The first quarter of 2026 saw two very different sets of market conditions. The beginning of the year picked up where 2025 left off and saw steady and consistent equity market gains, with the S&P 500 Index hitting new record levels. By the end of the quarter, investment markets were reeling as investors reacted with panic to negative geopolitical developments. Market volatility surged as equity markets cratered, and oil prices spiked after the US and Israel struck Iran in late February and the conflict spread throughout the Middle East.
The impact of the conflict in the Middle East reverberated throughout the globe late in the first quarter. US equity markets, as measured by the Russell 3000 Index, fell 3.96%. The S&P 500 Index experienced its worst first quarter since 2022, losing 4.3%, while the tech-heavy NASDAQ Index fell even further.
Market pain wasn’t felt only in the United States. International developed markets, as measured by the MSCI World ex-USA IMI index, lost 0.86% in the first quarter. Emerging markets fared slightly better than developed markets, losing 0.24% in the quarter. And losses weren’t constrained to stocks alone. The bond market in the US was down 0.05% in quarter one, while the international bonds experienced a 0.19% selloff.
Despite the broad market selloff, there were some bright spots for investors in the first quarter. The rapid rise in oil prices precipitated by the Iran conflict with the US and Israel resulted in energy stocks, in aggregate, surging more than 30% in the first quarter. Beyond specific market sectors, some countries and regions experienced gains in the first quarter. Korea and Taiwan performed the best in the first quarter. Among internationally developed markets, Japan, Canada, and the United Kingdom experienced positive returns in equity markets. Among emerging markets, South Korea and Taiwan performed the best in the first quarter.
While market downturns like the one we experienced in the first quarter can be unnerving for investors, it is helpful to keep a few things in perspective.
- We cannot control how investment markets behave, but we can control how we behave to market changes. Market corrections often offer opportunities to improve future tax obligations or reposition investment portfolios for the eventual rebound. Long-term planning provides better outcomes than short-term panic!
- Diversification is your friend in market downturns. Having a well-diversified portfolio helps weather periods of market turmoil. While broad investment markets reacted negatively to the conflict in Iran, the energy sector surged, helping balance investors’ portfolios. Exposure to international developed and emerging markets also helped investors mitigate losses.
- Investment markets are forward-looking. While markets are quick to incorporate new information into pricing and investors exhibit a strong dislike for uncertainty, markets are always forward-looking. This explains why we often experience market upturns and rallies while news headlines are dominated by doom and gloom.
Long-term investors are always rewarded for their patience. Keeping these principles in mind will allow you to reap the rewards of a prudent investment strategy when markets become unsettling.
Sources: The Wall Street Journal, Dimensional Fund Advisors