Market Update – March 22nd, 2026

Over the past three weeks, markets have been navigating a complex backdrop driven by geopolitical escalations in the Middle East.  The rising uncertainty and disruption of shipping lanes have led to surging commodity prices, particularly in the important energy sector.  The second and third-order effects of these rising costs have resulted in higher gas prices, heightened inflation expectations, higher interest rates, and a shifting narrative around the Federal Reserve’s next move in monetary policy.

In response to these concerns, investor sentiment has weakened around global equities.  US markets have dropped in four straight weeks with the S&P 500 pulling back nearly -7% from its all-time closing high made on January 27^th, 2026.  The Dow Jones Industrial Average and NASDAQ Composite are likewise down and near the -10% correction level.  US Small-caps are in that correction territory with the Russell 2000 down over -10% from recent highs, as smaller companies face heightened sensitivity to rising borrowing costs and slowing consumer demand.¹ 

International markets, the leaders in 2025 and early 2026, have struggled even more, with European markets weighed down by their greater direct exposure to elevated energy prices and the economic spillover from a geographically closer conflict.  Asian markets, highly reliant on Middle East energy imports, are also down, with Japan and South Korea as notable laggards.  The MSCI EAFE and MSCI EM Indexes, representing developed and emerging countries, respectively, are each down over -10% from recent highs.²

For the year, global stocks are modestly negative overall.  The S&P 500 is down -4.68% year-to-date through 3/20/26.   The Russell 2000 Index has fared slightly better and is down only -1.52%.  International stocks are down -3.05%.  There are pockets of strength and weakness in the market.  The Energy sector is up +32.77% on the year while traditional Value sectors like Consumer Staples, Utilities and Industrials are also positive.  On the downside, Technology and Financials have lagged, the sectors are down -8.36% and -10.37% respectively.³

Beneath the surface, market breadth has been even weaker, with the average stock experiencing much deeper drawdowns than headline indices suggest⁴:

Bonds have come under the pressure of rising interest rates on the heels of inflation fears.  Instead of falling, as is often the case during geopolitical turmoil, the 10-year US Treasury yield has risen from 3.96% at the end of February to 4.39% as of last week due to the inflationary shock.  The Bloomberg US Aggregate Bond Index has fallen over -2% since the conflict began and is now down -0.68% on the year.⁵

Within this update, we want to frame the key developments across the Middle East conflict and its effect on interest rates, inflation expectations, the Federal Reserve and the broader economy.

The US-Iran Conflict

Now in its fourth week, the conflict has escalated well beyond initial expectations.  Iran has responded with waves of attacks targeting Israel, US military bases across the region, and countries that host US forces.  The Strait of Hormuz, where 20% of global oil and liquified natural gas transits, has been effectively closed by Iran.  The US has requested assistance from allies to militarily assist with opening the Strait but has thus far not made much progress there.

While President Trump stated after market-close on Friday that the administration is considering “winding down” military efforts, citing progress in degrading Iran’s military capabilities, he also ruled out a ceasefire and raised the stakes further over the weekend by threatening to strike Iranian power plants unless the Strait of Hormuz was reopened within 48 hours.

Outside of the scope and scale of the conflict itself, markets have become particularly unsettled by the absence of a clear and coherent plan from the US.  Mixed signals from leadership such as threatening to strike Iranian power plants one day while floating a wind-down the day before, generally unclear objectives and benchmarks for de-escalation and public criticism of allies’ participation, have made it difficult for investors to price outcomes with any confidence.

Markets can absorb bad news and look forward but what they struggle with most is uncertainty, and the unpredictable communication has amplified that uncertainty considerably.  Until a clearer endgame emerges, this policy noise is likely to remain a headwind for risk assets.

Energy Markets

The most immediate and consequential market impact of the conflict has been on global energy supplies.  Iran has declared the strait closed as a strategic pressure point, threatening to attack any vessels attempting passage. At least 200 tankers are stranded, and daily transits through the strait plunged from approximately 24 vessels/day to nearly zero.^6,7

The market consequences have been significant, most notably in oil markets.  Brent crude oil surged from approximately $72/barrel before the conflict to nearly $120/barrel at its peak intraday on March 9^th, the highest level since 2022.  Brent Crude is nearly $112/barrel now.  Prices have remained elevated as the Strait closure has forced producers to curtail output, with storage filling and limited alternative export routes available.⁸

The US consumer will feel this impact most heavily at the gas pump.  US national average gas prices have risen from $2.934/gallon one month ago to $3.942/gallon.⁹  Diesel prices have increased even more.  Gas and diesel prices impact not only consumer sentiment through the pump but also raise costs across food and transportation, which ultimately filter through to broader consumer prices.

The US has floated and implemented some measures to reduce energy prices, although these can be best described as a “band-aid” or short-term relief measures that do little to address the underlying supply disruption.

Inflation’s Renewed Upside Risk and the Fed

The energy shock has materially changed the inflation outlook in the short-term. Heading into 2026, inflation had been moderating steadily, with Core PCE hovering around 3% annualized.¹⁰  This conflict has thrown inflation’s trajectory into question, causing economists to raise their inflation forecast for the US in 2026.

The backdrop bears some resemblance to the 2022 environment, when the Russian invasion of Ukraine triggered energy and commodity shocks that stoked already-elevated inflation.  Today’s starting point is different in a good way in that inflation is well below its 2022 peak and the Fed has already successfully reduced rates, but the re-emergence of energy-driven inflationary pressure is a risk that had largely been set aside.

The Producer Price index reading for February came in hotter than expected¹¹, and markets have begun to sharply curtail expectations for rate cuts this year, and even began pricing in the possibility of rate hikes as the inflation outlook has deteriorated.

At its March meeting last week, the Fed held the federal funds rate unchanged at 3.50% – 3.75%.  The decision was widely expected, continuing the pause that began in January following three consecutive 0.25% rate cuts in the fall of 2025.  The FOMC’s statement directly acknowledged the conflict for the first time, noting that “the implications of developments in the Middle East for the US economy are uncertain” and that the Committee remains “attentive to the risks to both sides of its dual mandate.” ¹²

In his press conference, Chair Powell acknowledged that inflation progress has been slower than hoped and he emphasized that the Fed is well positioned to respond as the situation develops: “The thing I want to emphasize is nobody knows. If we have a long period of much higher gas prices, that will weigh on consumption, but we don’t know if that will happen.”¹³

According to the Fed’s “Dot Plot” from the recent meeting, the committee still forecasts to cut rates once this year, but the bond market has priced that out of its expectations due to the uncertainty.¹⁴ The Fed Funds Futures Markets are now pricing in stable Fed Funds rate out until September 2027.¹⁵

The idea of a reversal in the expected path of monetary policy has added to the angst in the market, particularly for rate sensitive areas, such as small-cap stocks. 

Going Forward

US markets have displayed resilience throughout this conflict, in our view.  US stocks have absorbed a significant geopolitical shock with a modest decline thus far.  As of the end of last week, the S&P 500 stands at a 6,500 level that has served as support during recent pullbacks.  The CBOE Volatility Index (VIX) remains elevated at 26.78, reflecting above-average uncertainty but far from panic-level readings.¹⁶   We view these developments as an inflation-shock more than a growth shock which is a positive for the market in the long-term.  Although forecasts for a US recession are rising, the economy and market fundamentals remain on solid footing.

We will continue to monitor the key variables for the conflict:

• Duration of the conflict and the reopening of the Strait of Hormuz.  This single variable is the most consequential for energy prices and the inflation outlook.  Even a partial resumption of tanker traffic could significantly ease market anxiety.

• The trajectory of energy prices and inflation expectations.  Markets are currently pricing in an energy shock that is painful but manageable.  If oil prices move higher and stay there, the risk of a more damaging scenario increases.

• The Federal Reserve’s response.  The Fed’s “wait-and-see” posture is appropriate given the uncertainty, but a prolonged energy shock could force difficult choices between supporting growth and containing inflation.

• Diplomatic off-ramps. Signaling of a potential wind-down of military operations introduces the possibility of a de-escalation scenario that could sharply reverse recent moves in energy prices and market volatility.

Geopolitical events of this magnitude can feel overwhelming in the near term, and it is natural for investors to feel unsettled.  However, markets have consistently demonstrated resolve through periods of geopolitical stress, often recovering ahead of the news cycle.  We continue to emphasize balance and diversification in portfolios that helps in times of volatility like these, and we are always looking for opportunities from market dislocation. 

As always, if you have any questions or concerns, please do not hesitate to reach out to our team.

Footnotes:

1. Morningstar Direct Data
2. Morningstar Direct Data
3. Morningstar Direct Data
4. Morningstar Direct Data
5. Morningstar Direct Data
6. Reuters https://www.reuters.com/business/energy/hormuz-shutdown-worsens-after-us-hits-iranian-warship-tankers-stranded-fifth-day-2026-03-04/
7. Yahoo Finance https://finance.yahoo.com/news/passage-denied-hormuz-shutdown-keeps-112824186.html?guce_referrer=aHR0cHM6Ly93d3cuZ29vZ2xlLmNvbS8&guce_referrer_sig=AQAAACLRtJvDcXTkvbZAiyw3ajEfW3Pfv3iS4xW63CqSpmV30KFD4yd9oP2B3ZkXlHesZj2D01oXJ5tWett2ZVm9o8ri_wpjwTfL4TLfRc06hlMUllMLZyyWT7cGRLLQg9s9QycZOMzDwFAyRV3Q7wrHuRdZPsPNVnEzghArjpGYhcpl
8. Trading Economics https://tradingeconomics.com/commodity/brent-crude-oil
9. AAA https://gasprices.aaa.com/
10. FRED St. Louis Fed https://fred.stlouisfed.org/series/PCEPILFE
11. Reuters https://www.reuters.com/business/us-producer-prices-surge-february-services-2026-03-18/#:~:text=In%20the%2012%20months%20through,%E2%80%8Bin%20the%20monthly%20PPI.
12. Federal Reserve https://www.federalreserve.gov/newsevents/pressreleases/monetary20260318a.htm
13. Federal Reserve https://www.federalreserve.gov/mediacenter/files/FOMCpresconf20260318.pdf
14. Federal Reserve https://www.federalreserve.gov/monetarypolicy/files/fomcprojtabl20260318.pdf
15. CME Group FedWatch https://www.cmegroup.com/markets/interest-rates/cme-fedwatch-tool.html
16. Morningstar Direct Data

The views expressed herein are those of John Nagle on March 22^nd, 2026 and are subject to change at any time based on market or other conditions, as are statements of financial market trends, which are based on current market conditions. This market commentary is a publication of Kavar Capital Partners (KCP) and is provided as a service to clients and friends of KCP solely for their own use and information. The information provided is for general informational purposes only and should not be considered an individualized recommendation of any particular security, strategy or investment product, and should not be construed as investment, legal or tax advice. Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment or strategy will be suitable or profitable for a client’s investment portfolio. All investment strategies have the potential for profit or loss and past performance does not ensure future results. Asset allocation and diversification do not ensure or guarantee better performance and cannot eliminate the risk of investment losses. The charts and graphs presented do not represent the performance of KCP or any of its advisory clients. Historical performance results for investment indexes and/or categories, generally do not reflect the deduction of transaction and/or custodial charges or the deduction of an investment management fee, the incurrence of which would have the effect of decreasing historical performance results.  There can be no assurances that a client’s portfolio will match or outperform any particular benchmark. KCP makes no warranties with regard to the information or results obtained by its use and disclaims any liability arising out of your use of, or reliance on, the information. The information is subject to change and, although based on information that KCP considers reliable, it is not guaranteed as to accuracy or completeness. This information may become outdated and KCP is not obligated to update any information or opinions contained herein. Articles herein may not necessarily reflect the investment position or the strategies of KCP. KCP is registered as an investment adviser and only transacts business in states where it is properly registered or is excluded or exempted from registration requirements. Registration as an investment adviser does not constitute an endorsement of the firm by securities regulators nor does it indicate that the adviser has attained a particular level of skill or ability.