So far, 2026 has been a classic zigzag year for the markets and our portfolios. We had a tough month, then we had a better month. Then we had another tough month, then another better month, and so on. In May, we zagged again into another tough month due mainly to the war in Iran. Economic fallout from the conflict triggered a spike in long-term interest rates, which naturally created a headwind for many of our bond strategies.
Specifically, the interest rate on the 10-year government bond rose from 4.37% at the end of April to 4.6% by mid-May.1 As a result, our portfolios of bonds and bond-like instruments gave back about 1% of their gains last month on a median basis. Every allocation is different, but most of you should see a slight decrease in your latest statement, due mainly to this interest rate headwind.
I say “mainly” because there were other challenges for the markets in May as well, including a downgrade in growth estimates for the first quarter. The GDP had originally been up by a reported annualized rate of 2% for Q1, but in May that estimate was lowered to 1.6%, indicating slower economic growth.2
Then, of course, there was inflation. The general inflation rate is now up to 3.8%, and even the core index — with fuel costs removed — is at 3.3%.3 Though unemployment stayed fairly steady in May, with prices rising and growth slowing, it’s not surprising that this would have some negative influence on the markets.
The Big Exception
The one big exception to all this was the stock market. Wall Street maintained its strength in May thanks to the tech sector, which has been leading market growth for about two and a half years. Artificial intelligence companies are dominating once again after having weakened for a time earlier in the year, allowing for a more balanced market. But with the war in Iran and the softening economy affecting consumer, utilities, energy, and other market sectors more strongly than the tech sector, AI is back in the driver’s seat.
All in all, the S&P 500, which includes all of the Magnificent 7 tech companies, is up by about 11% for the year, with nearly half of the growth coming in just the last month.4 In short, this is one of those periods where the stock market isn’t necessarily an accurate measure of the economy overall because it is so skewed toward these AI companies.
Which isn’t to say that the economy is bad, of course. We’re not in a recession, and there is no real talk yet about the possibility of a recession. But we are in a slowdown and facing some challenges, the most immediate being inflation due mainly to the conflict in Iran. Fuel prices are now a solid 50% higher than they otherwise might be, and keep in mind that high fuel costs trickle down to just about every other area of the economy. Everything we buy in stores and restaurants needs to be shipped, flown, or driven in, and when it costs more for companies to deliver their goods, and more for manufacturers to deliver the materials to make those goods, all these higher costs get passed down to the consumer.
Temporary Blip
Still, we know that much of this is being driven by the Iran conflict and the closure of the Strait of Hormuz, which is hindering the global oil supply. Therefore, so long as the conflict gets resolved within a reasonable time frame and the Strait is reopened, we can probably expect fuel prices and inflation overall to come back down again. The consensus now is that this is only a temporary blip that shouldn’t lead to any kind of prolonged economic downturn. Even the Federal Reserve seems to share that outlook and has indicated there is little chance they will adjust short-term interest rates up or down before the end of the year. 5
All the same, it seems likely we will continue zigging and zagging between good months and tough months for a while. Fortunately, that’s nothing new. The markets are always challenging to some degree, and as experienced money managers, we have certainly managed your accounts through more challenging periods than this. We know how to manage them through high inflation, rising unemployment, slowing economic growth, and even unexpected black swan events like the financial crisis and the pandemic. With that in mind, you can rest assured we’ll manage well through whatever may come in the months ahead. Remember, the whole idea of our income-first, growth-second approach is to give you a strategy designed to help protect your portfolio and help ensure your income regardless of market conditions.
So, even though those of you in our fixed income portfolios may have given up some gains in May, I believe there’s a good chance you’ll recoup those losses in June if this zigzag pattern continues. Nothing is certain, but also keep in mind that when you’re investing for income first, growth second, any loss due to market volatility is only a temporary paper loss because the face value of your investment is more protected, and your income is unaffected.
As always, if you have any questions or concerns, give our office a call at any time. Meanwhile, have a great June!
Sources:
1 https://www.marketwatch.com/investing/bond/tmubmusd10y?countrycode=bx
2 https://www.wsj.com/economy/q1-gross-domestic-product-revision-e1a6ff93
3 https://tradingeconomics.com/united-states/inflation-cpi
4 https://www.marketwatch.com/investing/index/spx
5 https://finance.yahoo.com/personal-finance/banking/article/fed-rate-predictions-2026-154647304.html
June Recipe: 5-Ingredient Chicken Salad
Ingredients:
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Directions:
1. Start by chopping or shredding the cooked chicken into bite-sized pieces.
2. In a mixing bowl, combine the cut chicken with chopped celery and halved grapes.
3. Add the mayonnaise and dill to the mixture, then gently fold them in.
4. If you prefer, sprinkle in a pinch of salt and pepper to enhance the flavors and give it a good mix.
5. Serve immediately or refrigerate until you’re ready to eat. For easy meal prep, divide into mason jars before storing.
The 5-Ingredient Chicken Salad recipe: 5 Ingredient Chicken Salad Recipe | Everyday Family Cooking