Monthly Economic Insights

Resilient markets, rising complexity

Markets entered the year with remarkable resilience, and that remains true today, but the environment is becoming more complicated.

The first quarter ended with a strong day in equities, yet both the month and quarter finished lower overall. Geopolitical tensions and rising energy prices have weighed on performance. And still, markets have held up better than many expected.

Part of that resilience reflects history. Markets have a track record of working through geopolitical shocks and recovering over time. More importantly, the underlying fundamentals remain intact. 

Corporate earnings, and expectations for those earnings, continue to hold up, even in an environment where estimates often move lower. But the backdrop is shifting.

Stagflation risk, but not a reality (yet)

One of the more discussed risks today is stagflation—a period of slower growth paired with persistent inflation. We don’t see it as a high risk, but the direction of recent data makes it a credible scenario to watch. 

Growth is moderating. Inflation remains above the Federal Reserve’s target. And energy prices, a key input across the economy, have moved higher again.

This creates a difficult balance for policymakers. Tightening too aggressively risks further slowing growth. Easing too soon risks re-igniting inflation. 

For investors, the challenge is similar. Traditional portfolios have historically struggled in stagflationary environments, as both stocks and bonds can come under pressure simultaneously.

Inflation remains the linchpin variable. Near-term expectations have moved above 3%, while longer-term expectations remain closer to the Fed’s target. At the same time, the labor market is cooling, but not breaking. It is a “low-hire, low-fire” environment, suggesting stability, but not strong acceleration.

No misery, for now

Importantly, today’s environment is not one of extreme stress. A simple measure like the “Misery Index,” which combines inflation and unemployment, remains in the 6–7% range, well below levels seen in true stagflationary periods. In other words, risks are rising, but the system remains far from distressed.

At the same time, investor positioning deserves attention. U.S. households are more heavily allocated to equities than at nearly any point in history. That reflects confidence, but it also means the margin for error may be smaller. 

Bottom Line
Markets are navigating a delicate balance: resilient fundamentals alongside rising risks. For investors, this is not a call for dramatic change. But it is a reminder of what tends to matter most over time:

• Revisit asset allocation
• Rebalance where needed
• Maintain diversification

The path forward may be less certain, but the principles remain consistent.

Stay invested, but not overextended. Stay diversified, but not complacent. And above all, stay disciplined, especially when it feels least necessary.

Invest well. Be well.

— Rusty Vanneman, CFA^®, CMT^®, Chief Investment Officer (CIO), FNBO Wealth

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