Cornerstone 1st Quarter 2026 Commentary

The Vagaries of War

“There’s no honorable way to kill, no gentle way to destroy. There is nothing good in war. Except its ending.” ~ Abraham Lincoln

“Terrorism is the war of the poor, and war is the terrorism of the rich.” ~ Peter Ustinov

“A bad peace is even worse than war.” ~ Tacitus

2026 opened in a very optimistic fashion! The market broadened, and equities once again moved higher. The market expected the Fed to continue lowering rates, albeit with a possible pause that would persist until a new Fed Chair was named in May. Then the tide turned. Much like last year with the onset of Liberation Day fears, the surprise bombing campaign initiated by the U.S. and Israel at the end of February sent markets into a tailspin.

A war with Iran was certainly not a prevalent prediction of any crystal ball we know! Oil prices rose, and both stocks and bond prices dropped. Yes, even bonds declined as inflationary fears interfered with the traditional safe haven status of U.S. Treasuries. The only traditional “safe haven” asset that held up during the volatile “conflict phase” of the quarter was the U.S. dollar which managed to rally a couple percentage points following the outbreak of the war.

The AI trade, which was already sputtering in early 2026, continued to lose steam with the onset of war and the broader economic and political concerns associated with it.  Energy prices rocketed higher, and the U.S. oil industry enjoyed a moment, albeit a brief one, in the sun! Iran responded, somewhat unexpectedly, by immediately closing the Strait of Hormuz, and overnight that somewhat obscure waterway half-way around the world became a household name here in the U.S. and across the globe. In fact, Americans are not only becoming conversant in the geography of the region, but they are also becoming all too familiar with the fact that approximately 20% of the world’s oil passes through the Strait of Hormuz.

As if that were not enough, more and more of us are becoming uncomfortably aware that a great deal of other important products pass through the Strait as well. Fertilizer, for one, along with various rare earths, petroleum distillates, and metals like aluminum, to name a few more. Situations like this make us uncomfortably aware how small the world really is and how, even in the 21st century, geography plays a critical role in global trade. Also, while we are on the subject of trade, our readers should be aware that there are other “choke points” around the world.

Just a few years ago when the Ever Given container ship ran aground, we learned how challenging it is for resources to divert around the Suez Canal. Few people really took much notice of the U.S. working to take a more active role in the Panama Canal to thwart Chinese influence in the Western Hemisphere and help ensure the functionality of that critical trade route. Bab el-Mandeb is another key strait that could end up being affected if this war with Iran persists, and, of course, the Strait of Malacca poses its own challenge for Asia.

While globalization has been in retreat since Covid, we remain heavily dependent on global supply chains for many products. Nearshoring and onshoring are both trends that we believe are here to stay, but regardless of how the U.S. and other countries work toward “safer” sources and less far-flung supply lines, we will remain highly dependent on the rest of the globe for the foreseeable future.

As previously noted, the market broadened out during the first quarter, and the Magnificent 7 faded along with the rest of the U.S. large cap growth universe. The Russell 1000 Growth Index was down nearly 10% for the quarter, a fact made more significant given the January and early February rally. The NASDAQ also declined significantly from its highs earlier in the quarter, and Microsoft dropped over 23%, its worst decline since 2008.

The first quarter of 2026 was definitely a quarter in which diversification paid off! Reminiscent of the era following the “Dot Com” bubble, the Russell 1000 Value Index was actually positive for the quarter, up 2.1% at the end of March. A 1200-basis-point differential in performance between the Russell 1000 Growth and the Russell 1000 Value represents nearly 400 basis points per year when one evaluates three-year performance history! What a difference a quarter makes. Growth is still outpacing value significantly over a three-year time frame, but with the first quarter decline, the five-year delta, which still contains the 2022 growth bust, is much tighter.

Small cap staged a bit of a comeback in the first quarter of 2026. The Russell 2000 Index fell in March but was slightly positive for the year, up just under 1%. Here, as in large cap, value handily outperformed growth. The Russell 2000 Growth Index declined by 2.81% while the Russell 2000 Value Index rose 4.96%.

The small cap rally during the third quarter of 2025 was largely a “junk” rally driven by low profitability stocks, many of them linked to the AI trade, but the current rally is broader, and the “quality” factor has moved back into favor. REITs also made something of a comeback in the first quarter of 2026. The NAREIT Index fell a bit in March but was up 3.76% for the first quarter.

Like U.S. equities, international equities began the year with a strong rally. In fact, 2025’s outperformance continued, but the war hit international markets hard with the MSCI EAFE Index falling over 10% in the month of March alone. Despite the hit, the MSCI EAFE Index was only down 1.24% during the entirety of the first quarter, outperforming both the Dow and the S&P 500.

The MSCI Emerging Markets Index ended the quarter down only 17 basis points, and international small cap was approximately in line with the MSCI EAFE Index for the quarter. Consequently, international equity was once again a solid benefit to portfolios. Gold dropped nearly 12% during the crisis period but is still up over 5% in 2026.

While not exactly a safe haven, fixed income markets did not fare too badly during the first quarter of 2026. The Bloomberg Aggregate Index was down just 5 basis points for the quarter. Yields rose and the yield curve steepened noticeably. As inflationary fears grow, the longer end of the curve continues to drift upward. The strong current yield helped buffer bond investors, but concerns are growing that the Fed may not cut rates in 2026 and may even be forced to hike rates before the end of the year.

The first quarter was volatile, and as of this writing, the market has snapped back in April. It would seem that market participants are already putting the war in the rearview mirror. We are not so certain. In short, three factors concern us: an oil supply shock, growing inflationary risk, and private credit.

Despite the ceasefire, the Strait of Hormuz remains closed to shipping, contributing to an oil supply shock. The longer this persists the greater the likelihood that various Gulf nations are forced to “shut-in” their production. Many are not aware that very little oil is stored in the Middle East. Most oil moves directly from the wells either to pipeline or ship. The ships in the Gulf are already full, and consequently, the pressure is growing as any remaining storage capacity is exhausted. A “shut-in” situation will further exacerbate future supply problems since wells cannot be brought back online immediately.

As the supply shock worsens, spot oil prices will climb, impacting global inflationary indexes like the CPI and PCE here in the U.S. Additionally, the futures market, which has been relatively benign, may begin to adjust to the reality of scarce oil over the next year or two. Rising oil prices and their corresponding impact on inflationary indexes around the world will most likely cause central banks to tighten monetary policy to help stave off inflation. Tighter monetary policy will slow or stop global economic growth. As the price of refined petroleum products like gas and other distillates rises, they pressure the remainder of the economy. Consumers’ discretionary income is sucked up by higher gas prices, and they have less money to spend on other goods and services. Higher oil prices act like a “brake” on the global economy. Taken in connection with tighter monetary policy, these two factors raise the probability of a near-term recession.

Our other concern, private credit, may seem a bit unrelated. However, whenever monetary policy tightens, recession risk rises, liquidity often begins to dry up, and risk assets reprice. Concerns have been growing that prices in the private credit market do not fully reflect the risk inherent in these assets. Additional pressure could lead to capital flight and a destabilization of private credit that could bleed into private equity and high-yield debt. “Contagion” is a scary word as many of us learned in 2008.

Currently U.S. GDP continues to grow, the job market remains relatively healthy, and consumers are still spending. All is not lost, but relying on the AI boom to keep everything running smoothly seems a bit naïve to us. Consequently, we will be retaining our overall target to fixed income as well as diversifying assets like REITs to help buffer potential equity volatility in the tech sector and beyond.

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For additional information about Cornerstone Management or this report, please contact Bryan Taylor or
Chad Crawford

770-525-8249
bryan@cornerstonemgt.net
chad@cornerstonemgt.net

Cornerstone Management Inc. is a Registered Investment Advisory Firm. Although the information in this report has been obtained from sources that the Firm believes to be reliable, we do not guarantee its accuracy, and any such information may be incomplete or condensed. All opinions included in this report constitute the Firm’s judgment as of the date of this report and are subject to change without notice. This report is for informational purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security. This report may only be dispensed with this disclosure attached.