Safe Havens, Shifting Sentiment, and Staying the Course
The first quarter of 2026 was shaped by a familiar mix of geopolitical tension and shifting investor sentiment. The conflict involving Iran introduced fresh uncertainty into global markets, and while Canadian equities held up reasonably well, U.S. stocks pulled back meaningfully. Beneath the surface, we saw investors move toward safer ground, particularly into the U.S. dollar, as the quarter unfolded.
In Canada, the S&P/TSX Composite Index gained 3.29% over the quarter. It was a modest result, but a positive one given the global backdrop. The real bright spot was in small-cap stocks, with the TSX Small Cap Index climbing 10.92%. This suggests that investors continue to see value in smaller, domestically focused Canadian companies, many of which benefit from a relatively stable policy environment at home. The Bank of Canada held its overnight rate steady throughout the quarter, choosing to stay the course while keeping a close eye on how global events and inflation trends develop from here.
South of the border, it was a tougher quarter. The S&P 500 fell 4.64%, weighed down by stretched valuations, softer earnings guidance, and broader unease around policy direction given the increase in geopolitical risk. Interestingly, smaller U.S. companies fared better. The S&P 600 Small Cap Index eked out a 0.33% gain, continuing a pattern of relative strength we’ve seen in recent quarters. The Federal Reserve held its rate unchanged as well, taking a patient, data-dependent approach. The gap between large- and small-cap performance tells us the market is adjusting, moving away from the most expensive names and looking for value in less crowded parts of the market.
One of the more noteworthy stories this quarter was what happened with gold. In the lead-up to and early stages of the Iran conflict, gold was bid up sharply as investors looked for safety. But as the quarter wore on, gold began to sell off. That might seem surprising, but it actually points to a deeper shift: investors were selling gold to move into U.S. dollars, which remain the world’s go-to safe-haven asset when uncertainty is at its highest. When money flows out of gold and into the greenback, it tells us that markets aren’t just hedging. They’re actively seeking the safest, most liquid footing available. It’s a classic flight-to-safety signal, and one we’re watching closely.
Looking ahead, one risk worth keeping in mind is inflation. The closure of the Strait of Hormuz has disrupted one of the world’s most critical shipping corridors, and the effects extend well beyond fuel prices. Roughly a fifth of global oil supply passes through the Strait, and its closure has also choked off shipments of natural gas and fertilizer inputs that many agricultural economies depend on. Higher energy costs raise the price of transporting and producing goods across the board, while fertilizer shortages can feed directly into higher food prices at the grocery store, an area consumers feel most acutely. If these pressures persist and broader inflation begins to tick back up, both the Bank of Canada and the Federal Reserve may need to rethink their current pause on rate changes. A return to tighter monetary policy would be unwelcome news for markets that have grown accustomed to the prospect of rate cuts. For now, both central banks appear comfortable holding steady, but their next moves will depend heavily on how these supply disruptions play out in the months ahead.
As always, our approach through periods like this remains the same: stay disciplined, stay diversified, and stay focused on the long term. Uncertainty is never comfortable, but it’s a normal part of the investment cycle, and it often creates opportunities for well-positioned portfolios. We continue to manage your investments with a steady hand, making thoughtful adjustments where appropriate while keeping your long-term goals front and centre. If you have any questions about your portfolio or anything discussed here, please don’t hesitate to reach out.
Written By: Alex McCallum
