Q1 Market Review

For the first two months of the quarter, markets were relatively calm, with limited volatility across asset classes. That changed in March when the U.S. launched military operations in Iran, introducing significant geopolitical uncertainty. Oil prices surged, equity markets declined, and bond yields moved higher as volatility increased. Throughout the month, markets reacted sharply to developments in the Middle East, and by quarter-end, equities were nearing correction territory while bond yields were modestly higher.

This may sound familiar: equity markets were in a similar situation last year, when U.S. tariffs on imported goods sparked a sharp rise in volatility and pushed stocks into correction territory. Such events – geopolitical conflicts, policy shifts, high equity valuations, inflation, and recession risk-appear to be occurring more frequently, making investors feel like they are riding a roller coaster. Fortunately, our investments in convertible bonds can help mitigate volatility while providing attractive return potential.

Additionally, there are factors that do counteract some of the geopolitical uncertainties. 2026 bottom-up earnings growth projections for the S&P 500 are +17.6% with revenue growth pegged at 9.0% per year (FactSet). This growth rate is an acceleration compared to the last couple of years. Valuations, while still slightly above the 10-year average, have moderated, with the forward estimated P/E around 20X. A quick resolution to the macro difficulties of the moment could presumably see a resumption of the bull market environment.

Outlook

In the first quarter, our clients’ SMA convertible bond portfolios delivered slightly positive returns, compared to equities, which declined by over 4%, and bonds, which were broadly flat. Higher volatility and effective bond selection supported performance, while rising interest rates and wider credit spreads were headwinds. At the start of the year, markets expected two to three interest rate cuts, but stronger employment data and higher oil prices led to a shift in expectations. As a result, the yield curve flattened and the likelihood of rate cuts declined.

As the quarter ended, there was little indication of an imminent resolution to the conflict in the Middle East. Should tensions persist, it is reasonable to expect that financial markets will continue to experience elevated volatility and episodic risk aversion. In such an environment, we believe the investment case for convertible bonds remains compelling. The hybrid nature of these instruments—combining features of both equity and fixed income—positions them uniquely to navigate uncertain market conditions. Convertible bonds offer the potential for equity participation during periods of market strength, while their bond component provides a degree of downside protection when equity markets decline. As equities continue to show increased volatility, the convertible bond asset class can serve to help preserve capital and dampen overall portfolio volatility.

Sincerely,

IMPORTANT DISCLOSURES

Past Performance is not indicative of future returns.

Investments in convertible securities are subject to the risks associated with both fixed-income securities and common stocks. All fixed-income securities are subject to two types or risk: credit risk and interest rate risk. Lower rated fixed-income securities are subject to greater risk of loss of income and principal than higher-rated securities. When the general level of interest rates goes up, the prices of most fixed-income securities go down. When the general level of interest rates goes down, the prices of most fixed income securities go up. In general, stock and other equity security values fluctuate, and sometimes widely fluctuate, in response to activities specific to the company as well as general market, economic and political conditions.

This presentation is meant for broad discussion purposes only and is not intended as a recommendation to buy or sell any security. The reader should not rely on this information for investment purposes. An investment in convertible securities involves a risk of loss. The value of an investment in convertible securities may decrease as well as increase.

Index Description: 

Indexes do not include management fees, transaction costs or other expenses. You cannot invest directly in an index. 

The S&P 500 Total Return is an unmanaged composite of 500 large capitalization companies. This index is widely used by professional investors as a performance benchmark.