March 2026

Christopher P. Lorenz

Investing long-term based on compounding interest, isn’t easy.  In equity markets, risk invariably comes with volatility and at times our equity positions will trade at reduced value. So why do we take the risk when we can buy bonds and avoid the volatility of equity markets? The answer is simple; by taking more risk, you can achieve higher returns. If you have read my commentary over time, you are probably accustomed to hearing this, but it’s true.

Compounding interest has two drivers, which are time and growth rates. Equity markets over the past 25 years have compounded nearly 10% and that doubles your asset value every seven years. The 10-year US Treasury provides a current yield of around 4%. For investors building wealth the math is obvious; the equity returns are worth the risk.

Risk and volatility go hand in hand. If you look at a 25-year chart for the S & P 500 stock index the upward trajectory is firmly up and to the right. If you zoom into a 12-month chart you start to see the volatility and zoom into monthly and it gets dramatic. If investors fixate on that monthly chart (or worse, weekly) the power of compounding gets blurry. As investment managers our job is to stay focused on the long-term potential for our clients to meet their goals. It also means that we learn to see volatility as opportunity. It’s about perspective and the context under which we have volatility.

In our year-end letter to clients, we pointed out that equity markets have had a very smooth upward trajectory since the “tariff tantrum” last April and we were due for a pullback. At the time it was hard to know what the driver would be. Over the past months we have learned that one of the catalysts is geopolitics. Before I comment on that driver, I want to point out that another catalyst are the tremors in the debt markets, more specifically, private corporate lending to software companies. Years ago, to reduce risk within the banking industry, the government put tighter restrictions on bank lending to corporations and required banks to maintain higher capital levels. This meant a huge amount of corporate demand for debt was unmet. Businesses of all types use debt to grow, and someone had to meet the demand for debt and investment firms stepped in and started lending in greater volume to private companies. Thus, the private credit industry grew dramatically and became a new product line for companies, like Blackstone Group (BX), which has been one of our portfolio companies for over a decade.     

Let’s use Blackstone’s situation to outline the broader issues with private credit.  BX is an alternative asset management firm with over $1.2T, with a T, assets under management (AUM) across several different asset classes, but private credit has become one of their largest product lines. They have top tier lending standards and have not experienced credit defaults beyond normal levels, but investors have been pulling capital from their most popular private credit funds. The fear is that the loans they made to software companies can turn sour because of the disruption from AI’s ability to develop software at a faster pace. This will happen, but the scale is yet known, and defaults remain tepid. There have been a few high-profile defaults, but BX’s credit portfolio companies are still doing well and have plenty of cash to cover their loan payments. To simplify; have there been defaults in private credit, yes. Is it at a systemic level, no. Could it happen, maybe. Market sentiment has determined this will happen, sending tremors through debt markets and pricing asset managers like BX as if it was a foregone conclusion, which it is not. BX has a dividend yield of 5% so we will get paid to wait while they manage through potential issues in their credit portfolio. We are adding shares to portfolios that don’t have full positions.

Geopolitical turmoil has created significant uncertainty, not to mention human suffering. I won’t comment on the strategies being deployed because my job is to interpret the market impacts. Through that lens, the primary issues are escalating aggression on our land base, and the impact on oil prices. Oil has jumped significantly in the past few weeks, and if current or higher levels persist over several months, we will see it translate into higher costs for consumers (inflation) and ultimately higher interest rates. The turmoil in the middle east will not end soon, but global oil production is extremely resilient and will adjust. Thus, I don’t see the oil spike having immediate impact.        

Market volatility accelerates when a few different issues stack up for investors and geopolitics and private credit are worthy of concern. Since the “tariff tantrum” last April media pundits and economists have focused on “uncertainties”, mostly because they can’t point to real data to support their opinion on why our economy is heading toward a cliff. The world is constantly changing, and uncertainty is the only normal thing I can count on for determining portfolio construction. The best way to manage uncertainty is to build diversified portfolios like we do. The last few years large capitalization technology stocks have led the way, and the energy sectors was a loser. This year, energy is up 28% and the tech-heavy Nasdaq is down. Our diversification allowed us to benefit from both moves. The sector rotation has been dramatic, but not unexpected, and the rotations will reverse again, possibly soon.

During times of heightened uncertainty, the economic backdrop and outlook for corporate earnings can illuminate the equity market’s ability to weather the storm. This is where we have good news. We entered 2026 with a strong economic backdrop thanks to increased industrial spending, tax benefits, and lower interest rates. S & P 500 earnings are expected to grow over 10% and GDP is accelerating. Additionally, geopolitical issues in Europe have dramatically increased industrial spending there as Germany and others increase defense spending. The result is above trend economic growth in the EU.

We were overdue for a market pullback, and it makes sense that investors take chips off the table based on the issues identified above. If you look at the daily, weekly and monthly charts the volatility looks scary, but scale out and you will see market movement that we see often. These issues will remain a drag on performance for a while, and the human toll is hard to understate. As an investment advisor the focus is on the underlying strengths in our economy and corporate earnings since that will dictate how disruptive these issues will be.

 I often tell my clients that our job is to worry about everything, and we do. Additionally, our job is to remove emotion and let math, and data drive decision making. We have our eyes on private credit, geopolitics and corporate earnings and what I see is an opportunity to add to sectors that have lagged and focus on one of compounding interest’s primary drivers, time.