Markets started strong in the first quarter of the year with the S&P hitting record levels, but weaknesses in the tech sector started to appear coinciding with a rapid expansion of Claude Code AI features in early February. Layoffs at other software companies may have been coincidental, but concerns about the progress of AI in replacing human workforce came to the forefront. Non-US stocks significantly outperformed during the first two months, and US Large Growth stocks posted losses.
On Saturday, February 28, the US and Israel launched Operation Epic Fury attacking Iran which subsequently shutdown the Strait of Hormuz. While the US inflicted significant damage, Iran was able to counter with drones, further demonstrating the changing nature of war and the asymmetry in the cost of weapons. Because of the transportation time from the Persian Gulf, the full impact of the closing of the strait will not start until mid-April, but gas prices have already started to climb in the US.
Oil prices peaked at almost $120/barrel, a level experienced at the outset of the Russia-Ukraine war, and ended the quarter just over $100/barrel. The impact of the supply constraint will depend on how long Gulf oil is interrupted. Oil, liquified natural gas, and the related biproducts (i.e., fertilizer) are important to the world economy in ways that are hard to predict. Non-US stocks sold off more than US stocks, indicating a difference in exposure. The volatility index (VIX) peaked at 35 and ended the quarter at 31, an elevated level but not as high as the peak after the tariff announcement in April 2025.
US stock markets[2] returned -4.0% for the quarter. Large stocks slightly underperformed the US market, returning -4.2%. Small cap stocks maintained their momentum, outperforming large stocks and returning 0.9%. Large value stocks significantly outperformed large growth with returns of 2.1% and -9.8%, respectively, and small value stocks were the best performing US asset class, returning 5.0%. All of these asset classes posted losses in March, but losses were more severe in growth stocks.
Developed international and emerging markets outperformed US markets in the 1st quarter with returns of -1.2% and -0.2%, respectively, despite the dollar strengthening during the quarter. Value significantly outperformed growth stocks.
Domestic real estate[3] ended the quarter with a return of 4.6%, while US Utilities[4] gained 7.7%. Alternative lending posted modest gains over the quarter of 1.6%, while reinsurance benefited from a lack of natural disasters posting a 5.2%[5] return.
[1] Bloomberg US Aggregate Bond Index.
[2] Large, small, and broad market returns are based on the Russell 1000, 2000, and 3000. Value and Growth are based on the respective Russell indexes. International developed and emerging market equities are based on EAFE and MSCI Emerging Markets indices, respectively.
[3] Dow Jones US Select REIT Index.
[4] Utilities are represented by the MSCI US IMI/Utilities Total Return Index.
[5] Reinsurance and alternative lending represented by Stoneridge Reinsurance Risk Premium Interval Fund (SRRIX) and Stoneridge Alternative Lending Interval Fund (LENDX), respectively.
[6] This report only considers events and data available as of the date indicated. Subsequent events could have an impact on the discussion herein.
