Guest Post: Financial Markets and Economic Update for First Quarter 2026

 A Wild and Cold Quarter

I can only remember one other winter that was as cold as what we just experienced.  A snowstorm hit the Northeast on January 25^th, followed by a period of ice and freezing rain and days and days of a polar vortex, with brutally cold temperatures and wind chills.  Many days did not make it out of the single digits and roads were icy and winds fierce.  It reminded me of January, 1994, when we had a similar storm of snow and freezing rain.  Temperatures didn’t get above freezing for two weeks then, at which time the ice on the roads finally melted.  Every bone in your body felt frozen.  We escaped to Florida at the end of February and basked in the warmth.  We even got one moment of fame, when the Golf Channel filmed us live as we were getting our picture taken at the infamous Bear Trap at PGA National during the Cognizant Classic on February 27^th.

The quarter will also be remembered for volatile markets and a lot of events that moved markets.  Rallies on stocks, bonds, gold, silver, cryptocurrencies, and energy prices were soon met with selloffs and volatility.  The quarter started with the surprise of the US Military entering Venezuela on January 3^rd, arresting Nicolas Maduro and his wife, and bringing them to the US.  Venezuela surprisingly cooperated with the Trump Administration afterwards in opening their oil markets; the benefits to the people there will hopefully be an economy that grows and a life with freedom.

On January 30^th, President Trump nominated Kevin Warsh for Federal Reserve Chairman to replace Jerome Powell when his term expires on May 15th.  (In my mind, May cannot come soon enough).  The markets fell from their lofty highs, especially gold and silver, when they realized Warsh’s actions might actually support and defend the dollar.  Warsh believes that interest rates can be lower and the economy can grow strongly without inflation, with something called productivity.  Warsh also believes in targeting money supply to control inflation, which would make Milton Friedman proud.  Enough of the Phillips curve.  Enough of the ridiculous economic projections and the even more ridiculous Dot Plots.  Enough of thinking it’s okay to meet your inflation target two years out (i.e. do your job), as nearly every recent projection has shown.  Enough of the bloated Fed with its 3,000 economists and staff.

I’m not alone in my disgust for Powell.  On March 18^th at his press conference (which I heard about later since I avoided watching him), Powell said he would stay on as Chairman Emeritus if Warsh was not confirmed by the Senate by May and would, in any event, stay on the FOMC until the DOJ’s criminal investigation is concluded.  The markets hated to hear this.  Stocks sold off immediately and ended the day with losses.  The man who I once called a hero at the beginning of the Covid pandemic (what is wrong with me?) has overstayed his welcome.  He does not have any answers.  “We just don’t know” is his favorite phrase.  Enough!

A partial government shutdown occurred on January 31^st, with DHS as the only Department not funded.  Democrats did not want ICE funded.  Hello…ICE was already funded into 2029 in the OBBB passed last summer.  But still DHS is unfunded today and TSA is in the headlines, with airport security lines in many cases taking three to four hours due to short staffing and resignations.  Ironically, ICE was sent in to help TSA.  I’m so glad we traveled in late February.  FEMA, the Secret Service, the Coast Guard, cybersecurity analysis, and other operations are also unfunded and held hostage still.

Speaking of late February, on the 28^th, the US and Israel began a bombing campaign on Iran.  The decision was made urgently when the Iranian foreign minister bragged to US negotiators that Iran had 440-460 kilograms of 60% enriched uranium, sufficient, with more refinement, to make eleven nuclear warheads within a short time.  The Iranian people had tried peacefully protesting the regime in January, only to have an estimated 30,000 citizens shot/killed by Iranian “security.”  Trump promised that “Help was on the way” and it arrived.  One of the first bombs killed the Ayatollah and 40 senior leaders.  Since then, the bombing has been non-stop, but Iran has lashed out with drones and missiles fired at its Middle East neighbors, especially Israel, and has been threatening ships in the Strait of Hormuz.  This matters because crude oil is trading at $96 per barrel today and Brent crude is at $108, with an unusually wide spread between the two.  Gas prices have risen from $2.90 per gallon at the end of February to $3.98 today.  Once a tipping point is reached, consumers will cut back on spending on other goods and services.  The conflict with Iran and uncertainty about oil and gas prices took stocks and commodities off their recent highs, set early in the quarter.  (DJIA 50,000; S&P 7,000; Nasdaq 23,000; gold 5,500; and silver 120).  But figure this one out- the dollar index, DXY, is back close to Par at 99.24, up from 96.45, which was the recent low in January.

Some of my Favorite Economic Indicators

Leading Economic Indicators (LEI)- The Conference Board indicator was down again in January by -.1%, following December at -.2%, and November at -.3%.  The index has been negative for 40 of the past 44 months (no change in July 2025, May 2025, November 2024, and March 2024), signaling a recession that never came.  It’s not the only once reliable indicator to “fail” as no recession followed.  The inverted yield curves of 2022 to 2024 pointed to recession, too.

Real GDP- The Atlanta Fed’s GDP Now is currently at +2.0% for 1Q26, following a weak 4Q25 reading of +.7%, and full year 2025 of +2.2%.  Major world economies are also weak.  China just lowered its GDP projection to 4%-5% this year, which is the lowest since 1991, due to weak consumer demand, high debt, real estate crisis, tariffs, and an aging population.  It all sounds so familiar.  The economies in Japan, Germany, and the UK are no better.

Moody’s Beige Book Index-  An improvement in the districts occurred in March’s report, with the index at 16.7, following January 5.6, December 11.1, October 13.9, and September 0.

M2 Money Supply- February saw a mini-surge in M2 at +4.9% year-over-year, probably due to the Fed’s cognitive dissonance of not lowering interest rates.  January was +4.3%, December was +4.2%, and November was +3.9%.  The velocity of money ticked up to 1.41 in 4Q25 and 3Q25 from 1.39 in 2Q25 and 1Q25, boding well for GDP growth.  (Remember GDP=M x V).

Inflation- I was very excited by the February CPI report, which was +2.4% y-o-y and the core was +2.5%, both at the implied Fed target.  But the subsequent releases dampened my enthusiasm.  PPI came in very hot and very nasty at +3.4% y-o-y and the core was +3.9%.  PCE (upon which the Fed targets are based) for January was +2.8% and the core was +3.1%.  What gives?  PCE is greater than CPI?

CPI vs PCE- What’s Going On?

When February’s CPI was released, many business writers and talking heads complained that inflation was above target.  Well, for the first time since May, 2025, CPI did hit its implied target versus PCE.  Treasuries celebrated when no one else would, with the 2-year yield down to 3.41% and the 10-year yield down to 4.05%.  As I have written ad nauseum, Fed policy targets are set using PCE, which generally runs 50 basis points less than CPI because of the inclusion in PCE of substitution effects.  Since 2010, CPI has averaged 3.0% per year and PCE averaged 2.48%.  The spread between them showed about 50 basis points, as expected.  CPI hitting target in February probably won’t matter now as energy prices have risen substantially with the Iran conflict.

January’s PCE report came out with the y-o-y changes above 3%, higher than CPI.  The indices are constructed differently, with price effects of goods and services at different proportions.  CPI is down due to housing costs and rents dropping a lot over the past six months.  Rents are now at a 4-year low of $1,353 per month and are down -1.4% y-o-y.  PCE has a lower percentage of housing costs and also a higher percentage of other service costs rather than goods.  It may take some time for CPI and PCE to revert to their average relationship.

Private Credit Crisis Brewing?

Jamie Dimon sounded the alarm months ago when JPM Chase took charge-offs of private credit company (non-bank) loans and restricted new lending to them.  The $1.8 trillion market is comprised of many loans to private credit companies to make their loans; the loans are contained in funds managed by Blackrock, Goldman Sachs, T Rowe Price, Blue Owl Capital, Morgan Stanley, KKR, Apollo, and others.  They have restricted withdrawals from funds to no more than 5% in many cases as investors unsuccessfully scrambled to pull their money.  Liquidity crisis anyone?  It certainly bears watching.

Ending a Wild Quarter

Venezuela, Iran, and Cuba were not anticipated before this year began.  It shows how quickly things can change.  Other notables in the first quarter:

-          Independent journalist, Nick Shirley, exposed massive fraud in Minnesota regarding shell day care and healthcare companies throughout Minneapolis to the tune of $9 billion.  This led to probes expanding from Minnesota to California, Ohio, Maine, and New York.

-          The polar vortex finally ended!  March had some warm days.

-          The Cinderella story of the 16-0 Indiana Hoosiers had a happy ending with their NCAA championship victory over Miami  27-21.  I thought it was more exciting than the Super Bowl.

-          The Supreme Court ruled that the tariffs imposed by President Trump were not legal using the 1977 IEPPA law.  But tariffs can be placed using other existing laws and these laws were detailed in the ruling.  So, the markets really didn’t care.

-          New highs were reached in stocks, gold, and silver but volatility returned with a vengeance and prices all fell back.  Just ask bonds.

-          And congratulations to Giorgia Meloni and the entire Italian team for putting on a great Winter Olympics.  Giorgia, we will see you this summer…

 

Thanks for reading!  As always, I appreciate your support!  DLJ 03/24/26

Dorothy Jaworski has worked at large and small banks for over 30 years; much of that time has been spent in investment portfolio management, risk management, and financial analysis. Dorothy recently retired from Penn Community Bank where she worked since 2004. She is the author of Just Another Good Soldier, and Honoring Stephen Jaworski, which details the 11th Infantry Regiment's WWII crossing of the Moselle River where her uncle, Pfc. Stephen W. Jaworski, gave his last full measure of devotion.

Disclaimer: This publication is provided to you solely for educational and entertainment purposes.  The information contained herein is based on sources believed to be reliable but is not represented to be complete and its accuracy is not guaranteed.  The expressed opinions, views, and estimates are those of the author as of this date and are subject to change without notice.  The author cannot provide investment advice but welcomes your comments.