Lexington – Client Letter, April 2026

Bruce P. Thompson
Wealth Manager, Executive Director

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As Lexington Wealth Management becomes Hightower Signature Wealth, I will be continuing at the practice in an emeritus capacity, but the time has come for me to pass the torch for future investment letters into the capable hands of our firm’s research group.

After penning client letters for thirty-five years—five of them at LWM—I wanted to take this opportunity to offer my heartfelt appreciation for your readership, thoughtful comments, and all that you have given and taught me in return.

In the fitting words of Edward R. Murrow, I wish you “Good night and good luck.” Reflecting on the events we’ve encountered over the decades brings to mind the adage that, while history doesn’t necessarily repeat, it does rhyme! Against the tides of media near sightedness, I hope you will continue to seek wisdom over mere information and equip yourself with the enduring perspectives that history provides.

Sincerely,

Bruce P. Thompson
Wealth Manager, Executive Director
Hightower Signature Wealth
bthompson@htsw.com

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SUMMARY

• Rising oil prices and geopolitical risks prompted a market reversal in the first quarter, but the weakness has been relatively contained on hopes for a quick end to the Iran War.
• We look at how past oil shocks might inform today. Much depends on the length of the conflict and the strength of the economy going in. The U.S. is now a net exporter of oil, which may mute impacts.
• U.S. equities trade at optimistic valuations reflecting expectations for lower rates and marked improvement in earnings. The oil shock complicates the path for the Fed – and investors.
• Returns in Q1 weren’t uniformly negative as the broader market cushioned weakness in headline indexes, suggesting that so far investors haven’t been panic-selling. Diversification worked.
• We offer focus comments on tech stocks, international equities, and bonds. 
• Maintaining perspective is critical. Markets will fluctuate, risks will evolve and test conviction—but the combination of a sound plan, alignment with long-term goals, and disciplined execution – including rebalancing — remains the most reliable path to compounding wealth over time.

OIL’S WELL THAT ENDS WELL?

After extending last year’s momentum through the first two months of the year, both stock and bond markets slid in March amid rising risks—both tangible and unknown—related to the Iran War. Investors were rattled by uncertainties surrounding geopolitical disruption and the impact of rising oil prices.

This is unfolding in the context of a stock market priced on optimistic—but not unfounded—expectations for strong earnings growth, gradual continued improvement in inflation, and additional Federal Reserve rate cuts. Post-WWII oil shocks have posed a hard to manage combination of slower growth and rising inflation, often leading to recessions. More recently though, oil prices have had a muted impact on the economy because the U.S. is now a net exporter.

Geopolitical conflicts present significant unknowns, and this one is happening amid a broader realignment of global trade and strategic relationships. Adding to the worries is the way communications are being carried out on social media, making it hard to separate fact from fiction. Still, without diminishing the human toll of these events, while wars have brought near-term instability, markets have gone on to produce healthy returns nevertheless.

What happens next is impossible to predict with confidence — much will depend on how long the war lasts and how severe future strikes may be. So far market impacts have been relatively modest and diversification has served clients well, with broader exposures offsetting weakness in more concentrated equity segments.

This is the essential takeaway for clients. Effective investment management isn’t about predicting when risks may bubble up. Rather it is about understanding, accepting, and preparing for risk in advance.

That means maintaining asset allocations aligned with your risk capacities and long-term financial goals, paying attention to liquidity needs in case trouble arises, and building diversified portfolios designed to weather a range of outcomes over time. It also means following rebalancing disciplines so that overall portfolio risk levels stay largely constant as asset class values change relative to one another. 

While pullbacks can be unsettling, they are a normal part of market cycles. The fact that staying invested is difficult is exactly why it has been rewarded over time. Of course, “maintaining perspective” is a critical aspect of staying with well-designed investment plans and we hope that the insights provided in this letter supports that effort.

Quarter Review

During the quarter:

• The S&P 500 briefly fell into correction territory—defined as a decline of 10% or more from recent highs—before recovering some ground on hopes of a quick resolution. The index finished the quarter down 4.33%.
• The global MSCI All Country World Index (ACWI) declined 2.64%, with international markets providing relative support.
• International equities, as measured by the MSCI ACWI ex-U.S. Index, declined 1%, outperforming the S&P on a relative basis.
• The Large Cap Growth segment of the S&P led the market lower with a decline of 10.4%.
• The Bloomberg Aggregate Bond Index, which earlier had been up more than 2%, finished roughly flat.

Returns were far from uniformly negative, underscoring the benefits of diversification. This suggests that, rather than “panic selling,” investors were rotating into sectors more insulated from—or benefiting from—the war, as well as into areas with more attractive valuations relative to growth-stock leadership.

• The Large Cap Value component of the S&P gained 3.3% during the quarter. Within this segment, the S&P Energy Index surged 38% and the Morningstar Dividend Leaders Index returned 15%. Materials, defense contractors, consumer staples, utilities, and REITS also bucked the downturn.
• Small-cap stocks gained 2%, while Mid-caps held steady. Having lagged over the last few years, the Small and Mid-cap indexes are trading at 40% and 25% discounts, respectively, to the S&P 500.
• Real Estate Investment Trusts (REITs) rose 4.78% and, dare we say, appear to be stabilizing after a prolonged period of underperformance. Gains were led by realty sectors with improving fundamentals and constrained supply, including storage, healthcare, data centers, and strip malls.

Perspectives on Large Cap Growth and Tech Stocks

The correction in technology stocks is not entirely surprising given their high valuations after five years of outsized gains. That has resulted in a concentration anomaly: the top 10 companies in the S&P 500 now account for roughly 40% of the index’s total market value. Based on simple math, any bout of general selling is likely to have an outsized impact on this group.

Given this dynamic, it is prudent to monitor portfolio exposure to large-cap growth stocks across all holdings — and within funds—and to stick to tax-aware rebalancing disciplines, in case economic, regulatory, or valuation-related pressures turn the mega-cap boom into a bust.

We emphasize that this does not look like the late-1990s tech bubble. Unlike that boom and subsequent bust, today’s leading tech companies are large, with growing, high-quality profits—but the risks associated with overconfidence and high valuations do rhyme with prior cycles.

One observation from prior technological cycles is that the companies and sectors that ultimately benefited most from a transformative technology are not always the ones that dominated the initial infrastructure build-out. Railroads built the arteries of 19th-century commerce, but it was the manufacturers, retailers, and agricultural producers using those railroads which generated much of the long-run economic value.

In a recent Barron’s interview, Hightower Chief Investment Strategist, Stephanie Link, points out that AI driven capital spending is reverberating benevolently throughout the “AI food chain,” which she expects will continue for many years. The build-out of data centers already announced by the Mag Seven is sparking, for example, long overdue investments in the power grid, which has not been upgraded in over 50 years. She also believes that “we haven’t even gotten out of the dugout when it comes to cybersecurity.”

This reinforces the importance of maintaining broad diversification rather than concentrating in any single equity sector. Moreover, the AI revolution is a singular domestic phenomenom – companies all over the world may benefit.

Perspective on International Stocks

Many investors question if international equities can sustain the relative strength that began last year. While Europe and Asia are less energy independent than the U.S., and the Iran conflict may weigh more heavily on growth in the immediate future, several factors support the longer term case for international diversification:

• An overvalued U.S. dollar relative to trade fundamentals.
• Lower equity valuations – foreign markets collectively trade at about a 40% discount to the S&P 500 Index.
• Due to the outperformance of U.S. equities over the last market cycle, investors are significantly under-allocated to foreign stocks. Since 2009, the weighting of U.S. stocks in the MSCI ACWI has increased from about 40% to 63%.

The case for international investing is not just about mean reversion – the tendency for relative asset class returns to gravitate toward averages over the long term — it also reflects meaningful diversification benefits. The MSCI ACWI ex-U.S. Index is less concentrated than the S&P 500, with the top 10 holdings representing just 14% of the index. The two largest positions—Taiwan Semiconductor and Samsung—account for only 4% and 2%, respectively, and just four of the top holdings are in the technology sector.

In addition to spreading risks, diversification involves combining assets that are likely to perform differently over time, reducing overall portfolio volatility, and expanding the opportunity set. It is tempting to think the long cycle of relative strength for U.S. stocks will continue indefinitely. However, international stocks also experienced long periods of leadership in the 1970’s, 1980’s, and 2000’s.

One insight is that, while the U.S. drove globalization and free markets—and benefited from it handsomely—this also made the world a smaller place and led to increased correlations between global markets, thereby reducing the diversification benefits of international equities. Globalization also contributed to socio-economic dislocations and income disparities in the U.S. Current efforts to reshape global trade relationships counterintuitively may reduce economic and market correlations—potentially restoring diversification benefits of international investing.

Perspectives on Bonds

The increase in bond yields in March reflects concerns about inflation tied to rising oil prices, increasing government debt levels, and reduced expectations for Fed rate cuts.

Until just a few years ago, bonds offered little yield, prompting investors to reach for income by extending durations and increasing interest rate risk. It also led investors to allocate larger proportions in corners of the markets that entail higher credit related risks – lower rated corporate bonds and, increasingly, private credit. Those higher yields can sometimes mask underlying risks that may not be apparent until credit and liquidity conditions tighten.

The bond environment changed in 2022, as higher rates restored fixed income to its traditional role as an income-generating anchor of a balanced portfolio. Today, investment-grade bonds—as measured by the Bloomberg Aggregate Bond Index—yield approximately 4.7%, in line with their historical five-year historical average returns.

Bonds once again offer meaningful diversification and maintaining bond allocations near strategic portfolio targets remains prudent. Further, given the “Catch-22” facing the economy and Fed  interest rate policy, there does not appear to be a compelling case for extending duration or credit risks beyond normal portfolio targets.

Perspectives on Oil Shocks and Geopolitical Risks

Not all oil shocks are the same. The duration of an oil shock—and the strength of the economy entering it—are critical variables.

Geopolitical events carry real human consequences — while they have created short-term instability, their impact on portfolios often fades as situations stabilize. This pattern has held true for markets in recent years, as seen during Russia’s invasion of Ukraine, the attacks on Israel in 2023, and more.

All of the recessions in the post-WWII era characteristically have been preceded by sharp increases in energy prices, but not all oil shocks have resulted in recessions. Sustained higher oil prices can reduce growth while also increasing inflation, thereby restricting the Fed’s ability to offset weakness by lowering interest rates. What’s important is how long the conflicts have lasted and what was happening with broader economic fundamentals.

This was evident after the 1973–74 Arab oil embargo, which was a deliberate response to U.S. support for Israel during the Yom Kippur War. At that time, the U.S. was still adjusting to the 1971 transition away from the gold standard, which resulted in significant devaluation of the U.S. dollar and a stagflation shock. The 1979–80 Iran revolution and Iran–Iraq War resulted in production shortages and a second stagflation shock to an economy still bruised from the first.

The 1990 Gulf War resulted in a mild U.S. recession, and the S&P 500 fell about 21% from its peak. Of course, stocks recovered and produced record gains in the following decade. Crucially, the disruption only lasted a few months—an important reminder that the duration of a shock often matters as much as its magnitude.

*As of 3/31/26

*JP Morgan, Guide to the markets, as of 3/31/26

Since the 1990s, the impact of oil shocks on the economy has been more muted because the U.S. is less energy-dependent, production is more efficient, and the U.S. is now a net exporter of oil. Today, what consumers and businesses may lose to higher oil prices, domestic producers may gain, unlike during the 1973–74 oil embargo when wealth was transferred abroad.

The increase in oil prices from 2002–08 was not primarily a supply disruption; rather, it was demand-driven by a decade of rapid growth in China and unprecedented oil hoarding. The oil price crescendo in 2008 contributed to the severity of the Great Recession, but the downturn itself was triggered by the collapse of the housing market and the subsequent credit crisis.

More recently, from 2011 to 2014, oil prices remained elevated for several years due to the Arab Spring, yet no recession occurred. In 2018, U.S. sanctions on Iran pushed oil prices toward $100 per barrel before they declined. GDP grew 3.1%, and although markets experienced volatility, the S&P 500 gained 28% in 2019.

By the time of Russia’s invasion of Ukraine in 2022, the fracking revolution had made the U.S. a net exporter of petroleum products. Inflation surged to 9% that year, but the increase in oil prices contributed only about 1 percentage point to CPI. GDP still grew 2.1%, and a recession did not materialize. Inflation was largely driven by prolonged near-zero interest rates and aggressive fiscal stimulus to offset COVID-related weakness. As the economy reopened, pent-up consumer demand, supply chain disruptions, and a housing shortage caused inflation to spike. While the S&P 500 declined 19%, it quickly recovered.

As of this writing, the trajectory of the Iran conflict remains uncertain. However, there is increasing pressure to de-escalate given rising economic costs, constrained military resources, and the approaching midterm elections.

That last factor may prove crucial, as rising gasoline prices will have tangible and outsized impacts on already stretched lower- and middle-income consumers. Given that the sitting president’s party typically loses seats in midterm elections, the administration has strong incentives to bring the conflict to a swift conclusion.

Overall, the current Iran War is happening in the context of a resilient economy. Employment and wage growth has been softening, though the unemployment rate may stay low due to baby boomer retirements and a decline in immigration. Significant tailwinds remain in the form of stimulative tax policy, deregulation, productivity gains, and rapid investment in artificial intelligence. Ex-oil price impacts, estimates for GDP growth are in the 2.5% range, while corporate profits are expected to surge 13% to 15%.

Further, the impact on consumers of higher energy costs will be cushioned by the large tax refunds enacted last year, which will hit consumers’ bank accounts beginning next month, and potential tariff rebates later this summer.

Final Thoughts

Recent events are no doubt unsettling and may lead to further market turbulence. However, history consistently shows that such periods—while uncomfortable—shouldn’t derail well-constructed, long-term investment strategies.

The more durable lesson is that investment success is not driven by predicting and reacting to uncertainty when it occurs, but by preparing for it in advance. Portfolios built on thoughtful asset allocation, broad diversification, and disciplined rebalancing are designed not for a single outcome, but for a range of possible environments. This represents a rare “free lunch” in investing.

Maintaining perspective is critical as well. Markets will fluctuate, risks will evolve, and headlines will test conviction—but the combination of a sound plan, alignment with long-term goals, and disciplined execution remains the most reliable path to compounding wealth over time.

Investment markets are a zero sum game – for every winner, there is a loser. Focusing on these practices offers the best chance of taking return from your competitors in the markets over time. We’re here to help you win that game!

As winter gives way to the sun’s warming light, we wish you a resplendent spring – and beyond. No matter if the name on the door says Lexington Wealth Management or Hightower Signature Wealth, we remain committed to helping you navigate these environments with clarity and discipline. Thank you for your continued trust and partnership—we look forward to the opportunities ahead.