The first quarter of 2026 ended with one dominant storyline: the conflict involving Iran and the ripple effects it created across energy markets, inflation expectations, and the consumer. Markets were reminded that some of the most important risks do not begin in earnings reports or Federal Reserve meetings. They begin in the real world, where geopolitical events can quickly work their way into portfolios, gas stations, and household budgets. Even after a sharp rally on March 31, the S&P 500 finished the quarter down 4.6%, the Dow was lower by 3.6%, and the NASDAQ fell 7.1%.
Oil and the Iran Conflict
What made this quarter different was the speed of the events percolating into the financial markets. The Strait of Hormuz, which handles about 20% of global oil and LNG transport, became the focal point of the global economy. As supply disruptions mounted, oil prices surged and analysts sharply revised their 2026 oil forecasts higher. Reuters reported that oil benchmarks rose roughly 60% from late February through quarter-end, while Brent crude briefly traded well above $100 per barrel. In other words, the market was not simply reacting to headlines. It was reacting to the possibility that a major energy artery of the global economy had become impaired.
That matters because oil is not just another commodity. It is an input cost that touches nearly every corner of the economy. When oil rises sharply, it tends to push higher not only gasoline prices, but also diesel, shipping, airline costs, manufacturing inputs, and eventually the prices consumers pay for a wide range of goods and services. Energy shocks have a way of rippling outward. They begin at the pump, but they rarely end there. That is what makes this quarter’s move in oil more important than a simple commodity story. It has the potential to become an inflation story, a consumer story, and ultimately a Federal Reserve story.
The Consumer Feels It First
Consumers are already feeling that pressure. The national average price of gasoline moved above $4 per gallon on March 31 for the first time since 2022, after jumping sharply in March. Gasoline has a way of hitting confidence differently than other prices because it is visible and frequent. People may not notice every change in the cost of a basket of goods, but they do notice the number on the gas station sign every week. Picture yourself in your car, driving down any main street in any local town. What is the single sticker price that is always font and center? The price per gallon of gas. No other price measure is as visible to the American consumer than the price of gasoline ($0.99 cheeseburgers? Those days are gone). When that number rises quickly, it can weigh on sentiment even before broader inflation data moves materially higher.
US Gasoline Price 32-Day Change (%)
Inflation: Cooling, but Vulnerable
The inflation backdrop was already somewhat unsettled before the latest oil spike. The Fed’s preferred inflation gauge, the Personal Consumption Expenditures Price Index, rose 2.8% year over year in January. CPI for February showed headline inflation at 2.4%. That is a dramatic improvement from the peaks we experienced in 2022, but it is still not all the way back to the Fed’s 2% target. Said differently, inflation had cooled, but it had not fully healed. The latest energy shock arrives at a time when inflation progress has already become slower and less linear than many had hoped. The next reports for PCE will bring February data (April 9) while CPI will bring March data (April 10). The Iran conflict began on February 28th, and this is important to note as it we will not see oil’s impact on these figures for several months. And potentially longer, depending on how long oil prices remain elevated.
This is where the distinction between CPI and PCE still matters. CPI tends to be the figure most people see quoted in the press, but PCE remains the Fed’s preferred measure because it better adjusts for how consumers actually change spending patterns over time. Even so, both measures were telling a similar story heading into quarter-end: inflation had improved materially from the worst of the post-pandemic surge, but the final stretch back to 2% was proving more difficult. The concern now is that a prolonged rise in oil prices could interrupt that final stretch, especially if higher energy costs begin spilling into services, transportation, and household inflation expectations.
Inflation expectations are often where a temporary shock can become a broader problem. Consumer one-year inflation expectations rose to 5.2% in March, the highest since May 2025. Kansas City Fed President Jeff Schmid warned against complacency, noting that inflation had already been running near 3% before the latest oil shock and that progress toward 2% had stalled. That does not mean the Fed is about to react aggressively to one month of higher energy prices, but it does mean policymakers are watching carefully for signs that a supply shock is spreading into broader behavior. Chair Powell did comment that he believed inflation was in check and that, currently, higher oil prices did not necessitate increasing policy rates. However, there is the unknown of what future economic effects may bring. Once households and businesses begin expecting higher inflation, wage demands, pricing behavior, and long-term contracts can all start moving in that direction.
The Fed’s Dilemma
For now, the Fed appears inclined to be patient. At its March 18 meeting, the Federal Open Market Committee held the federal funds rate steady at 3.5% to 3.75% and reiterated that it would carefully assess incoming data and the evolving balance of risks. That cautious posture makes sense. The Fed cannot produce more oil or reopen shipping lanes. Monetary policy is a blunt tool for a supply shock. Raising rates into an energy-driven inflation burst would risk worsening growth without necessarily solving the underlying problem. On the other hand, if high oil prices persist long enough to push broader inflation higher, the Fed may have less room to ease than markets had previously expected.
Labor Market and Consumer Resilience
That tension places the consumer squarely at center stage. The labor market is no longer as strong as it was a year ago, even if it has not broken. February non-farm payrolls fell by 92,000 and the unemployment rate held at 4.4%. Job openings dropped to 6.882 million in February, while hiring declined to 4.849 million, the lowest level since the pandemic-era freeze in 2020. This is not a classic recessionary labor market with broad-based layoffs, but it is a softer one, and softer labor conditions reduce the consumer’s margin for error at precisely the time that gasoline and energy costs are moving higher.
Consumer confidence captured some of that tension in March. The Conference Board’s index rose modestly to 91.8, but the details beneath the surface were mixed. The present situation index improved (123.3), while the expectations index fell to 70.9, a level that historically reflects caution about the future. In practical terms, households seem to be saying two things at once: conditions today are still manageable, but the road ahead looks less certain. The consumer has not rolled over, but rising fuel prices, softer hiring, and sticky inflation are all moving in the wrong direction at the same time.
There is still an important counterpoint to all of this: the consumer has not stopped spending. Retail sales rose 0.6% in February. That suggests households came into the latest geopolitical shock with some resilience, but this figure also reflects the month prior to the beginning of the conflict. It also helps explain why the economy has not slipped into recession despite softer payroll growth and a slower labor market. Consumers are still spending, but the risk is that higher fuel and energy bills start crowding out more discretionary categories over time. A family can absorb higher gasoline costs for a month or two. It becomes more difficult if those costs linger while labor income becomes less secure. Another wild card to add is potentially stimulus to the consumer’s pocketbook from tax law changes. While most consumers are still completing their annual filing, this will be a key piece of data to watch albeit short-term stimulus.
Growth Is Slowing
Economic growth had already slowed before the March energy shock. The second estimate for fourth-quarter 2025 GDP showed growth at an annualized rate of just 0.7%, down sharply from 4.4% in the third quarter. That does not mean a recession is here, but it does mean the economy entered this quarter with less momentum than many investors may have realized. We should not forget the government shutdown in the 4th quarter as this adversely impacted GDP, to the tune of 1.5% annually, according to Brookings. But an energy shock landing on top of slower growth is precisely why markets have become so sensitive to oil. It is one thing for higher energy prices to arrive when growth is running hot. It is another when the economy is already cooling. The chart below highlights just how important consumer spending has been in propping up GDP.
Markets and the Road Ahead
Financial markets reflected that concern for most of March. Treasury yields moved higher during the quarter as investors re-priced inflation risk and dialed back expectations for Fed rate cuts. Equities, especially growth and large-cap technology stocks, struggled under the weight of higher oil, higher yields, and renewed uncertainty. The NASDAQ entered correction territory before quarter-end, and by the final week of March the market had begun trading as if oil were the single most important variable in the outlook. Then, on March 31, stocks staged a powerful rally as optimism grew that the conflict might de-escalate. That rally was a useful reminder that today’s market is extraordinarily headline-sensitive. It also reinforced a larger point: the market can reprice very quickly in both directions when investors believe the oil story is changing.
Source: https://www.reuters.com/world/asia-pacific/global-markets-trading-day-graphic-2026-03-31/
Where does that leave us as we move into the second quarter? In my view, the path of oil matters more than almost anything else right now. If the conflict de-escalates and energy prices begin to normalize, some of the inflation pressure may fade faster than feared, the consumer may remain resilient, and the Fed could retain flexibility. If oil stays elevated or moves higher, the spill over into inflation expectations and household budgets may become much more problematic. In that case, the Fed could remain constrained, the consumer could slow more meaningfully, and growth could come under additional pressure. There is another layer to add here when viewing the historical pattern for the second and third quarters in the second year of a presidential term, as mid-terms approach. As the chart indicates below, the 2nd quarter of the second year of the presidential term has only been positive 47% of the time and on average the market is lower by 2.8%. The 3rd quarter has also been soft, historically, with the market up 63% of the time and +0.20% on average. However, that trend breaks after mid-terms with the 4th quarter positive 84% of the time with an average gain of 6.6% and continues into the third year of the presidential term.
Investor Takeaway
In closing, I would remind you that markets do not wait for certainty, and neither should long-term investors. The headlines this quarter were serious, and the economic ripple effects are real. But a difficult quarter, even one driven by war and energy shocks, is not a reason to abandon a disciplined investment approach. Volatility is the admission price for long-term investing. Sometimes that volatility comes from the Fed, sometimes from the economy, and sometimes from events far beyond our borders. The challenge is not to predict every headline correctly. The challenge is to remain grounded when the headlines become uncomfortable. Diversification still matters. Discipline still matters. And staying invested with a strategy built for periods like this still matters most of all.
If you have any questions or would like to discuss your personal circumstances, please do not hesitate to reach out to me. Thank you for your continued confidence.
Rob Leiphart, CFP®
203-220-6474
rleiphart@rbcapitalmanagement.com