Market Commentary
That 70’s Show
The 1970’s were a decade marked by iconic fashion such as bell bottoms and platform shoes as well as significant geopolitical turmoil and rising inflation, driven in part by conflict in the Middle East and sharp increases in energy prices. The first quarter of 2026 began in a similar fashion as conflict with Iran emerged following the breakdown of negotiations aimed at preventing nuclear proliferation.
While military operations greatly reduced Iran’s traditional military capabilities, Iran responded by, in effect, closing the Strait of Hormuz, through which over 20% of the world’s oil and LNG passes each year. As a result, the price of oil (WTI) rose 51% in March and more than 76% for the quarter. Higher oil prices raised concerns around inflation and interest rates, with the 2-year treasury gaining 32 bp over the same period. The S&P 500 Index declined 5.1% in March and over 9% from recent highs before rebounding 2.9% on March 31st.
While the year began on a challenging note, we note that tensions in the Middle East may ease in the coming weeks, which could lead to a decline in oil prices from elevated levels. The market is a discounting mechanism; as such, we are likely to see a significant rally upon more concrete signs of a resolution. In the meantime, we continue to manage portfolios with a focus on long-term risk-adjusted returns using diversification to help navigate periods of uncertainty while staying invested.
Top performing sectors during the quarter included: Energy (+37.2%), Materials (+9.3%), and Utilities (+7.5%).
Underperformers included Financials (-9.8%), Consumer Discretionary (-9.4%), and Technology (-9.3%).
Artificial Intelligence (AI) continues to negatively impact multiples of stocks in several industries, including software, travel, and payment processing. Software was particularly weak, down 23.9% as measured by the S&P Software and Services Index.
In spite of the oil-supply shock, the economy has been quite resilient. The labor market remains stable despite AI headwinds, which have particularly impacted demand for recent college grads. Non-farm payrolls came in higher than expected at 178k, and the unemployment rate dropped to 4.3% in March. While Q1 GDP is estimated to be a 1.6% by the Federal Reserve Bank of Atlanta, weather likely weighed on activity, particularly in February.
Inflation will be the big question going forward as February’s 2.4% CPI does not include the large spike in oil prices since the war began. Much will depend on reopening the Strait of Hormuz. If the flow of oil were to reopen soon, inflationary impacts would likely be transitory. In the meantime, the Federal Reserve is likely to keep its Fed Funds rate steady until it can determine whether progress towards its 2% inflation target has been reversed or if this will be a short-term blip.
Following recent market weakness, we believe it is important to highlight the value of staying invested, as long-term returns are driven by the power of compounding. Pullbacks of 5% or greater are common and as of early April the market pulled back approximately 9% before regaining 2.9% or nearly a third of the drawdown on March 31. The market rally continued into April as the probability of a near-term solution has increased. Rather than attempting to time the market, we remain disciplined in managing your portfolios utilizing diversification to remain invested and help ensure participation in eventual recoveries.
Coming out of the conflict, there are several catalysts that could support higher equity prices later this year. Productivity should benefit from harnessing the power of AI. This should drive profit margins higher as earnings growth has been strong, and expectations are for double-digit earnings growth again in Q1. AI is also contributing to economic growth through increased investment in datacenters and electrical infrastructure, benefitting industries such as Industrials and Utilities. Additionally, the economy is expected to benefit from fiscal stimulus and tax cuts provided by the One Big Beautiful Bill (OBBA).
Though we acknowledge that we likely are in a period of higher near-term volatility while energy prices remain elevated, the inflation impact may be much less than seen in the past. Despite an increase of more than 50% in oil prices, the market reaction has been rather muted with the S&P 500 down 4.6% in Q1 compared to more sizeable sell-offs in the S&P 500 during the 70’s, including -48% during the Oil Embargo in 1973 and -27% during the Iranian Revolution in 1979. The economy today is much better able to absorb the rise in energy prices as the US economy shifted away from manufacturing towards services, with manufacturing as a percent of GDP dropping from 24% in 1970 to 10.5% in 2026. That said, the ultimate economic impact will depend on how long energy prices remain elevated.
Performance Attribution
Our top three contributors to performance for the quarter were as follows:
Quanta Services, Inc. (PWR 2.14% of the holdings of the fund) reported significant growth in revenues, EPS and free cash flow along with a $44 billion backlog. Nationwide data center construction is providing substantial growth opportunities and is the largest piece of the company’s backlog. The company continues to forecast double-digit growth for the current year.
Qnity (Q 1.74%), which was recently spun out of Dupont (DD), reported much stronger than expected organic growth. The company provides specialized materials and chemicals for advanced chip manufacturing for high-performance computing and has been a leader in materials innovation within the semiconductor industry. Qnity’s most recent product release, the Emblem CMP pad platform, has received strong positive feedback and recognition from customers and helps to maintain the company’s competitive advantage in the quickly evolving tech landscape.
Williams Cos Inc (WMB 2.77%) completed several expansion projects providing growth opportunities in LNG exports with new transmission infrastructure and strategic partnerships. In addition, the company is focused on easing grid constraints by enhancing natural gas infrastructure. Williams reported a solid increase in EBITDA in the latest quarter and maintains a positive growth outlook for the current year.
Holdings within the portfolio that were negative contributors to performance were as follows:
Salesforce (CRM 1.13%) reported a record full-year revenue of $41.5 billion, up 10% year over year and $11.2 billion, up 12% for the latest quarter. In addition, the company announced a $50 billion share repurchase authorization, reflecting confidence in its financial strength. Agentforce (Salesforce’s agentic AI platform), which deploys AI agents that collaborate with employees using a company’s customized data, is seeing strong traction, growing 200% year-over-year, marking a pivotal shift towards agentic enterprise solutions. The company has traded lower along with a host of software-based (SaaS) companies as the market wrestles with terminal values for seat-based licensing models. The transition to consumption-based pricing, however, should help to alleviate some concerns for those companies able to successfully navigate and evolve their pricing models. The key concern for investors is how quickly the transition can occur relative to the potential erosion of existing seat-based revenue.
Accenture (ACN 1.44%) reported a strong quarter with $18 billion in revenue, with record bookings of $22.1 billion, while also planning on returning $9.3 billion to shareholders through stock purchases and dividends. The company is focusing on AI-driven opportunities through internal development and acquisitive initiatives. The stock was under pressure in the quarter as investors debated the need for the scale of its services going forward, given new and improving frontier model releases. Enterprise customers have clearly shown the need for Accenture’s implementation and monitoring services across existing platforms with conversions to AI-based solutions. However, questions arise over new AI-native organizations that may be the developing model for future enterprises, which may require less of these types of services going forward.
Abbott Labs (ABT 1.60%) delivered revenue growth of 10.5% in its medical devices segment, driven by diabetes care, while also positioning for future growth with its acquisition of Exact Sciences which adds its cancer diagnostics offerings. Weakness persisted in its nutritional segment due to a loss of the WIC (Women, Infants, and Children) contract and market challenges in China. Even with the nutritional headwinds, the company is forecasting 7% organic sales growth and 10% eps growth for 2026.
Activity During the Quarter
Given our outlook for greater short-term volatility in early 2026 due to geopolitical concerns and AI fatigue, several defensive and stabilizing positions were added to the portfolio to help mitigate spikes in volatility. Waste Management (WM 1.96%) was purchased given its steady operational performance that is less prone to market cyclicality during periods of greater market volatility. The company reported robust operating margin expansion of 150 basis points centered around its focus on sustainability, including bringing seven new renewable natural gas facilities online and implementing automation upgrades at five recycling facilities.
The company expects free cash flow to grow nearly 30% and announced a 14.5% increase in the quarterly dividend rate and a new $3 billion share repurchase authorization. Proctor and Gamble (PG 1.70%) was also added to the portfolio. The company reported nearly 3% growth in organic sales, reflecting resilience across most product categories, and returned $4.8 billion to shareholders through stock purchases and dividend payouts. IBM (IBM 1.16%), which was purchased during the quarter, saw solid revenue growth and accelerating free cash flow as it transitions to higher-margin consulting services and hybrid cloud offerings. The company’s advancements in quantum computing are poised to drive out-year growth beginning in 2029.
Although no securities were sold in the portfolio, several positions were trimmed to lock in gains and reduce exposure to market cyclicality. Positions included Caterpillar (CAT) 1.4%, Wells Fargo (WFC 1.70%), and Charles Schwab (SCHW 1.55%). Other notable activity included the re-weighting of Apple (AAPL 5.15%), Google (GOOGL 4.28%), Raytheon (RTX 2.1%), and Palo Alto (PANW 2.03%) after they were partially called away during the quarter. At quarter end, the model portfolio was overweight Industrials, Materials, Financials, and Real Estate while underweight Technology and Communication Services. We are in line with our benchmark in Health Care, Consumer Staples, Energy, and Consumer Discretion. The current dividend yield of the portfolio is 1.5%, which remains greater than the S&P 500’s yield of 1.1%.
Call Option Premium
The quarter was defined by a shift from early-year AI-driven optimism and hopes of Federal Reserve rate cuts to a high-volatility regime driven by geopolitical shocks, specifically the war in the Middle East and the closure of the Strait of Hormuz. Concurrent with geopolitical headwinds was the AI-driven software valuation re-rates and a risk-off tone in speculative assets.
Volatility as measured by the VIX Index steadily climbed higher and crossed 20 in mid-January, marking an end to the previous low-volatility environment. Volatility broke out significantly following the escalation of the conflict and subsequent tanker blockade with the VIX reaching over 30 due to intense energy market disruptions and inflation fears. With that setup the model portfolio generated solid premium income through covered call writing yielding 1.0% simple return and 4.1% annualized, on a net basis. On market pullbacks, opportunities were presented to roll existing in-the-money options, such as Raytheon (RTX 2.1%) and Caterpillar (CAT 1.4%) , which were rolled out and up in strike to allow for additional upside participation on market recovery. For others, such as Alphabet (GOOGL 4.28% ) and Lowes (LOW 1.54%), options were rewritten after recovery in the individual stock prices. Overall, the model portfolio had a weighted average of 87 days to maturity with a weighted average of 10.2% to upside strikes and was roughly 48% covered with individual option writes with the target of 60% as stock recovery continues.
Protective Put Positioning
The notional value of put contracts ranged from 20% to 48% of total portfolio value, ending the quarter at roughly 46%. Positioning for the quarter consisted of spreads to reduce overall costs for protection and included a combination of indexes with allocations in S&P 500, Russell 2000, and iShares iBoxx High Yield Corporate Bond ETF (HYG). This combination provided a solid downside buffer given the myriad of headwinds facing the market from the Iran conflict, rising oil prices, concerns of re-emerging inflation, dwindling probability of rate cuts, and the re-rating of software stocks wreaking havoc on private credit capital investments.
By quarter-end, the put spreads generated a positive 0.15% return, despite a 2.9% market rally on the final trading day of the quarter.
Outlook
After three consecutive quarters of positive returns, greater market volatility returned in the first quarter driven by a 1970’s-style oil supply shock. Although the events in the Middle East have added uncertainty, the economy is much less dependent on oil than in the past. A resolution to the conflict could support solid returns through year-end, driven by increasing industrial activity tied to data center buildouts and re-shoring of manufacturing.
Lower interest rates and fuel costs could further support consumer spending alongside the tailwinds provided by tax cuts. While it is difficult to determine whether the market bottomed during the recent pullback, several indicators suggest markets may be oversold, providing meaningful upside potential over the long term. We remain focused on investing for the long-term and believe that maintaining a diversified portfolio is the most effective way to navigate periods of heightened volatility while remaining invested.
In addition, puts and put spreads can help further reduce volatility, particularly during sharp drawdowns. We continue to look for opportunities to take advantage of market pullbacks by adding to new or existing positions with strong underlying fundamentals and attractive risk/reward profiles.
|
The performance data quoted represents past performance. Past performance does not guarantee future results. The investment return and principal value of an investment will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than the performance data quoted. For performance current to the most recent month end, please call 833-601-2676. |
IMPORTANT INFORMATION:
Past performance is no guarantee of future results. As with any mutual fund investment, there is a risk that you could lose money by investing in the Fund. The Connors Hedged Equity Fund is distributed by Ultimus Fund Distributors, LLC. (Member FINRA) Connors Investor Services and Ultimus Fund Distributors, LLC are separate and unaffiliated.
This information is for use with concurrent or prior delivery of a fund prospectus. Diversification does not ensure a profit or guarantee against loss. Investors should consider the investment objective, risks, charges, and expenses of the Fund(s) before investing. The prospectus and the summary prospectus contain this and other information about the Fund and should be read carefully before investing. The prospectus may be obtained by calling 844-ACFUNDS (844-223-8637).
This material is being provided for informational purposes only. Any information should not be deemed a recommendation to buy, hold or sell any security. Certain information has been obtained from third-party sources we consider reliable, but we do not guarantee that such information is accurate or complete. This report is not a complete description of the securities, markets, or developments referred to in this material and does not include all available data necessary for making an investment decision. Prior to making an investment decision, please consult with your financial advisor about your individual situation. Investing involves risk and you may incur a profit or loss regardless of strategy selected. There is no guarantee that the statements, opinions, or forecasts provided herein will prove to be correct. Opinions are subject to change without notice.
Definitions:
Investments in options involve risks different from, or possibly greater than, the risks associated with investing directly in the underlying securities.
Call option: A call option is a financial contract that gives the buyer the right, but not the obligation, to purchase a specific asset at a predetermined price within a specific time period.
Covered call: Selling a call option on an underlying long-held security.
In-the-money options: Refers to an option that has intrinsic value because the strike price is favorable compared to the current market price. For a call option, the stock's price is above the strike price; for a put option, the stock's price is below the strike price.
Notional: In derivatives markets, such as futures and options, the notional value is the value of the underlying asset that the contract is based on.
Option premium: Price of an option contract.
Out of the money: Out of the money refers to a call option with a strike price that is higher than the market price of the underlying asset, or a put option with a strike price that is lower than the market price of the underlying asset.
Portfolio percentage written: Refers to the number of call contracts written (or sold) versus the number of shares held in the portfolio. One contract is equivalent to 100 shares.
Premium: Price of an option contract.
Premium generation: Collecting proceeds from the sale of a call option.
Put contract: Refers to a contract that gives the holder the right, but not the obligation, to sell an underlying asset. In this case, the underlying asset is the S&P 500 Index.
Put protection: Implementing a protective put by purchasing a put option vs a long underlying equity position or a broad index that is not necessarily held.
Rolling in the money (ITM) call option: A trading strategy that involves closing an existing ITM call option and opening a new one. The new option has a different expiration date or strike price
Roll qualification: A situation where closing out an existing option and writing a new option.
S&P 500® Index: A market capitalization-weighted index of 500 widely held stocks often used as a proxy for the stock market. Unlike mutual funds, the index does not incur expenses. If expenses were deducted, the actual returns of this index would be lower.
Simple: The return generated from the sale of a call option relative to the price of the stock.
Strike Price: The predetermined price at which a specific security may be purchased (for a call option) or sold (for a put option) by the option holder until the expiration date of the option's contract.
Total Income generation: The income generated through the sale of the call option contracts, which generates cash and is counted as income for the portfolio.
VIX Index: The ticker symbol and the popular name for the Chicago Board Options Exchange's CBOE Volatility Index, a popular measure of the stock market's expectation of volatility based on S&P 500 index options.
Volatility: A statistical measure of dispersion of returns. It measures investors’ expectations for market volatility over the next 30 days and is often viewed as a gauge of investor sentiment or fear.
When the VIX is below 20, it generally indicates a calm market environment with lower expected volatility and a higher level of investor confidence.