Executive Summary
Last week, stock and bond prices were down and yields were up. Three simultaneous shocks are feeding off each other: oil at $100/bbl (up 35% in a week), a February jobs loss of 92,000 versus expectations of +60,000 growth, and a third major private credit gating event. Bonds are not providing their usual cushion because the shock is inflationary.
Last week, the S&P 500 outperformed the MSCI EAFE and MSCI Emerging Market indices. In the near term, geopolitical uncertainty is overwhelming fundamentals. The biggest risk is the price of oil and natural gas. This risk is especially acute for Europe, Japan, China and India who are large energy importers. If oil-per-barrel were to trade through $100, it will be an inflation shock and a growth shock, depending on how long it stays elevated understanding before the Middle Eastern conflict the oil market was fundamentally oversupplied and the gas market is largely in balance.
Despite the elevated geopolitical uncertainty, the S&P 500 is declined only about 1% on the year, while small caps, mid caps and the S&P 500 Equal Weight Index are up between 6% and 7%. We believe this is likely a reflection of a resilient earnings environment and a resilient economy where the United States is a net energy exporter.
Last week, the CBOE Volatility Index (VIX) traded higher to 28. We believe a VIX reading of 30 or higher is an indicator where investor capitulation begins to overwhelm underlying fundamentals. Since 1990, when the VIX closed at 30 or higher on a weekly basis, forward returns for the S&P 500 have been positive with a fair level of consistency. For example, the one-year median forward returns are 23.5% with a hit rate of 88.6%. If the VIX closes above 30 based on weekly data, it may be an attractive time to add to rebalance portfolios and add to equity positions, especially with a dollar-cost averaging approach. Finally, since 1990, median forward returns one-year after a VIX move to 50 were 24.1%, with a 100% success rate.
The geopolitical shock, weak labor report, and private credit events are not completely related. The oil shock is pushing prices higher, which keeps the Fed from cutting rates to help the weakening job market. That combination (inflation going up and jobs going down at the same time, with no easy policy fix for both) is exactly the kind of environment that makes everything harder. Rising costs and higher borrowing rates also increase the odds of defaults in private credit portfolios. The market can handle any one of these. The question is whether it can handle all three at once. Conditions are moving fast. Oil has gone from $70 to $100 in ten days. The VIX spiked to nearly 30 on Friday before pulling back modestly this morning.
What To Watch
Geopolitical Offramp
The narrative has shifted from “short war” to “energy crisis” to the inflation/jobs squeeze in the space of six trading days. A single diplomatic statement or production agreement could reverse days of selling in hours, just as further escalation could deepen it.
For example, the S&P 500 Index had a strong year in 2025, finishing up 17.9%, but the ride was anything but smooth. In the spring, the Index fell nearly 19%, largely because markets reacted poorly to the administration’s announcement of a new tariff policy. Interestingly, the best single day of the entire year happened on April 9, right in the middle of all that volatility. Missing just that one day would’ve slashed your full year return by more than half.
Inflation Expectations
Inflation expectations have moved up in the near term. One-year breakeven rates are now 4.22%, an alarming move to say the least, although there is a first-quarter seasonal component to this historically. No doubt some of this move, and maybe a lot of this move, is the result of higher oil and natural gas prices. Two-year breakeven rates are 2.99%. Five-year breakeven rates are 2.56%. These numbers represent bond market pricing of annualized inflation one, two and five years in the future.
Credit Spreads
Despite reported fears of a pending credit crisis and the recent geopolitical events, corporate credit spreads are behaving. Investment-grade spreads (one-year to three-year option-adjusted spreads, or OAS) were 50 bps over Treasuries, up two bps on the week. High-yield spreads, as proxied by the Bloomberg US Corporate High Yield Index OAS, were 281 bps over Treasuries, up three bps on the week. Corporate fundamentals remain healthy. Significant spread compression from here seems unlikely, both in Investment Grade and High Yield sectors.
We are mindful that total AI related /tech issuance in the Investment Grade sector is approximately 10- 15%. While software’s share of the higher-risk leveraged loan market is around 13% to 17% of outstanding loans, and its representation in the public high-yield bond market is much lower, with a total outstanding volume of around 5%. We find municipal taxable equivalent yields to be attractive (dependent upon client tax profiles) along with robust fundamentals.
Weekly Commentary
Triple Whammy Shocks: Geopolitical, Labor and Private Credit
Stuart Katz
Executive Summary
Last week, stock and bond prices were down and yields were up. Three simultaneous shocks are feeding off each other: oil at $100/bbl (up 35% in a week), a February jobs loss of 92,000 versus expectations of +60,000 growth, and a third major private credit gating event. Bonds are not providing their usual cushion because the shock is inflationary.
Last week, the S&P 500 outperformed the MSCI EAFE and MSCI Emerging Market indices. In the near term, geopolitical uncertainty is overwhelming fundamentals. The biggest risk is the price of oil and natural gas. This risk is especially acute for Europe, Japan, China and India who are large energy importers. If oil-per-barrel were to trade through $100, it will be an inflation shock and a growth shock, depending on how long it stays elevated understanding before the Middle Eastern conflict the oil market was fundamentally oversupplied and the gas market is largely in balance.
Despite the elevated geopolitical uncertainty, the S&P 500 is declined only about 1% on the year, while small caps, mid caps and the S&P 500 Equal Weight Index are up between 6% and 7%. We believe this is likely a reflection of a resilient earnings environment and a resilient economy where the United States is a net energy exporter.
Last week, the CBOE Volatility Index (VIX) traded higher to 28. We believe a VIX reading of 30 or higher is an indicator where investor capitulation begins to overwhelm underlying fundamentals. Since 1990, when the VIX closed at 30 or higher on a weekly basis, forward returns for the S&P 500 have been positive with a fair level of consistency. For example, the one-year median forward returns are 23.5% with a hit rate of 88.6%. If the VIX closes above 30 based on weekly data, it may be an attractive time to add to rebalance portfolios and add to equity positions, especially with a dollar-cost averaging approach. Finally, since 1990, median forward returns one-year after a VIX move to 50 were 24.1%, with a 100% success rate.
The geopolitical shock, weak labor report, and private credit events are not completely related. The oil shock is pushing prices higher, which keeps the Fed from cutting rates to help the weakening job market. That combination (inflation going up and jobs going down at the same time, with no easy policy fix for both) is exactly the kind of environment that makes everything harder. Rising costs and higher borrowing rates also increase the odds of defaults in private credit portfolios. The market can handle any one of these. The question is whether it can handle all three at once. Conditions are moving fast. Oil has gone from $70 to $100 in ten days. The VIX spiked to nearly 30 on Friday before pulling back modestly this morning.
What To Watch
Geopolitical Offramp
The narrative has shifted from “short war” to “energy crisis” to the inflation/jobs squeeze in the space of six trading days. A single diplomatic statement or production agreement could reverse days of selling in hours, just as further escalation could deepen it.
For example, the S&P 500 Index had a strong year in 2025, finishing up 17.9%, but the ride was anything but smooth. In the spring, the Index fell nearly 19%, largely because markets reacted poorly to the administration’s announcement of a new tariff policy. Interestingly, the best single day of the entire year happened on April 9, right in the middle of all that volatility. Missing just that one day would’ve slashed your full year return by more than half.
Inflation Expectations
Inflation expectations have moved up in the near term. One-year breakeven rates are now 4.22%, an alarming move to say the least, although there is a first-quarter seasonal component to this historically. No doubt some of this move, and maybe a lot of this move, is the result of higher oil and natural gas prices. Two-year breakeven rates are 2.99%. Five-year breakeven rates are 2.56%. These numbers represent bond market pricing of annualized inflation one, two and five years in the future.
Credit Spreads
Despite reported fears of a pending credit crisis and the recent geopolitical events, corporate credit spreads are behaving. Investment-grade spreads (one-year to three-year option-adjusted spreads, or OAS) were 50 bps over Treasuries, up two bps on the week. High-yield spreads, as proxied by the Bloomberg US Corporate High Yield Index OAS, were 281 bps over Treasuries, up three bps on the week. Corporate fundamentals remain healthy. Significant spread compression from here seems unlikely, both in Investment Grade and High Yield sectors.
We are mindful that total AI related /tech issuance in the Investment Grade sector is approximately 10- 15%. While software’s share of the higher-risk leveraged loan market is around 13% to 17% of outstanding loans, and its representation in the public high-yield bond market is much lower, with a total outstanding volume of around 5%. We find municipal taxable equivalent yields to be attractive (dependent upon client tax profiles) along with robust fundamentals.
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