The first quarter of 2026 unfolded in dramatic fashion. Volatility, which began to emerge late last year, intensified and created a more challenging environment for investors. What first appeared as brief disruptions in the fourth quarter became more sustained, as markets faced a complex and often conflicting mix of signals around economic growth, inflation and monetary policy, along with ongoing geopolitical developments.
Instead of the relatively steady, upward trend seen through much of the prior year, markets experienced drawdowns, sharper rotations and a lack of sustained direction—even within a single trading day. Over all, risk assets moved lower as expectations shifted.
Equity markets showed a clear change in behavior. While broader participation across sectors remains a positive long-term trend, in the near term it contributed to more widespread declines across sectors, styles and market capitalizations. Unlike earlier periods, when weakness in some areas was offset by strength in a small group of leaders, this quarter offered fewer places to hide. Energy was one of the more resilient sectors, but declines were otherwise widespread. As volatility rises and liquidity tightens, stock movements tend to become more correlated, and that was clearly the case this quarter.
What Happened in the Markets
- Growth-oriented segments of the market, in which our portfolios have maintained an underweight position, were particularly vulnerable during this quarter.
- Areas that previously benefited from multiple expansion and strong forward expectations faced increased scrutiny as interest rates moved unpredictably and multiples contracted.
- Large-cap technology and AI-adjacent companies, which drove a disproportionate share of returns in prior periods, experienced more pronounced pullbacks as the market reassessed both the timing and magnitude of future sustainable growth.
- In an environment where expectations were priced for near-perfection, even modest disappointments or shifts in macro conditions created outsized reactions.
At the same time, more cyclical and value-oriented areas of the market were not immune to weakness. Industrials, financials and other economically sensitive sectors faced headwinds as investors recalibrated their outlook for economic growth and/or the multiple they were willing to pay. While these areas may still benefit from a longer-term normalization in market leadership, in the short term they were pressured by concerns around slowing activity, tighter financial conditions, and policy uncertainty. Small- and mid-cap stocks, which had only recently begun to show more consistent participation, also struggled as higher financing costs and reduced risk appetite weighed more heavily on these segments.
International equities, which had been a source of strength in prior quarters, similarly faced a more difficult environment. Both developed and emerging markets moved lower, influenced by a combination of global growth concerns, currency fluctuations and ongoing geopolitical uncertainty as the war in Iran drags on and influences global markets.
Volatility Persists
Rather than appearing as short-lived spikes that were quickly absorbed by the market, volatility became more persistent. Both realized and implied volatility trended higher, with markets reacting more sharply to economic data releases, central bank communication and geopolitical developments. Interest rate fluctuations played
a central role in shaping portfolio performance, while markets struggled to reconcile soft labor market data, moderating inflation trends with still-resilient economic activity and an uncertain interest rate policy path.
Volatility was a defining feature of this quarter and, importantly, behaved differently than it had in prior periods.
Our Positioning
Against this backdrop, our slightly conservative asset allocation and disciplined approach to risk management appeared to help mitigate the impact of market declines. Our positioning, which leaned neutral to modestly defensive across asset classes and maintained an underweight to higher-valuation growth equities, helped mitigate the impact of the broader market decline.
While no allocation is entirely insulated during periods of broad weakness, avoiding areas where elevated expectations and valuations left little margin for error likely helped reduce downside exposure relative to broader market movements.
Within equities, our emphasis on selectivity and valuation awareness was particularly important. Periods like this tend to expose imbalances that can grow during more benign market environments, especially in areas where optimism becomes embedded in pricing, like the AI adjacent sectors.
By maintaining a more measured exposure to growth and remaining open to opportunities across a broader set of sectors, we were positioned to navigate the volatility that bubbled up as overall market direction remained negative.
Fixed income again played an important role as a stabilizer and a diversifier, though conditions were far from steady. Interest rates—especially at the longer end of the yield curve—were volatile as markets adjusted expectations around inflation, fiscal policy and central bank actions. Longer duration bonds were especially sensitive to these shifts, with price movements reflecting even modest changes in rate expectations.
Our decision to maintain a relatively short duration allocation within fixed income contributed to overall portfolio stability and served as the ballast of the portfolio. As a reminder, the shorter the duration, the less sensitive the portfolio is to interest rate swings, and there were plenty this quarter. As rates moved higher at times and the yield curve experienced periods of steepening and flattening, shorter duration holdings may have historically provided greater stability and helped preserve capital more effectively than long bonds.
In addition to managing our duration, our continued emphasis on higher-quality fixed income was an important contributor to overall portfolio resilience. Credit spreads widened modestly during this quarter; however, they remain relatively tight from a historical perspective.
Fixed income continues to provide not just stability, but also optionality. The improved yield environment relative to recent years allows for meaningful income generation, which contributes to total return while also building the capacity to redeploy capital as opportunities arise. In a market environment where volatility is increasing and asset prices are adjusting, having this “dry powder” can provide flexibility. It allows for a more proactive—rather than reactive—approach to portfolio management.
The persistence of volatility reinforces a core principle of our investment philosophy: volatility is inherently mean-reverting, and periods of relative calm (like much of last year) are often followed by more normalized, and sometimes elevated, fluctuations (like we saw this quarter). While the exact timing and catalysts for these shifts are unpredictable, the presence of volatility itself is not unusual.
The key is not to avoid volatility entirely, but to be positioned in a way that can withstand it and ultimately take advantage of it.
Our current allocation reflects this mindset.
- Rather than making binary or short-term directional bets, we remain focused on maintaining a balanced and flexible portfolio that can adapt as conditions evolve.
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Our slightly conservative stance provides a degree of downside protection while preserving the ability to increase risk exposure should valuations become more compelling.
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This also allows us to become more defensive if economic conditions deteriorate more meaningfully.
Volatility is a natural and necessary component of functioning markets.
Looking Ahead
Several key factors will continue to shape the investment landscape: Geopolitics—and the subsequent inflation trends—softening labor markets, the direction of the Federal Reserve and other central banks, as well as corporate earnings, will be an important lens through which we assess the durability of current valuations and the broader market outlook.
The first quarter represented a more complex environment for investors, marked by broader declines across asset classes. Unlike earlier periods where gains were concentrated, this quarter’s weakness was more widespread—reinforcing the importance of diversification, valuation discipline and risk management. We believe that our slightly conservative asset allocation, underweight position in higher-valuation growth stocks; and emphasis on shorter-duration, higher-quality fixed income helped mitigate downside and preserve flexibility.
While the near-term environment remains uncertain, we believe this disciplined approach positions us to navigate volatility and take advantage of opportunities as they arise.
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