‘March Madness’ for Markets Too

Thoughts on the Market

•March 20, 2026•4 min

Thoughts on the Market•Mar 20, 2026

Why It Matters

Understanding how geopolitical events can instantly overturn market fundamentals is crucial for investors seeking to navigate volatility and avoid being caught off guard. The episode highlights the importance of flexible risk management and diversification when traditional asset correlations break down, a timely lesson as markets react to ongoing Middle East tensions.

Key Takeaways

•March volatility linked to geopolitical shocks.
•Iran conflict caused oil price spike, reversing market narrative.
•Rapid shift hurt investors, exposing overexposed positions.
•Diversification challenged as stocks, bonds, gold move together.
•Potential reversal if oil flow resumes through Strait.

Pulse Analysis

March has become a calendar marker for heightened market turbulence, and the 2026 episode was no exception. In January and February, analysts saw a bullish narrative driven by cheap energy, stimulative policy and booming AI investment. That optimism evaporated almost overnight when the Iran‑Houthi conflict threatened the Strait of Hormuz, sending crude prices soaring. The oil shock flipped the story: metals, transport and financial equities tumbled, European and Asian markets lagged, and the U.S. dollar surged as investors fled to safety. The rapid reversal caught many portfolios off‑balance.

The shock reverberated across asset classes, collapsing the usual diversification cushion. Stocks, bonds and even gold moved in the same direction, eroding the low‑correlation benefits that many investors rely on during stress periods. Yield curves flattened as higher inflation expectations forced central banks to reconsider rate‑cut timelines, while the U.S. jobs report turned weak, reinforcing downside bias. Consequently, investors found themselves over‑exposed to sectors that were now under pressure, prompting a wave of defensive positioning. The confluence of rising oil, a stronger dollar and tightening monetary outlook created a perfect storm for risk‑averse portfolios.

Looking ahead, the market’s next move hinges on the resolution of the Strait of Hormuz bottleneck. If oil flows normalize, energy prices could retreat, potentially restoring the earlier growth narrative and reopening upside for cyclical equities. Until that materializes, investors may prioritize liquidity, shorten duration, and seek sector‑specific hedges rather than broad diversification. Monitoring geopolitical developments and central‑bank signaling will be critical for timing re‑entry. In this volatile environment, disciplined risk management and a clear view of macro‑driven storylines can differentiate winners from those caught in the next momentum swing.

Episode Description

As the Iran conflict upends market narratives, our Global Head of Fixed Income Research Andrew Sheets offers his take on how to view the historic disruption happening in March and what the next few weeks could bring.

Read more insights from Morgan Stanley.

----- Transcript -----

Andrew Sheets: Welcome to Thoughts on the Market. I'm Andrew Sheets, Global Head of Fixed Income Research at Morgan Stanley.

Today on the program, a survey of just how quickly key narratives have changed and how lasting that might be.

It's Friday, March 20th at 2pm in London.

The NCAA basketball tournament, also known as March Madness, is one of my favorite times of the year. The single elimination tournament of 64 teams is wonderfully chaotic with plenty of surprises, especially in the early games. And basketball is one of those sports where momentum often seems real. A team that has somehow forgotten how to shoot in the first half of the game can suddenly look unstoppable in the second.

As I said, March is one of my favorite times to watch sports. It is often not one of my favorite times to forecast markets. In 2005, 2008, 2020, 2022, 2023, and 2025, March saw outsized market volatility. And it’s the case again this year. I'm sure, it's just a coincidence.

This time, it's not just about a historic disruption to the energy markets, which my colleague Martijn Rats and I discussed on this program last week. It's also a major reversal of the market storyline. If this were a basketball game, the momentum just flipped.

In January and February of 2026, there were strong overlapping signals that the U.S. and global economy were in a good – even accelerating – place, boosted by cheap energy, stimulative policy, and robust AI investment. Oil prices were down as metals, transports, cyclicals and financial stocks, all rose. Europe, Asia, and emerging market equities – all more sensitive to global growth – were outperforming. Inflation was moderating. Central banks were planning to lower interest rates. The yield curve was steepening and the U.S. dollar was weakening. The January U.S. Jobs report was pretty good.

And then … it all changed. In a moment, the Iran conflict and the subsequent risk of an oil price shock flipped almost every single one of those storylines on its head. Now, oil prices rose and the prices for metals, transports, cyclicals and financial stocks all fell. Equities in Europe and Asia – regions that rely heavily on importing oil – underperformed.

The U.S. dollar rose as investors sought out safe haven. Inflation jumped following oil prices. The yield curve flattened on that higher inflation, as we and many other forecasters adjusted our expectations for what central banks would do. And, as it happens, the last U.S. Jobs report was pretty bad.

If the Iran conflict ends and oil resumes flowing through the Strait of Hormuz, it's very possible that this story could once again swing back. But until it does, the speed of which this momentum has flipped means that almost by definition, many investors have been caught off guard and left poorly positioned.

If you couple that with the challenge of diversifying in this new environment – where the prices for stocks, bonds, and even gold have all been moving in the same direction – the path of least resistance for investors may be to continue to reduce their exposure to ride out the storm, driving further near term weakness.

Unfortunately, that could make for an uncomfortable few weeks. At least, there's some good basketball on.

Thank you as always, for your time. If you find Thoughts on the Market useful, let us know by leaving a review wherever you listen. And also tell a friend or colleague about us today.