Weekly Newsletter: March 23, 2026
Winter has officially ended, and Spring has sprung. Looking at the markets, there remains a serious chill in the air. Higher energy prices make taming that chill much more expensive. The markets remain hyperfocused on energy prices. Questions are now being asked about how high oil prices can go. The concern is creeping into the bond market as yields are rising due in large part to the worries about how severe the impact will be to US prices and the ensuing inflation data in the months to come. The longer the strain continues, the longer the impact will be in getting back to “normal”. Some of the inflation concerns were addressed by Fed Chair Powell in his press conference, essentially saying that it is too early to tell the overall impact. That was not what the markets wanted to hear, and rates rose, stocks fell on the news. One thing to note on the Fed and interest rates, cutting or raising rates will not create more oil. What remains the great unknown is how/when the strait reopens for tanker traffic. Unfortunately, there will be little economic news in the coming week to refocus investors. There will be plenty of Fed governors chatting about their views on inflation and the impact of higher energy prices.
For the fourth week in a row, the markets traded lower, coinciding with the war in Iran. Investor sentiment, not surprisingly, has turned sour. The only data point that was discussed this past week was the producer price index, which came in higher than expected due in large part to higher food prices. The worry is that this will, eventually, flow into consumer prices in another month or two. Piling on top of that would be the early stages of energy price increases at the pump, which have increased by a full dollar since the lows of early January. Since the Fed meeting, there has been a meaningful shift in the Fed Fund futures, from a possible cut by year’s end to one, maybe two rate HIKES this year in response to higher inflation. The Fed’s balance sheet received little attention, but it is at its highest level since last July and is now increasing at a 6% clip since Thanksgiving. What the Fed has been doing is buying bonds and putting cash into the financial system. Whether it is needed or not remains a vibrant debate, but the extra money is meant to keep the financial markets from seizing up.
What has been a slow grind higher in interest rates has become a strong move higher in yields and lower in bond prices. The two-year yield is now above the Fed Funds rate, and the 10-year is at its highest level in nearly a year. As expectations for an interest rate hike get ingrained in the market, the current yield on treasuries looks fair. Assuming inflation does pick up, and the economy slows; various models would put a fair yield on the 10-year at 4% vs. the 4.4% in the market today. Momentum in both stocks and bonds will tend to push each to extremes. Given the news of the past few weeks, interest rates could rise further before falling back toward a 4% level later in the year. The shape of the yield curve is beginning to flatten again, a sign of rising worries about an economic slowdown. This could, if true, push interest rates lower if a recession becomes a “base case” for investors.
The relative calm of the averages is hiding deterioration below the surface. Today, only half of the industry groups are above their long-term average price; six weeks ago, it was nine of ten. Momentum is clearly on the downside, but for how much longer? Using valuations as a metric, the markets remain expensive, and further downside is possible over the course of the year. Looking at momentum, it can be argued that the markets are due for a bounce. Many of the readings on industry groups (outside of energy) indicate that the next six months could be higher, with energy likely to be lower. The momentum models are not yet at “historic” low readings, but are quickly getting there, meaning another couple of weeks of pain may be ahead before we get to the gain. What has been surprising in this market is that the “traditional” safe havens of consumer staples, utilities, and healthcare have not done well over the past month. There may not be much spring in the step of the markets right now, but they could be getting coiled to pounce come the warmth of summer.
Another geopolitical week, as little economic data is set to be released. Fed governors will be listened to closely for their thoughts on inflation, transitory or more ingrained in the economy.
The opinions expressed in the Investment Newsletter are those of the author and are based upon information that is believed to be accurate and reliable but are opinions and do not constitute a guarantee of present or future financial market conditions.