Commentary

Stocks and bonds began the year with strong gains in January and February, but geopolitical conflict with Iran, higher oil prices, and renewed inflation concerns led to increased volatility in March. As a result, stocks ended the quarter modestly lower, while bonds were largely flat. Against this backdrop, real assets, which includes exposure to commodities and energy, performed well and delivered solid gains.

Geopolitical events like the Iran conflict often feel unprecedented in the moment and raise understandable concerns about the global economy. While the human cost of conflict cannot be overstated, history shows that markets tend to respond to such events in the short term and recover quickly once uncertainty subsides. Consider that the S&P 500 was higher one year after the onset of both the First and Second Gulf Wars. Even during longer conflicts such as World War II, the Korean War, and the Afghanistan War, markets were meaningfully higher five years after hostilities began. While every conflict is different, the consistent lesson is that making major portfolio changes during periods of stress increases the risk of missing the recovery.

Rather than attempt to predict how long the current conflict will last, our focus remains on managing portfolios designed to navigate a wide range of outcomes. Within U.S. equities, we maintain exposure to value-oriented stocks, which include more defensive areas of the market that tend to hold up better during volatile periods. This allocation benefited portfolios this quarter, particularly through energy stocks,

which rose 33%. Other value-oriented sectors performed well, including materials (up 11%), utilities (up 9.4%), and consumer staples (up 7.8%).

In the growth side of the market, technology stocks faced headwinds during the quarter. After several years of strong performance, the technology sector declined 7%. The Magnificent 7 stocks (including Microsoft, Apple, Amazon, etc.) fell 12%, reflecting increased investor scrutiny whether large investments in artificial intelligence infrastructure will translate into future profits. In contrast, small company stocks performed well, as investors anticipate that smaller companies may benefit disproportionately from productivity gains driven by AI. At a time when technology is down, our portfolios have demonstrated resiliency by maintaining stock exposure across market sectors, company sizes, and investment styles, helping to reduce volatility and smooth long-term results.
In fixed income markets, the Iran conflict has contributed to increased uncertainty around inflation and interest rates. Higher oil prices raise concerns about inflation because energy costs affect transportation and manufacturing costs. In response, the Federal Reserve and other central banks around the world have paused further rate cuts. As a result, the yield on the 10-year Treasury rose modestly from 4.16% at the start of the year to 4.31% at quarter-end. Despite this increase, bond returns were essentially flat, as higher yields offset price declines.

The U.S. economy continues to show resilience. Unemployment is steady at 4.4%, and wage growth has been solid, with average hourly earnings rising 3.8%, which is slightly above inflation. Job growth slowed in 2025, with 181,000 new jobs added. The job market is currently reflecting both lower demand and lower supply as retiring baby boomers reduce the size of the workforce while slower job growth provides fewer jobs for those who want one. Positively, consumer spending, especially among high earners, has been robust and continues to power the economy.
Periods of heightened volatility can be unsettling, especially in a market that reacts sharply to headlines and social media posts. History consistently shows that staying invested through uncertainty is a key driver of long-term success, as recoveries often occur quickly and unexpectedly. We will continue to monitor developments closely while focusing on what we can control, which is maintaining diversification, managing risk, and keeping your portfolio aligned with your long-term goals.

Sincerely,

Your Harbor Group Team