NEWS & INSIGHTS  |  FIRST QUARTER 2026

Sand in the Gears

April 2, 2026

By Mark Oelschlager, CFA

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This is Spring Break season with youngsters heading to the beaches in search of nice weather and a good time.  While there were surely many who traveled south on previous spring vacations, the tradition of Spring Break began when a Colgate University swim coach in the 1930s decided to take his team to Fort Lauderdale for some extra training.  Various books and movies in the ensuing decades contributed to the growth of the trend, and by the 1980s approximately 300,000 students were descending upon Fort Lauderdale every year!  As you can imagine, this led to some problems for the town, and the state of Florida increased its drinking age from 18 to 21.  In a few short years the number of college students choosing Fort Lauderdale as their Spring Break destination fell by 90%, as they opted for more accommodating destinations.

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Another region with an abundance of sand, the Middle East, took center stage in the first quarter.  The US’s attack on Iran led to the latter effectively closing the Strait of Hormuz, cutting off 20% of the world’s oil supply.  With transportation hindered, the key players in the region slowed or stopped production.  This supply shock caused the price of oil to almost double, reaching well over $100 per barrel.  Not surprisingly, energy stocks were strong performers for the three months, but the conflict threw sand in the gears in many parts of the global economy and markets.

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With all that has gone on, it’s easy to forget that commodity prices plummeted when Kevin Warsh was announced on January 30 as the new chair of the Federal Reserve.  Given President Trump’s outspokenness on the Fed needing to adopt easier monetary policy, expectations were that he would select a “dove” to fill Jerome Powell’s seat when his tenure as chair ends.  While not necessarily a “hawk,” Warsh is seen as a more moderate choice and one who has spoken about the need for quantitative tightening (albeit coupled with lower short-term interest rates).  This led to a reversal of the highly levered trades that anticipated a continuation of favorable conditions for commodities.  Gold, which had risen by 25% in the first four weeks of the year, fell by as much as 19% but finished the quarter up by about 8%.  Silver exhibited a similar pattern.

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Like the Warsh appointment, the US invasion of Venezuela seems like a footnote at this point.  It will be interesting to see how the new leadership is formed and who it includes.

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Back to Iran.  One of the goals of the US attack was to effect regime change, especially in light of the thousands of protesters killed by the Iranian military in the last few months.  The assassination of Supreme Leader Ali Khamenei on February 28 was the first step in this change, but the power vacuum appears to have been filled by the leader’s partner in crime, the Islamic Revolutionary Guard.  Another goal was to dismantle their nuclear program.  The extensive bombing may have accomplished this to some degree, but it’s hard to know to what extent.

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It is said that the first casualty in war is the truth, and this “war” has been no different, with both sides making misleading statements and shifting course on a whim.  As was the case with its tariff policy, it has been difficult to keep track of the White House’s position on Iran on any given day.

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In 2025 President Trump developed a tendency to reverse course on policy when the stock market reacted unfavorably.  Market participants started to sense this pattern and dubbed it the “TACO” trade for Trump Always Chickens Out.  There were numerous examples of this, including tariff policy, the threats to terminate Chair Powell from the Fed, and an invasion of Greenland, all of which the President reversed course on after the stock market gave its disapproval.  At the end of the first quarter, the TACO trade struck once again, as the President, seeing the effect that the high price of oil was having on the economy and the stock market, vowed to cease the bombing regardless of whether Iran reopened the Strait of Hormuz.  This sparked a 3% rally in the S&P 500 that day.  That said, the price of oil remains stubbornly high and the bombing continues for at least the time being.

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The other big story was the performance of the mega-cap tech stocks.  Other than Apple, which registered a small gain, every one of the largest tech stocks (Alphabet, Amazon, Broadcom, Meta Platforms, Microsoft, Nvidia, and Tesla) fell between 5% and 17% in Q1.  The market, which had looked the other way on these companies’ prodigious AI infrastructure spending, seems to finally be saying “enough is enough” and questioning the duration of this spending, particularly since it has reduced the ability of these firms to buy back their own shares.

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Software stocks were pounded over the last three months, due to fears that their businesses would become obsolete with the proliferation of AI.  These markdowns carried over into the private arena, as a hefty portion of their investments is in software companies.  This created nervousness in an area that had been beloved for many years now, and investors started asking for their money back.  This prompted many private equity and private debt firms to limit withdrawals.

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As we hinted in citing the performance of energy, mega-cap tech, and software stocks, the magnitude of divergence in returns in the quarter was unusual.  Energy led all sectors with a gain of 37%, while Financials, Consumer Discretionary, and Technology fell 8-10%.

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Bitcoin fell 22% for the three months, and we did see some signs of bullishness receding as stocks turned lower, but there is plenty of evidence that the speculative fervor remains.  Some websites are now offering the ability to bet on whether the price of a cryptocurrency will rise or fall over the next 5–15 minutes, with roughly $70 million in daily volume across two such platforms.  Another trading platform, Robinhood, which is known for its aggressive clientele, has seen its equity trading rise 400% in the last eight quarters.  Options trading, including options that expire the day they are purchased, has grown at a tremendous pace as well.  All of this reminds us of the day-trading frenzy in the late 1990s, when many people quit their jobs to become full-time day-traders of stocks.  Of course it didn’t end well for most.

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After showing some progress in 2025, inflation has reaccelerated in 2026 to about 3%.  In combination with the rising price of oil, this has engendered fears that the Fed won’t cut rates by 50 basis points this year as many expected.  These dynamics created a noteworthy shift in bond yields in March.  While the offered return on the three-month US Treasury Bill stayed around 3.65% for the quarter, the one-year and two-year yields spiked in March.  In less than a month, the 1-year yield climbed from 3.48% to 3.86%, and two-year paper rose from 3.37% to 3.98%!  This created an opportunity for investors holding money market funds or 3-month bills, if they acted, to lock in higher yields at slightly longer maturities while taking minimal incremental duration risk.  Normally, one must extend the term length to a far greater degree (10-20 years) in order to earn significantly higher returns in the realm of the safest bonds.

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This was a rare quarter in that the value of our accounts rose while the broader market declined.  And it was the 14th consecutive quarter of positive returns for Towpath Focus Fund, the fund vehicle for our core strategy.  To be clear this streak is part statistical fluke, part process - probably more of the former.  (And we know it will end one day.)  But we try to be the tortoise, sticking to our pace, not chasing the shiny objects, with the goal of outpacing the field over the long run.  It tests our patience when we aren’t keeping up with the sprinters in booming markets, but times like these are the reward.
 

Mark Oelschlager, CFA  

Oelschlager Investments ​​