Thayer Partners Q1 2026 Quarterly Commentary

Executive Summary

• Financial Markets Experience March Pressure from Iran War and Oil Price Surge
• War Campaign Sees Progress, with Key Issues Remaining Unresolved
• Supply Constraints Threaten World Economy, but Oil’s Shock Value Has Declined
• Upcoming Fed Chair May Bring New Philosophy as Iran Action Complicates Picture
• Portfolio Diversification, Defensive Elements, and Rebalancing Discipline Remain Intact

Quarterly Commentary – Five Questions

What Happened in the Financial Markets in the First Quarter?
The quarter comprised two time periods. It began with a moderately positive first two months, with strong gains in non-U.S. stock markets, and small stock and bond gains here at home. This all changed with the U.S./Israeli invasion of Iran on February 28, keying a final month highlighted by a 51.3% surge in the oil price, mid- to upper-single digit losses in U.S. and overseas stocks (the S&P, EAFE developed international and EM emerging international), and a 1.8% reversal in bond prices (the broad AGG index). Overall, after three straight positive calendar years, the quarter proved to be the toughest for U.S. stocks since (second quarter) 2022.

This sell-off reflects an uneasy combination of what is known – notably, the supply of energy and other key commodities has been upended as the Persian Gulf and its lone exit, the Strait of Hormuz, are now a theatre of war – and what is unknown, namely how will the war be resolved and what will the impacts be moving forward. The oil price surge has raised fears of higher inflation, checking further Federal Reserve interest rate cuts, while also dampening consumer spending power, with gasoline prices rising about 35% so far. As with the tariff drama a year ago, elevated international strife and supply uncertainty undermine corporate planning, possibly creating new economic headwinds.

Including giving back solid first two-month gains in March, typical Thayer client accounts held up reasonably well in the quarter, declining a bit more than 1%. Geographic diversification was helpful, with about a third of stocks outside the U.S. in better performing markets. Portfolios also benefitted from earlier placement of defensive elements in both the stock and bond groups (more specifically the use of a hedged manager on the stock side, and a shorter than average, thus less interest/inflation rate sensitive, maturity structure in the bond mix).

What are Likeliest Pathways for the Iran War?
Financial markets will remain on edge as the war proceeds and uncertainties remain, including the ongoing state of shipping traffic, the profile of Iran’s leadership and fate of its nuclear capability.
There have been notable successes: the U.S. and Israeli air campaign has decidedly crippled Iran’s big military assets such as their navy, air defense capability and launch infrastructure, and killed the top layer or two of the Revolutionary Guard leadership. At the same time, the army itself has been reduced but only marginally, with about 5000 out of several hundred thousand killed. Iran’s missile and drone arsenals have been hit hard, but are still active. In the Gulf and elsewhere, the country is continuing to conduct asymmetric low-cost offense (such as drone or cheap rocket attacks), requiring and thus depleting higher cost defense by the U.S. and Israel (such as interceptor missiles).

The fate of the Strait of Hormuz has been a key hinge point since the war’s outset. It has remained non-functional, with shipping and tanker traffic down from 140 boats a day in February to around five, according to S&P Global Intelligence. This has blocked some 15 million barrels a day of oil from entering world markets, about a 15% supply haircut. Presumably, with nine countries (including Iran) neighboring the Gulf waterway and depending on it for commerce, economic incentives will have a greater say over time and traffic will increase. But the logistical pathway is unclear, including whether an elevated, extended presence by the U.S. and/or other NATO naval forces in the region will be needed.

How are Oil and Other Commodity Disruptions Affecting Key Sectors/Economies?
The steep rise in the oil price (with WTI breaching $100 for only the second time in more than ten years, the other a brief spike in mid-2022) will have numerous dislocating effects within the world economy. Oil-dependent and importing countries, many in Asia, and energy sensitive sectors, such as transportation, steel/aluminum, and chemicals/petrochemicals, face sudden new challenges. Russia, with now U.S.-loosened sanctions on its sale of pricier oil, appears to be a beneficiary.

Importantly, it’s not just oil; natural gas, agricultural fertilizer, and helium all are significantly impacted by the Hormuz chokepoint. The last of these, for example, is a key input in semiconductor and MRI hardware manufacturing. All told, the OECD now sees higher inflation and lowered GDP growth in 2026, raising its U.S. forecasts for the first from 2.8% to 4.2%, and trimming the second from 2.4% to 2.0%, in the wake of the Iran war.
Today, there are a few redeeming factors, particularly when comparing to the severe oil shocks and recessionary conditions in the 1970s. Oil’s role in generating economic growth has been reduced by about half over the last fifty years, with world real GDP quintupling since 1970 while oil consumption has increased two and a half times. There are many reasons for this, including less reliance on heavy industry in favor of the service economy, a move away from oil to alternative energy sources, and major advances in energy efficiency. These improvements may explain why near-term recession fears have been held in check, at least so far.

What is Implied by the Upcoming Change in Federal Reserve Leadership?
Fed chair Jerome Powell’s tenure, two four-year terms, is set to come to an end on May 15th, and there is only one more FOMC meeting on Powell’s datebook, on April 29th. The reins are to be handed over to Kevin Warsh, who made his name as New York Fed governor during the 2008 financial crisis, and his selection earlier this year by President Trump was seemingly well received by the markets and broader audience. And unlike some predictions, his presence as successor in waiting has not created any pointed public policy dissent or distraction for Powell as he completes his final months.

That said, Warsh still needs to be confirmed, and while hearings are loosely expected by mid-April, it may be delayed pending resolution of an investigation into Powell’s handling of the Fed’s office renovations, with the investigation itself hung up in a Senate dispute. Also, Powell may well stay on as an FOMC member after the hand-off, stating that he would like the investigation to be concluded before leaving, and also perhaps simply wishing to maintain a voice.

Whether Warsh can deliver on White House hopes for multiple rate cuts remains to be seen, and the calculus surely has changed with the actions in Iran. As with tariffs, a wait-and-see posture may be adopted, maybe followed by cuts down the road if inflation stays unexpectedly muted. Warsh may in fact prove more hawkish than Powell, and has been very public since 2008 in his opposition to the Fed’s aggressive “quantitative easing” practices. Specifically, QE has meant multiple trillions in Treasury and mortgage bond purchases over the years, designed to tamp down market interest rates. Any pivot to quantitative tightening could pressure rates upward.

How are Portfolios Positioned for this Shifting Investment Landscape?
Thayer portfolios continue to be moderately defensive, as noted, and well diversified across both the stock and bond sections. The geographic mix is about two-thirds U.S. stocks, slightly over the neutral weight in the benchmark ACWI (All Country World Index), and a third in mostly developed non-U.S. markets. We recently (in 2025) added some emerging market investments but remain lightly positioned there as well. Overall, the U.S. overweight seems appropriate as we negotiate post Iran invasion oil dynamics, and several Asian countries deal with blackouts.

The bond allocation continues to carry a shorter than benchmark maturity profile, designed to provide some protection if inflation and interest rates move higher, while still participating well if rates in fact decline. It may also be appropriate to stay short as we embark on the Kevin Warsh era (possibly bringing a new tightening bias) at the Fed.

We will rebalance portfolios as the second quarter begins. This likely will entail trimming non-equity holdings and topping up equities to restore allocations back to original percentages. As our equity book has held up relatively well, these trades should be relatively small, but we still like maintaining this discipline as it is free from emotion and often proves helpful over time.

We hope you are enjoying the beginnings of Spring. As always, please reach out with any questions or concerns.

David Beckwith, CIO