‘March Madness’ for Markets Too

0:00Andrew 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 2 p.m. 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.

0:45Andrew Sheets: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 Martin Ratz 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.

1:32Andrew Sheets: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.

2:19Andrew Sheets: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.

3:01Andrew Sheets: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.

3:40Andrew Sheets:If you find Thoughts of the Market useful, let us know by leaving a review wherever you listen, and also tell a friend or colleague about us today.

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