IMG Q1 2026 Investor Letter

Welcome Spring!

 

Following three straight years of double-digit gains in the stock market, 2026 is off to a bumpy start. Fears of higher prices and a slowdown in employment were already evident as we began the year. Concerns surrounding artificial intelligence (both overspending and disruption) and the war in Iran fanned the flames. The S&P 500 declined 4.3% in the first quarter and the technology-heavy Nasdaq composite fell 7%. For perspective, the S&P 500 fell 4.3% in the first quarter of 2025 and the Nasdaq declined 10.3% but both indexes went on to rally in the following nine months. While past performance does not guarantee future results, it does reflect how market sentiment changes.

 

U.S. Economy

The consumer price index (CPI), which measures costs of goods and services across the economy, rose 3.3% in March from a year earlier, far surpassing February’s 2.4% increase. Meanwhile, core inflation, which excludes more volatile food and energy, increased 2.6% annually. The index for energy rose 10.9% in March, led by a 21.2% increase in the index for gasoline which accounted for nearly three quarters of the monthly all items increase.

 

The personal consumption expenditures (PCE) price index, which reflects changes in the prices of goods and services purchased by consumers in the U.S. and is the Fed’s preferred indicator of inflation, increased 0.4% in February and is up 2.8% from a year ago. Excluding food and energy, the core PCE price index rose 0.4% and is up 3.0% from a year ago. Alternately, the producer price index (PPI), which tracks the price changes companies see, rose 3.4% in February from the year prior, the most since February 2025. Excluding food and energy, core prices rose 3.5%. Inflation remains stubborn and above the Federal Reserve’s (Fed) 2% target.

 

After shedding 92,000 jobs in February, employers added 178,000 jobs in March, and the unemployment rate dipped to 4.3% from 4.4%. Strength in health care and social assistance powered half of the month’s gains, as workers returned from strikes. Moreover, job growth has been the most widespread across industries since December 2023. New applications for unemployment benefits remain at historically low levels, a signal that employers are not implementing widespread layoffs. Still, wage growth is slowing, and the rise of artificial intelligence (AI) has cast a wave of uncertainty over the labor market. While the extent of AI’s impact on the labor market remains to be seen, layoffs at major tech companies and advancements in AI models have amplified concerns.

 

Fears of higher prices and concerns about the situation in the Middle East have weighed on consumers’ outlook. The Conference Board’s confidence index, which measures consumer attitudes on prevailing business conditions and likely developments for the months ahead, edged up by 0.8 points in March to 91.8. The expectations index, which is based on consumers’ short-term outlook for income, business, and labor market conditions, declined by 1.7 points to 70.9. Likewise, the University of Michigan’s consumer sentiment index, which is used to estimate future spending and saving, fell to a reading of 53.3 in March from 56.6 in February. Uncertainty about the course of the war and higher prices at gas stations have continued to darken consumers’ mood. Still, sentiment remains above the  lows reached late last year, when persistent inflation and a frustrating job market sent the index down to 51 in November 2025, close to all-time lows.

 

After three consecutive months of declines, retail sales increased 0.6% in February from the prior month, the strongest growth in seven months. This could be due to higher Federal tax refunds than 2025, fueling renewed purchase behavior. In addition, higher income households, buoyed  by last year’s rise in stock prices, keep spending. Alternately, low-income Americans (less likely to have financial investments) face slowing wage growth and a higher reliance on debt. Granted, the February retail sales report predates the escalation of conflict in the Middle East, meaning it does not yet reflect any potential drag from higher energy prices and/or financial market volatility. However, with the stock market under pressure in recent months, the significant boost to spending by high-income households from rising stock market wealth could diminish spending, as higher gas prices push lower-income families over the edge.

 

Real gross domestic product (GDP), the broadest measure of economic output, rose at an annual rate of 0.7% in the fourth quarter of 2025, down from 4.4% in the third quarter, according to the U.S. Bureau of Economic Analysis. Compared to the third quarter, the deceleration in real GDP in the fourth quarter reflected downturns in government spending and exports and a deceleration in consumer spending that were partly offset by an acceleration in investment. For the year, real GDP increased 2.1% in 2025.

 

Following three rate cuts in 2025, the federal funds rate has remained steady in a target range of 3.5% to 3.75% since December. The war in the Middle East that began on February 28^th further complicates the Fed’s path on interest rates. Brent crude futures rose 71% in the first quarter, the biggest quarterly percentage gain since the Gulf War of 1990. Not only have oil prices surged, but supply chains have been disrupted for a variety of other important commodities, from the fertilizers essential for global food security to the minerals powering the energy transition. The oil shock threatens to drag on growth, raising energy costs for consumers and businesses. Before the conflict broke out, economists expected that the Federal Reserve (Fed) would cut rates twice by the end of the year. Now those odds have swung in the other direction on inflation worries. Fed Chairman Jerome Powell has hinted that interest rates are unlikely to go up this year. As such, the string of six rate cuts that began in September 2024 may be over.

 

Traditional Asset Class Returns Q1 2026

 

U.S. Stock Market

After surging 17.9% in 2025, the S&P 500 has pulled back, declining 4.3% in the first quarter. Similarly, after soaring 29.6% in 2025, the technology-heavy Nasdaq composite fell 7% in the quarter. Ten out of 11 sectors posted negative returns in March, with only Energy (+10.4%) in positive territory. For the quarter, six out of eleven sectors posted positive returns, with Energy far surpassing all other sectors, soaring 38.2%. Tight global supply, strong refining margins, and persistent geopolitical risk kept crude prices elevated and cash flows strong across the sector. Utilities and Materials also showed strength, up 8.2% and 9.7%, respectively. Technology (-9.1%), Consumer Discretionary (-9.2%), and Financials (-9.3%) were the worst performing sectors for the quarter.

 

Growth underperformed value in the first quarter, which is not surprising given the artificial intelligence pause. The Russell 1000 Value index finished the quarter up 2.1% compared to the Russell 1000 Growth index, which was down 9.8%. As the breath of the market widened, there has been a shift toward value, with the Russell 1000 Value index up 12.6% and the Russell 1000 Growth index up 8.8% from a year ago.

 

Fixed Income

Like U.S. equity markets, the bond markets experienced increased volatility in the first quarter of 2026 driven by geopolitical risk. The U.S.-Iran conflict abruptly reversed the decline of U.S. interest rates that we had observed in February. Previous releases of weaker economic data had initially heightened anticipation of a sooner than expected rate cut by the Federal Reserve. This quickly subsided as fears of new inflationary pressures emerged from skyrocketing oil prices. The U.S. 10-year Treasury Bond started the year at 4.17%, ended February at 3.94% then rose sharply to end the quarter at 4.32%.  

 

U.S. government bonds are often viewed as a safe haven during periods of market volatility. However, in this instance we witnessed rates rise during the month of March due to the concern of rising energy prices and the potential impact on what was already widely viewed as sticky inflation. With minimal signs of de-escalation, interest rates around the globe increased as investors feared this would further delay any potential rate cut in 2026. During the March Fed meeting the committee kept rates unchanged adopting a “wait and see” approach citing geopolitical uncertainties while increasing it’s 2026 inflation forecast from 2.4% to 2.7%. The European Central Bank (ECB) faced similar inflation and energy price concerns vowing to remain patient before considering raising rates to combat inflation.

 

The length and scope of the U.S.-Iran conflict and its long-term impact on inflation is impossible to predict, but it is important to remember bonds are vital to your portfolio, particularly in times of market uncertainty. Regardless of interest rate movements and monetary policy decisions by the Fed, bonds provide diversification, stability, and a consistent stream of income all helping to achieve your long-term financial goals.

 

Diversifying Asset Classes

MLPs (+16.86%), Global Infrastructure (+8.29%), and Managed Futures (+7.82%) were the top performing diversifying equity asset classes for the quarter. Foreign stocks and Mid-Cap were the laggards, down 1.29% and 1.24%, respectively. Regardless, all diversifying equity (both positive and negative) added significant relative value in the quarter, outperforming the S&P 500.

 

For the quarter, all diversifying fixed income asset classes were negative and underperformed the benchmark. We did see credit spreads widen slightly during the quarter from historically tight levels as investor concerns increased the premium required to hold a U.S. corporate bond over a government bond. As a result, government bonds outperformed U.S. credit and high yield bonds for the quarter with a return of +0.05%. U.S. Corporate High Yield was the lowest performing sector for the quarter returning a negative -0.50%.

 

 

Conclusion

We anticipate continued volatility in the market as the war in Iran plays out. Surging oil prices may spark inflation and complicate the direction of interest rates. Importantly, most wars in recent decades have depressed stock prices initially but have had relatively minor effects on investment returns a year later. We construct portfolios to meet your long-term financial goals in all environments and encourage you to stay the course. As always, should you find yourself questioning your current situation, our team is always here to help you navigate through these challenging times.