Geopolitics Threatens Stagflation for U.S.
March marked a clear change in market leadership and declining investor sentiment, primarily driven by macro geopolitical events. The dominant driver was no longer a reassessment of AI winners versus AI losers, but the reemergence of geopolitical supply risk as a force capable of reshaping inflation expectations, interest-rate assumptions, and the near-term growth outlook. Markets spent much of the month repricing that reality: a world in which a supply-side shock can reaccelerate price pressures even as underlying growth remains vulnerable. By month-end, the S&P 500 price return had fallen 5.1% for March and 4.6% for the first quarter, even after a sharp relief rally on the final trading day of the month.
“March ultimately served as a reminder that markets do not operate in a vacuum. Even in an environment still shaped by structural themes such as AI, productivity, and broadening participation, external shocks can quickly reassert themselves and force a rapid repricing of inflation, growth, and policy expectations.”
The central macro development was the market’s response to the U.S.-Israeli conflict with Iran and the resulting disruption to global energy flows. Oil prices moved sharply higher as markets assessed the risk of sustained supply interruption, and energy stocks briefly outperformed even as the broader market sold off. The move in crude was fast enough and large enough to force a reassessment of the inflation outlook almost immediately.
That shock quickly moved beyond the energy complex itself. Investors were forced to consider not only the direct effect of higher oil and fuel costs, but also the second-order consequences: tighter household budgets, rising transportation and input costs, worsening supply-chain friction, and a Federal Reserve less able to ease policy into weakness (meaning, lowering interest rates or increasing money supply to prevent the economy from slowing or stalling). In that sense, March was not merely a geopolitical month; it was a month in which geopolitical developments materially altered the market’s inflation and policy framework.
That inflation concern found confirmation in real-time data. The ISM services report for March showed the sector still expanding but with price pressures accelerating sharply, a combination that left the Fed with little room to respond to slowing growth. The services prices-paid index rose to 70.7, its highest reading since October 2022. Businesses pointed to higher fuel and freight costs, logistics disruptions, and rising landed costs (total comprehensive expense of getting a product to the final customer) as the primary culprits. The New York Fed’s Global Supply Chain pressure Index corroborated this theme, as it climbed from 0.54 in February to 0.68 in March, its highest level since early 2023. Taken together, these readings made clear that March’s inflation story was not a just a concern, but it was already embedding itself in operating conditions.
The Federal Reserve’s March meeting reflected this more complicated backdrop. The FOMC left the federal funds target range unchanged at 3.50%-3.75%, but what stood out was its explicit acknowledgement that uncertainty remained elevated and that developments in the Middle East carried uncertain implication for the U.S economy. That framing signaled a shift: policy was no longer being shaped only by the familiar balancing act between labor-market cooling and disinflation progress, but also by the possibility that a renewed supply shock could push inflation higher while simultaneously weighing on activity. March, in other words, raised the real possibility of stagflationary pressure – slower growth without the clear disinflation that markets would expect.
That tension surfaced definitively in the fed funds futures markets. Over the course of March, pricing shifted from expecting at least one Fed cut this year to little if any easing at all, as investors reassessed the inflationary implication of higher energy prices and sustained geopolitical risks. Not everyone agreed, however. Goldman Sachs, among others, maintained that the Fed would ultimately deliver cuts later in the year, arguing the shock would prove transitory.1 That divergence captured the months central question: whether the inflation impulse would prove persistent enough to keep policy restrictive , or temporary enough to allow easing once conditions stabilized. Interest rates and markets didn’t wait for an answer; the 10-year Treasury Yield rose sharply through March starting the month under 4% and ending at 4.35%, with 30-year mortgage rates climbing to 6.4% by month end.
March ultimately served as a reminder that markets do not operate in a vacuum. Even in an environment still shaped by structural themes such as AI, productivity, and broadening participation, external shocks can quickly reassert themselves and force a rapid repricing of inflation, growth, and policy expectations. For investors, the key takeaway is not to overreact to any single headline, but to recognize that uncertainty has broadened beyond earnings and valuation alone. In periods like this, discipline, diversification, and a process grounded in risk management remain far more valuable than short-term prediction.
Signal Update
The economic backdrop — CIGNX
0%20%40%60%80%100%1980198819962004201220202024Our CIGNX Economic Indicator has a reading of 49.2, a notable increase from last month’s revised reading of 41.7. The reading suggests neutral economic activity and is just below our baseline threshold of 50.0, indicative of neutral conditions. The indicator remains above our secondary baseline reading of 40.0 for a second consecutive month, which indicates the economy appears to be continuing a trend towards recovery. Our overall economic outlook still remains unfavorable.
| 2026 | JAN | FEB | MAR | APR | MAY | JUN | JUL | AUG | SEP | OCT | NOV | DEC |
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| CIGNX (Revised) | 37.9 | 41.7 | 49.2 | — | — | — | — | — | — | — | — | — |
| CIGNX Trendline | 37.1 | 37.4 | 37.6 | — | — | — | — | — | — | — | — | — |
The market trend — Alpha & Omega
02,0004,0006,0008,00020002004200820122016202020242026Our short-term signal (Alpha) remained Negative in March, while our intermediate-term signal (Omega) turned Negative on Monday, March 30th, indicating both the near-term and intermediate-term outlook may be unfavorable. Accordingly, we have adjusted each of our Dynamic and Tactical portfolios into a “Bearish” positioning with reduced exposure to exposure to equities. Our overall market sentiment is Bearish.
| 2026 | JAN | FEB | MAR | APR | MAY | JUN | JUL | AUG | SEP | OCT | NOV | DEC |
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| ALPHA | Sell | Sell | Sell | — | — | — | — | — | — | — | — | — |
| OMEGA | Buy | Buy | Sell | — | — | — | — | — | — | — | — | — |
Two positive signals give a Bullish outlook and positioning; mixed signals give Caution; two negative signals give Bearish and Risk-Off. The economic indicator describes the backdrop and does not by itself change positioning.
Market segment review
| Segment | Index | Month | Year to date |
|---|---|---|---|
| U.S. Stocks | S&P 500 Index | -4.98% | -4.33% |
| U.S. Stocks | S&P 400 Index | -5.39% | 2.50% |
| U.S. Stocks | S&P 600 Index | -4.07% | 3.51% |
| U.S. Bonds | U.S. Bond Index | -1.76% | -0.05% |
| Alternative Assets | S&P GSCI Index | 24.53% | 40.02% |
| U.S. Real Estate | S&P 1500 Real Estate | -6.19% | 2.08% |
U.S. Large Cap Stocks
U.S. large-cap equities weakened in March, with the S&P 500 declining 4.98% for the month and bringing its year-to-date return to -4.33%. After February’s modest pullback, March represented a more pronounced repricing as markets absorbed a tougher mix of cross-currents, including rising geopolitical tension, higher energy prices, and a meaningful shift in rate expectations. Importantly, the decline did not reflect a simple unwind in risk appetite so much as a broader adjustment to a more inflation-sensitive macro backdrop, with investors increasingly focused on policy constraints, earnings resilience, and valuation sensitivity.
U.S. Mid Cap Stocks
U.S. mid-cap equities declined in March, with the S&P MidCap 400 falling 5.39% for the month, though remaining up 2.50% year-to-date. After holding up relatively well earlier in the year, mid-caps came under pressure as March’s more difficult macro backdrop weighed on economically sensitive areas of the market. Rising energy prices, tighter financial conditions, and reduced confidence in near-term policy easing created a less supportive environment, particularly for companies with greater sensitivity to domestic growth and borrowing costs.
U.S. Small Cap Stocks
U.S. small-cap equities declined in March, with the S&P SmallCap 600 falling 4.07% for the month, though similarly to mid-caps remained up 3.51% year-to-date. After showing resilience earlier in the quarter, small caps faced a more challenging backdrop as higher interest rates, rising input costs, and renewed macro uncertainty weighed on sentiment. March’s shift toward a less forgiving environment was particularly important for smaller companies, which are often more sensitive to domestic economic conditions, financing costs, and changes in investor risk appetite.
U.S. Bonds
Core also weakened in March, with the Bloomberg U.S. Aggregate Bond Index declining 1.76% for the month and leaving its year-to-date return roughly flat at -0.05%. The move reflected a less supportive environment even for high-quality duration, as rising Treasury yields and firmer inflation concerns weighed on bond prices. With markets scaling back expectations for near-term Fed easing and geopolitical developments adding to supply-side inflation risk, March served as a reminder that core bonds can face pressure when rates move higher, even as they continue to play an important long-term role in diversification and portfolio stability.
Alternative Assets
delivered very strong gains in March, with the S&P GSCI Index rising 24.53% for the month and bringing its year-to-date return to 40.02%. The move was driven overwhelmingly by energy, as crude oil surged more than 40% amid the escalation in the Middle East conflict and growing concern over global supply disruption. While returns across alternatives can be volatile and highly sensitive to geopolitical developments, March highlighted their value as a potential hedge when inflation risk, commodity shocks, and supply-side pressures reemerge as dominant market forces.
U.S. Real Estate
U.S. real estate equities followed suit with the weakening of equities and fixed income, declining 6.19% for the month, however remained up 2.08% year-to-date. The pullback was driven largely by the sharp rise in Treasury yields and mortgage rates, which pressured rate-sensitive, income-oriented assets and reversed much of February’s strength. In this environment, REITs faced a more challenging backdrop as tighter financial conditions reduced the relative appeal of real estate equities and renewed macro uncertainty weighed on sentiment across interest-rate-sensitive sectors.
Disclosures
The information presented herein is based on data derived from various underlying data sources. The figures presented, while deemed accurate, are not guaranteed. A Smarter Way to Invest makes no representation or warranties as to the accuracy of the information presented, the underlying source data, or the source data providers. The content of this letter is provided for informational purposes only and is not advice or a recommendation for the purchase or sale of any security. Carefully consider your investment objectives, risk factors, and charges and expenses before investing. There are risks involved with investing, including possible loss of principal. This information reflects the views of the Smarter Way To Invest Portfolio Management Team on the date made and may change without notice. We will not be responsible for any investment decisions, damages or other losses resulting from or related to the use of the information we provide. When applicable, we have provided references where information was acquired for use in this newsletter.
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