. Despite the harrowing headlines, the U.S. economy remains on fundamentally sound footing, though this recent oil price shock will be the next test of its resilience.
Throughout the 2020s, the U.S. economy has weathered pandemic induced supply chain disruptions, soaring inflation, monetary tightening, regional bank failures, and tumultuous trade policy.2 In recent weeks, the escalation of the Iranian conflict has quickly pushed oil prices (WTI) from $62-$65 per barrel in February to over $88 per barrel as of the time of writing. It is too soon to estimate the scope and duration of the impact on the broader economy. As additional oil and gas facilities across the region are damaged the Strait of Hormuz remains impassable, the risk of a prolonged period of elevated oil prices increases considerably. Persistently high oil prices generally exert downward pressure on consumer spending and employment, and upward pressure on inflation; a combination of risks which could slow broader economic growth. While we acknowledge this risk, we believe the U.S. is better equipped to withstand oil shocks than in prior decades.
With headlines driving consumer sentiment to abysmal levels in recent years on fears of recession or stagflation, it is important to contextualize the current economic environment when drawing historical parallels. Following Russia's invasion of Ukraine in early 2022, oil prices quickly spiked from $93 per barrel to above $123 per barrel which coincided with a bear market in stocks from January through October of 2022 but did not precipitate a recession. We believe this is because the broader economy was on significantly firmer footing than it had been during the oil crises of 1973 and 1978, to which such situations are often compared. Ahead of the October 1973 OAPEC oil embargo – when oil prices nearly quadrupled – underlying inflation and employment trends were already running considerably hotter than in recent years. In 1971-1972, core PCE was between 2.3-5.2%, peaking at 11.9% Q3 1974 and unemployment was between 5.2-5.9% throughout the same period, ultimately spiking to 9.0% in May 1975. In the subsequent period between 1975 and 1977, Core PCE and unemployment remained very elevated within ranges of 4.9-8.1% and 6.8-9.0%, respectively.3 The 1978 oil crisis stemming from the Iranian Revolution prompted widespread fears of supply disruption and speculative hoarding, further exacerbating underlying economic issues.4 As core PCE peaked at 10.2% in the first quarter of 1980, Volcker’s Fed began aggressively but inconsistently tightening monetary conditions, increasing the fed funds rate from approximately 11% to over 19% by June 1981, which proved successful in combating inflation but pushed the economy into a recession from July 1981 to November 1982 when unemployment reached a peak of 10.8%.5
Today, the United States is far more insulated from disruptions in oil markets. As a net energy exporter and the world's largest producer of oil and natural gas, the U.S. is now energy-independent and has a significant domestic buffer that did not exist in the 1970s. Additionally, energy intensity – energy consumption per unit of GDP – is much lower than in prior decades, meaning that the effect of price shocks on economic output will likely be less severe. This is largely due to improvements in energy efficiency and a significant shift toward a service-based economy, though it is worth noting that the ongoing data center buildout will increase energy demand in coming years. Consumers are similarly insulated, as gasoline and energy products as a percentage of personal consumption expenditures has declined meaningfully since the 1970s to 1.9% in January compared to over 6% following the 1978 crisis.2 Even so, we acknowledge that rising oil prices are likely to weigh on consumer sentiment/confidence, with the inflationary impact disproportionately affecting middle and lower-income households.
Inflationary Environment
Current inflationary readings are a far cry from the double-digit levels that defined the 'stagflationary' period of the 1970s; however, the divergence in the most recent readings of the Consumer Price Index (CPI) and Personal Consumption Expenditures (PCE) may complicate the Federal Reserve's monetary policy trajectory – especially as the inflationary effect of rising oil prices is not yet reflected in either measure.
For February 2026, core CPI – which excludes food and energy – continued its gradual decline to 2.5% year-over-year as expected, marking the lowest reading since March 2021. Meanwhile, core PCE – also excluding food and energy – was 3.1% y/y for January 2026, higher than expectations of 2.9%, marking the highest reading since March of 2024. This dispersion is attributable to methodological differences in both data sourcing and category weightings. CPI is derived from a household survey capturing direct out-of-pocket costs, while PCE draws from a broader set of sources to include all goods and services consumed by households, regardless of who bears the cost. This distinction is most visible in healthcare, where PCE captures employer-sponsored insurance and government program expenditures; increases in insurance premiums and healthcare labor costs appear in PCE which do not affect CPI. Additionally, shelter costs – which carry nearly a double weighting in CPI compared to PCE – have moderated as monthly rent increases have slowed to their lowest pace since January of 2021.6,7,8 Though both metrics remain above the Fed’s stated 2% target, wages continue to rise faster than prices, with average hourly earnings up 3.84% y/y in February.9
Labor Market
Against the backdrop of geopolitical uncertainty and a nuanced inflationary outlook, the U.S. labor market has remained relatively stable. The most recent unemployment figure was 4.4% and has remained within a range of 4.1%-4.5% since June 2024, below the historically healthy threshold of 5% and the long-run (1948-2026) average of 5.66%.
Nonfarm payrolls have been subject to significant noise in recent months due to delayed reporting following the government shutdown, the annual benchmark revisions based on tax filings, and changes in the backward looking birth-death model used to estimate the impact of newly created firms or firms which have shut down that are not captured in the monthly survey data. For 2025, the revisions implied an average monthly gain of +49k vs an average monthly gain in 2024 of 168k, however, the impact of tightened immigration policy has also materially lowered the monthly payroll number needed to maintain a stable unemployment rate, i.e., as labor-force growth slows, the economy requires fewer payroll jobs to remain in balance, reflecting a smaller workforce rather than a materially weakening labor enviornment. The Federal Reserve Bank of Dallas now estimates a breakeven rate of approximately +30k, meaning that more moderate payroll gains are sufficient to maintain a stable and balanced labor market.10,11
In contrast to the payrolls noise, initial jobless claims – which offer an additional metric to more frequently track the health of the labor market – have remained consistently below the long-run (1967-present) average of 361k. For the week ending March 14th, initial claims were 205k, better than estimates of 215k and lower than the 4-week average of 211k. Continuing jobless claims (workers still receiving benefits after the first week) were 1,857k for the week ending March 7th, higher than estimates of 1,850k, though lower than Q2-Q4 2025 levels.11 We continue to montitor these metrics weekly as an early indicator of labor market weakness.12
Economic Growth
Fourth Quarter 2025 real gross domestic product increased at an annual rate of only 0.7%, lower than the initial estimate of 1.4%. Growth in the fourth quarter was primarily driven by increases in consumer spending and investment, which were partially offset by a 16.7% decline in government spending due to October’s record 43-day government shutdown. The Bureau of Economic Analysis estimated that this reduction in government spending likely subtracted about 1.0% from the Q4 result, materially distorting the reported figure. We expect an offsetting improvement in the first quarter of 2026 as government appropriations resumed and furloughed employees received back pay. Despite this softer-than-expected Q4 result, annualized GDP for 2025 was 2.1% y/y.13
As of March 19th, the Atlanta Fed GDPNow model estimate for GDP growth in first quarter of 2026 is 2.33%, supported by improvement in consumer spending, non-residential investment, private inventories, and government spending. Recent declines are attributed to a downward revision to consumer spending (still positive) and a decline in new home sales which negatively impacted domestic investment. The ‘Blue Chip’ institutional consensus has broadened moderately due to recent uncertainty but remains positive with the average near 2.5%.14
Our Thoughts
We anticipate that the market will continue to “climb the wall of worry” as it has throughout previous geopolitical events and conflicts. As of March 23rd, the S&P 500 is off -5.70% from its record high close which occurred on January 27th, 2026, while the technology-heavy Nasdaq is off by -8.40% from its record close on October 29th 2025. As we have often emphasized, the U.S. economy and markets have displayed remarkable resilience, particularly considering recent developments. Nevertheless, we continue to anticipate heightened volatility – regardless of geopolitical events – following three consecutive years of double-digit S&P 500 total returns (+26.29% in 2023, +25.02% in 2024, and +17.88% in 2025).1 If the conflict in Iran proves to be short-lived, meaning that oil prices remain elevated for a period of weeks or a few months, we will have greater confidence in current forecasts for continued corporate profit and margin growth this calendar year. FactSet consensus estimates have continued to improve, with full-year 2026 earnings growth for the S&P 500 currently projected at 17.14%.1 It is not the duration of the conflict itself that matters; rather, the duration of elevated oil prices – a calloused economic reality.
As stated in recent communications, we remain constructive on the long-term trajectory of the U.S. economy and encourage investors to focus on the meaningful improvements in productivity in recent years. Since 2020, productivity has annualized at 2.2% – the strongest rate recorded since the internet boom of the 1990s and well above the 1.4% average recorded between 2006 and 2018.15 Output per hour across non-farm business has accelerated meaningfully relative to its pre-pandemic trend, driven by two powerful megatrends. First, the onshoring and reshoring of domestic manufacturing is expanding the production capacity of the economy while consolidating/strengthening supply chains. Notably, manufacturing sector productivity posted its largest annual gain since 2010, increasing 1.9% in 2025.16 Second, the infrastructure buildout and increasing adoption of artificial intelligence technology across sectors is beginning to translate into measurable efficiency gains. Against this backdrop, we anticipate continued productivity growth in coming years.
We will continue to look through the “fog of war” and remain focused on diversification, balance, and opportunity. Thus far, the market pullback has not been significant enough to prompt allocation changes in client portfolios in accordance with client investment policy statements. If a deeper correction occurs, we will opportunistically make adjustments where appropriate. We remain focused on monitoring the price of oil and impact that it has on corporate profits and margins, as well as consumer sentiment and spending trends. Stay tuned.
As always, we believe patience, discipline, and maintaining a long-term perspective are of critical importance to achieving long-term growth of principal and income. We highly value your relationship and thank you for the trust you place in our team. We look forward to engaging with you throughout the year.
Sources
1 FactSet Research Systems, Inc
Disclosures
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