***Q1 Client Report***

One thing is for sure; the past 15 months have not been quiet. On an apolitical basis, Donald Trump does not like when things are status quo. He doesn’t like copacetic. He seems to create or encourage chaos, which is a well-known style of management, like it or not. I would almost go as far as to say that President Trump is most successful when he is successful using chaos theory. Whether you love or hate the president, my comments are not to support or oppose your opinion.

While Q1 and early Q2 2025 were all about the on again, off again tariffs and the ensuing tariff tantrum in the markets, Q1 2026 may have equaled or exceeded that with its geopolitical news. It was a dizzying three months both home and abroad. The controversial abduction of Venezuelan President Maduro was a huge event at the time. By quarter’s end, most Americans had completely forgotten.

Battle lines were drawn and oil began to rally from its bear market bottom. I thought there would be a huge opportunity for global energy companies to rebuild the infrastructure in Venezuela in the coming years with security guarantees from the U.S. government. Oil supply would increase and the Venezuelan people would win. Little did I know that Maduro was either just an appetizer or a scrimmage for what was to follow in Iran, by far the biggest story of the young year and arguably the past few years.

As usual, President Trump rarely surprises anyone. He clearly telegraphs so many of his moves. He ordered carrier groups to the region. He publicly warned the Ayatollah. Trump followed through. Battle lines were drawn again. Oil surged, again; this time from the mid-60s to almost $120, the day I warned that several technical factors pointed to an impending peak rather than further surge as a number of pundits and Wall Street firms predicted. This was yet another example of one of my favorite old adages. If it’s obvious, it’s obviously wrong.

The war occupied most of the headlines for the rest of the quarter. Similar to the on again, off again tariffs, we had the on again, off again ceasefire. Elsewhere, and largely forgotten, the world participated in the winter Olympics. I don’t know about you, but I felt underwhelmed this time around. I didn’t sense the widespread interest nor the unique and widely followed human interest story.

In DC, Congress battled over, what else, funding. Congress could not agree on fully funding the Department of Homeland Security which included ICE and TSA, so we had a partial government shutdown. The Democrats wanted systemic changes to ICE while the Republicans wanted a clean funding bill and then negotiation. In the end, President Trump signed an Executive Order using spare funds from elsewhere to fund TSA in a “national emergency”.

There is so much to unpack there, but I will leave my two cents as this. Government shutdowns should not exist. If Congress cannot agree on funding, then the previous levels should hold until new legislation is passed. And if that is unacceptable then Congress should not get paid while there is a shutdown. Then you will see how fast they reopen the government. It’s insulting and beyond hypocritical to hear Congressmen cry and whine that they have families to feed and bills to pay.

Economically, inflation began to warm as the data changed. That warming was measured in fractions not fully percentages. I do not see a spike coming. The labor market was all over the place, a topic you are probably exhausted from my writings. January saw a surge in new jobs and a much higher than expected 159,000 with calls for a renewed expansion. That lasted all of one month as February saw the economy shed 95,000 jobs, which was very unexpected. March reversed that trend as new job creations soared by 178,000.

How can the data be so volatile or unreliable? First, I believe the data are accurate when reported. I absolutely do not believe in any conspiracy theory that the government is manipulating data. The problem is the data collection methods. They are beyond antiquated and the estimate to update is into the billions, an amount neither party in Congress wants to spend. To the government’s credit, they do revise the data a month later and then do a detailed update and square up a year later.

With the economic data volatile, it is best to average everything out. On the jobs front, the economy is creating roughly 90,000 new jobs a month, which is just below the estimated 100,000 new jobs needed to for population growth. Other data suggest a growing economy at reasonable levels with inflation warming due to soaring energy prices. Remember, because the U.S. is energy independent, it is highly unlikely we will see shocks like the 1970s.

Given all that, my favorite Fed indicator, the 2-Year Note, climbed back above the Federal Funds Rate by a few ticks at quarter-end. Basically, the two rates are close enough to be at equilibrium, suggesting no interest rate moves foreseen. That suits outgoing FOMC chair, Jay Powell, just fine. His successor, likely Kevin Warsh, will have his hands full as he is more of a hawk where President Trump wants rates cut sharply. The confirmation hearings are going to be must see TV!

Turning to the markets, the venerable Dow Jones Industrial Average achieved my 50,000 target, first offered in Q4 2022. As usual, people laughed and scoffed and gave me the “BUT BUT BUT” about soaring inflation and impending recession. I have made a career going against the masses and against the grain. If it’s obvious, it’s obviously wrong. When pundits are smug and the media is one-sided, run to the other side.

The Dow 50K celebration was brief as the market peak followed shortly thereafter. When all was said and done, the stock market declined 4-6% in Q1 while bonds were essentially flat. Crude oil almost doubled from $57 to $101. Gold jumped almost 8% while Bitcoin and silver experienced crashes, the former losing more than 50% of its value since its 2025 high.

Interestingly, Bitcoin appears to have bottomed in early February, right as stocks were peaking. It is certainly possible that the cryptocurrency sector may be leading the markets. Regardless, the lack of chirping from the crypto crowd has been a breath of fresh air. It was exhausting to hear the constant beat of a perma-bullish narrative that led to countless individuals not only going all in on an asset, but adding leverage on top of that without any plan to manage risk. I hope this latest 50% crash in Bitcoin serves to give pause to those spinning one way narratives.

At this point in the report, I usually write about my barbell strategy for investing. If you picture a barbell from the gym, there is a long, thin bar with big weights on both ends. Think of those weights as our conservative strategies and aggressive ones, the exact proportions do not matter yet. In theory, your money would have higher weights to conservative and aggressive strategies, especially if you are in or very close to retirement, and lower allocations to the middle of the road strategies.

This barbell approach has also worked very well with monies being transferred in from 401K and 403b plans as those pre-packaged plans rely heavily on bonds for the more conservative approach and do not account for interest rates rising. Additionally, their aggressive choices do not usually reward the risk taken. If you would like to learn more about the barbell approach, we can set up a meeting, call, or Zoom.

The economy remains on solid footing the bigger the picture you look at. Goldilocks comes to mind. It is easy to cherry pick pockets of negativity, but the overall summary remains good. The final significant effect from the One Big Beautiful Bill hits this quarter in the way of major tax refunds for lower earners. That windfall should see its way into the economy by summer on top of the massive wave of deregulation that has been seen over the past few quarters. Inflation should be warmer, given the rise in energy prices, somewhere above 3%. I do not believe a new inflation scare is here now or is imminent. The effects of the government shutdown are gone, but there remains some noise from the partial shutdown. Given how volatile the Q1 labor market was, I am almost scared to venture a guess on what lies ahead in Q3. Using a three-month moving average, the economy should create another 150,000 to 200,000 new jobs by this time in July.

I have never personally known any of the members of the FOMC, let alone the Chairman of the Federal Reserve. That will change if Kevin Warsh succeeds Jay Powell. I knew Kevin Warsh in the 1990s on a social level and I will say this. You cannot find a more intelligent, more genuine, more humble and overall good guy than Kevin Warsh. He is as ethical and moral a person as I have ever met. And while I disagree with some of his economic leanings, I think he will do an outstanding job. Part of that job will be disappointing President Trump on the massive rate cuts expected. Although the Fed will not cut interest rates in Q2, I do believe a cut or two will be coming in the second half of 2026.

Turning to the financial markets, the almost 10% stock market correction, so far, should wrap up in early Q2 with a run to new highs by July 4th as I outlined in my 2026 Fearless Forecast. It is the quality and breadth of the rally that will determine if another decline lies ahead as many seasonal and cyclical patterns suggest or just a pause to refresh before another leg higher unfolds. I receive questions all the time about why markets are doing something when something else suggests differently. Stocks roared higher in Q2 2020 when COVID consequences were just beginning. The same happened in early 2023 when inflation hit 40-year highs. Markets surged when tariffs didn’t even hit prices in 2025. And 2026 is all about oil and Iran. Here is the bottom line. Markets price in outcomes after the initial shock throws them for a loop. Anytime I hear, “BUT BUT BUT” from people about what should happen, it usually means they are on the wrong side and clinging to a narrative they heard from TV pundits or their friends. I am the last one to claim I know everything. I don’t. I make mistakes every single day. However, I try to learn from them. When it comes to managing our portfolios, I keep it simple. As you know, we gather data. We model data. We analyze data. We execute on data. The rest I will leave to those much smarter than I am.

The foundation for the “risk on” markets in 2026 remains solid. The longer-term has some challenges. Bears are hanging their hats on things like the Shiller PE at its second highest level ever as well as Warren Buffet’s stock market value to GDP being strongly overvalued. These are indisputable facts. However, they are terrible at timing. Valuation traps can last quarters or many years. It took four years for valuation to matter in the Dotcom era. Eventually, this will matter. I can only speculate that the catalyst for the next multi-year bear market will be rooted in some AI bust.

The bond market remains in a trading range which has nothing to do with what the Fed does or does not do. Long-term rates are set by the markets, and the Fed “usually” follows them. I think yields on the 10-Year should be in a range between 4% and 4.5%. One of my long-term concerns is that the Fed cuts and cuts short-term rates, but long-term rates go up. That will be fine if it’s slow and does not exceed 5% too much. If it’s quick and breaches 5%, that could be a “Houston, we have a problem” moment. For Q2, the bond market is saying that GDP growth is solid and that inflation is not moderating.

Three months ago, I forecast that gold and silver bulls would be punished in Q1. Silver saw an historic crash and gold corrected more than 25%. I see modest returns and volatility for both in Q2. I am most interested to see what the metals do if and when they revisit their lowest prices from Q1. I also forecast that oil would rally into the $60s. It hit $119. The peak looks to be in. Volatility should settle down and oil should enter a trading range above $70 and below $100. The U.S. dollar has been moving sideways since July. Three months ago, I offered that a downside break of the range would be buyable. That happened in January and the greenback immediately bounced to the top of the range. The dollar looks like it is bottoming and perhaps preparing for a new bull market later this year. Bitcoin achieved the minimum downside projection of -50% from its peak. I had thought -50% to -70% was the target. While I do not see another mania in Q2, I do see Bitcoin as buyable with more upside coming.

Finally, please remember some of the opportunities at hand. We will do our best to harvest tax losses in taxable accounts. We did that in Q1. If you have IRAs, you should strongly consider ROTH conversions with the goal of having as much as possible in ROTHs during retirement. ROTHs are the single best account structure ever invented and far too few people take advantage of them. And I equally love ROTH 401Ks for your employer sponsored plan, especially for folks under the age of 50.

Updating your retirement projections is an invaluable tool, especially during periods of market weakness. Remember, we account for 10% declines, 20% declines and multi-year-bear markets in our projections. Stock market declines reinforce our projection process. It is those projections that matter most over the long-term, not the day-to-day market volatility which causes discomfort for so many investors.

Please remember that while I publish regularly on the blog and speak freely in the media, our non-emotional, quantitative models dictate how each strategy invests, not my personal feelings or opinions. It is sometimes difficult when one group of models reduces exposure while another group remains in full steam ahead mode. I just keep my head down and follow what we built as best I can.

Please continue to share your feedback, positive and negative. Investing is a marathon not a sprint and the long-term future continues to look very, very bright. We look forward to sharing that with you over the coming years. Remember, I am always interested in meeting, whether it is to create or update retirement projections on your financial situation, review the strategies in your portfolio, run social security analysis’ on when and how to file for the best benefit, discuss your estate or even smaller transactional-type issues like securing a mortgage or weighing insurance. Again, here is the link to my calendar to schedule a meeting in the office, call, Zoom meeting. https://schedulewithpaul.as.me/

Thank you for the privilege of serving as your investment adviser!

Sincerely,

Heritage Capital, LLC

Paul Schatz AIF®
President

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