“Take a calculated risk. That is quite different from being rash.” – General George Patton
March is always a fickle month – from the weather to the markets – we know to expect volatility and a bit of misery. History tells us there will be a violent storm or two along the way, making sure we feel the pain of winter or a pullback one more time before a Spring revival. March is also home to the NCAA Men’s & Women’s Basketball Tournament called March Madness, which for a math nerd is a statistical wonderland. The odds of a perfect bracket are 1 in 9.2 quintillion (9.2×1018), meaning you are 4 million times more likely to get struck by lightning than picking a perfect bracket. With that backdrop, we add in some extra spice with the troubles brewing in the Private Credit market and a full-blown regional war in the Middle East. Wars often come with a sharp drop in the markets, but we warn, historically, wars do not start bear markets – even if the risk feels high. Do not allow all the “what-ifs” to build into a crescendo that override the basic market dictation: buy low, sell high. Never panic sell.
The twin risks facing the market are real and we are not underestimating them. First, the Private Credit meltdown could spread into traditional banks and bond markets causing market losses, defaults, and concerns on banking health. We feel this is more isolated and not at risk of contagion yet. We are aware the opaque and bifurcated nature of that market makes it more difficult to assess risk and tend to agree with JPM CEO Jamie Dimon – where you see one cockroach, expect to find more. But we feel this is not a full-blown infestation and while it may take down some funds and companies (similar to the commercial real estate banking scare of March 2023) our overall banking system health is very strong. During Q4’s earnings, most banks reported record earnings as well as minimal need to set aside more capital for credit losses. The consumer continues to remain healthy, and lending remains brisk in an era of relatively lower rates. Most of these private loans are owned by Alternative Managers, not traditional banks, keeping this concern a bit more arm’s length.
War, and most importantly to investors & US consumers, oil and gas markets are also a risk. As the conflagration grows and ensures more countries, as well as hopes of a quick resolution dim, this means we could easily see $100 WTI if the Strait of Hormuz remains closed and Iran continues to strike energy infrastructure in Saudi Arabia, the UAE and other large energy producing countries. Already we are seeing production halts due to lack of storage or ability to transport in that region. Asia is most at risk since they are large net importers of Crude and 80%-85% of the cured oil and condensate passing through the Strait is destined for Asian markets. US markets may see higher energy prices and gasoline prices driving inflation higher, but we do not fear the oil shortages of the 1970’s as the US is now the world’s largest producer of oil and gas, as well as other close-by regions such as Guyana which can help defray shortages. Per the EIA, the US only imports about 7-8% of all its imported crude from the Middle East. Prices may go up as market prices are rising rapidly, which risks making inflation sticky and causing the Fed not to cut. Energy driven inflation the real risk here and could be another headwind to the markets as well as consumer spending if gas eats more of their wallet.
We anticipate volatility and downside risk in the near term. The headwinds are real, but we do not belie them fatal to the bull market at this point. Earnings were very strong, economic growth continues, and the US is well insulated from energy supply shock risks. War is a horrible, tragic event. We do not want to minimize the real costs of war. But markets tend to take war in stride and investors should not panic sell into any knee jerk downside reaction. Be ready for volatility was our 2026 outlook, and March is going to test investor mettle.