Investment Commentary: Q1 2026

Oil & GDP

One area we are watching closely relates to oil. The chart above shows the correlation between rising oil prices and economic growth (changes in Gross Domestic Product aka GDP). What stands out is that recessions are somewhat associated with a 100% year-over-year increase in the price of oil. This is because oil’s role in being an input cost (for many of the products we own and its role in transportation) is substantial. When prices are high enough, we tend to spend less on other economically productive activities. As of this writing, there is a pause in hostilities. However, the War in Iran has led to higher prices, and we will continue to monitor for levels that risk an economic pullback.

Employment

Employment is another aspect of the economy that drives consumer spending. When total employment is expanding, the economy tends to grow. However, this is not always the case if inflation is increasing at a rate faster than employment growth. In the chart above, you’ll notice that when the line rolls over into negative territory, the storm clouds of recession appear (indicated by the grey vertical bars). Specifically, it signals that the labor market is no longer providing enough "new fuel" to offset the "friction" of inflation.

The good news is that, unlike previous cycles, we are currently seeing significant productivity gains (blue line in the next chart) from technological advancements such as AI integration. Productivity gains tell us workers are producing more value per hour of work, and as a result, GDP can grow even while payrolls remain flat (the "Jobless Growth" scenario).

Another positive aspect of employment is wages are growing faster than inflation (green line in the next chart) as measured by “Real” (inflation-adjusted) wage growth. So, despite slow growth in the labor market, workers are being more productive and getting paid for it.

Housing

"Housing is the Business Cycle" is the title of a well-renowned research paper by the late economist, Edward Leamer. The message from this research is that when consumers are building less houses, economic growth is at risk. Today, there is a lower contribution to new home construction than the past couple of years – indicating consumers are balking at the combination of interest rates and housing prices. We will continue to look for further signs of stress in housing.

Healthy Business Climate

The economy’s strongest contributor to continued growth seems to be coming from the business sector. In addition to healthy productivity gains, we observe other compelling indications of continued growth. Firstly, when looking at earnings growth expectations, as measured by the S&P 500 Index of the 500 largest public companies in the U.S., the chart above shows rather strong growth over the next year – despite higher oil prices.

Further, investors are suggesting corporate debt is in good shape. The chart above shows the extra yield premium investors demand to own riskier corporate bonds. Right now, the “spread” or yield premium over low-risk treasury bonds is low. Investors are not worried about corporations’ ability to repay debt

Summary

Recent productivity gains, full employment, solid wage growth for the typical wage earner, and strong projected earnings lead us to remain positive on the business climate for the remainder of 2026 – a typically healthy environment for stocks.

Further, interest rates are generally providing a positive yield over inflation – even for short-term vehicles like treasury bills (90-day T-Bill provides a 3.7% yield vs. U.S. Consumer Price Index 2.4% as of 04/08/2026). This means conservative assets in investor portfolios can reasonably provide income levels ahead of inflation. As a result, and despite all of the major headline events, we maintain the view that investors should stick with their long-term asset allocation objectives.