Friday, April 17, 2026
The first quarter started strong but ended with a whimper as the Iran war began on February 28th. Imagine how the stock market would have responded had this battle with Iran occurred in the 1990’s when the US economy was much more dependent upon foreign oil. I would think our stock market indices would have been down 20% or more. As it turns out, hydraulic fracturing, or fracking, has allowed the US to be net exporters of oil since 2020. While the Dow Jones Industrial Average and Nasdaq experienced corrections (greater than 10% declines) over the past few weeks, their losses have been completely wiped out, and they are now on to new highs as I write this letter. With all of this said, the price of oil is still dictating the global economy and with the Strait of Hormuz now open (according to Iran), things are looking a bit more positive. Keep in mind that 20% of the world’s crude comes through that strait and Europe – in particular – will want to keep Hormuz open.
Typically, after three years of gains like we have experienced you would have some natural market volatility occur regardless of geopolitical events. The Iran event brought some of the profit taking to the forefront and many of the analysts we follow believe the S&P 500 can continue its climb to a +8 to 10% return for the year. I do not expect that climb to go straight up. As mentioned above, we will continue to see volatility in the months ahead. The S&P 500 was down 5% on March 31st and is now +4% for the year at the time of this letter. That is a +9% rally in just a few weeks. Thus, most of you are doing much better at present than the enclosed reports would indicate. That said, fasten your seatbelts as the higher price of oil continues to filter through the economy and will impact everything from the price to fill up our auto’s gas tank to airline travel to the price of our groceries. Some of those increases have not been fully felt by the consumer yet. Will inflation become a bigger probability in the months ahead? Perhaps. President Trump has been eager to have the Federal Reserve drop rates, so I am certain his pick for the new Federal Reserve chair, Kevin Warsh, would have had to be open to some rate cuts in order to receive Trump’s approval. The question is, once Warsh is in the hotseat, will he follow through with rate cuts or will he let the data speak and influence the Federal Reserve decision. As of now, no rate cuts are expected in 2026. At the beginning of the year, two quarter-point cuts were expected. Times have certainly changed.
In the coming months, CJ and I will be adding to our overseas exposure as that area still represents one of the cheaper areas to invest in right now. For example, the forward P/E ratio for the Dodge & Cox International fund is 12.4 while the forward P/E ratio for the S&P 500 is approximately 20.4. One way to look at the P/E ratio is that it is the number of years at the next 12 months of earnings that it would take to pay for the current price of that security – everything else being equal. The smaller the P/E ratio, the better. The historical average P/E ratio for the S&P 500 is 15, thus, the S&P 500 is more expensive from a historical and relative perspective when compared to international stocks – particularly to one of the funds we use for international equities: Dodge & Cox International.
– Best regards, Bill and CJ