April Investment Comments
It has been a jarring few weeks for investors. The U.S. and Israeli strikes on Iran that began on February 28th have reshaped the outlook for energy prices, inflation, and monetary policy in ways that were hardly on anyone’s radar at the start of the year. Brent crude has surged above $100 per barrel, up more than 40% from levels below $70 before the war, as traffic through the Strait of Hormuz has slowed to a trickle. Gasoline prices climbed nearly a dollar per gallon in a matter of days. The ripple effects are showing up everywhere: in airline costs, shipping rates, fertilizer markets, and consumer confidence. Against this backdrop, the S&P 500 has been under pressure, giving back more than 5% from its highs and currently trading below 6,600.
The economic data, even before the war, were painting a complicated picture. Nonfarm payrolls fell by 92,000 in February, a sharp reversal from January’s modest gains and well below expectations. The unemployment rate ticked up to 4.4%. Inflation, as measured by the February consumer price index, had been trending in the right direction at 2.4% versus the prior year, but the oil shock now threatens to unwind that progress. The Federal Reserve’s favorite inflation measure, Core PCE, remains stuck around 2.8%, above its 2% target while the energy price surge will only make further progress more difficult. Consumer spending was already showing signs of fatigue, retail stocks fell more than 5% in February, and higher fuel and food costs will further squeeze household budgets, particularly for families at lower income levels who spend a disproportionate share of their earnings on essentials.
The Federal Reserve finds itself in an unenviable position. The FOMC voted 11 to 1 to hold rates at 3.50% to 3.75%, but the details matter more than the headline. Seven of nineteen participants now see no cuts this year. The updated dot plot raised the 2026 inflation forecast to 2.7%, and Powell made clear the Fed cannot treat the energy shock as transitory until goods inflation driven by tariffs is under control. The bar for cuts has risen. Collectively, market participants are now pricing in no rate cuts this year, down from the one to two cuts expected at the start of the year. Adding to the uncertainty, Powell’s succession remains unresolved. Kevin Warsh’s confirmation is stalled in the Senate Banking Committee, and Powell signaled he has no intention of leaving while the DOJ investigation remains open.
The $1.8 trillion private credit market is undergoing its first genuine stress test. What had been a simmering concern among credit analysts has now become front page news. Several of the largest credit funds including vehicles managed by Blackstone, BlackRock, Blue Owl, and Cliffwater, have been forced to gate or cap redemptions as investor withdrawal requests exceed quarterly limits. JPMorgan has begun marking down the value of certain private credit loan portfolios, particularly those tied to software companies whose business models may be vulnerable to AI disruption. The true default rate in private credit, once the industry accounts for PIK interest (payment in more debt of the company rather than cash) and selective defaults, is now estimated closer to 5%, well above the headline figures that managers have been reporting. The core issue is how these investment vehicles are designed. These funds promised something approximating quarterly liquidity to investors while holding illiquid loans with five-year terms. When confidence is high, the mismatch is invisible. When it isn't, it becomes the whole story.
The downstream effects are what matter most. Banks are intertwined with private credit through leverage facilities and credit lines. If markdowns deepen and redemptions persist, fund managers will be forced to sell into thin secondary markets, creating a feedback loop of lower values, tighter lending, and more redemptions. An asset class that attracted enormous investment on the promise of smooth, yet equity-like returns is now being tested in a way it never has been. The results will take quarters, if not years, to fully play out.
It is worth noting that public high yield spreads have widened in recent weeks but remain tight by historical standards. The ICE BofA US High Yield Index sits around 330 basis points, up modestly from the levels below 300 seen late last year, but still well below the historical average near 450. The widening has been concentrated in the weakest CCC credits, particularly those with software and tech exposure that overlap with private credit portfolios, while spreads on BB bonds have compressed as investors rotate up in quality. The market is not pricing in broad credit stress; it is pricing in targeted pockets of vulnerability. If the private credit situation worsens or the economic impact of higher energy prices deepens, those tight headline spreads could reprice quickly, and the short duration of the high yield index would offer less cushion than many investors assume.
The S&P 500 forward price-to-earnings ratio sits around 21 times next year’s estimated earnings, above both the five-year average of roughly 20 times and the ten-year average closer to 19 times. The heaviest AI capital spenders, companies that commanded premium multiples on the promise of infrastructure-driven growth, have been among the laggards in recent months as investors grow more impatient for clear evidence of attractive returns on these AI-related investments. The market is beginning to ask harder questions about the payback period on that spending. Thus far, demand for computer power has been insatiable without regard for the near-term economics of AI investments.
Our approach, as always, is to resist the temptation to react to any single headline. Markets have a way of resolving uncertainty in directions nobody predicts, and the investors who fare best over time are those who maintain discipline through the noise. That said, discipline is not the same as indifference. We are paying close attention to the trajectory of oil prices and their downstream effects on inflation expectations, monitoring private credit developments for signs of contagion, and closely watching the Fed’s likely path for interest rates.
As we navigate 2026, from the geopolitical shock in energy markets to the AI infrastructure buildout reshaping capital allocation across industries, our philosophy remains unchanged. We do not attempt to time the market. Instead, we focus on owning high quality companies with durable competitive advantages, strong balance sheets, and the ability to generate cash flow in various economic climates. This disciplined approach has served us well, and we believe it remains the most prudent path for preserving and growing wealth in the years ahead.
Eric Wathen, CFA®