1) On Monday, I recommended that investors ignore the recent headlines and market turmoil based on history. Here's another reason why...
Market volatility (as measured by the CBOE Volatility Index, or "VIX") spiked 48% last week, putting it in the top 25 biggest weekly gains since 1990.
When jumps like these happened in the past, "stocks have tended to bounce back with above-average forward returns," as Charlie Bilello notes in his latest Week in Charts.
You can see this in the table below:
The results are similar when the U.S. has entered military conflicts, as we're seeing today:
Based on history, the volatility we're seeing right now won't lead to losses – quite the opposite.
I repeat: Ignore the headlines and stay the course.
2) Naturally, investors are paying a lot of attention to the Iran war and the resulting spike in oil prices. But I think the bigger risk to the economy and markets is the crisis in private debt...
As you can see in this Bloomberg graph, the number of private-credit funds has soared over the past decade:
Such growth has been driven by strong returns over the past decade, as shown in this graph by J.P. Morgan Private Bank:
But, as with most investment booms, it went too far...
In particular, these private-credit funds lent heavily to software companies whose stocks have been battered by AI fears. This has made investors question whether these funds are stuffed with loans that might go bad – and they're demanding their capital back.
As a result, there has been lots of negative media attention in the past few months, as my friend shares in this X post:
This has led to a surge in redemption requests as investors demand to sell fund shares back to the issuers, as this Bloomberg chart shows:
JPMorgan Chase (JPM) is reducing its lending to these private-credit funds to reduce risk, as this Financial Times article reports:
The bank informed private credit lenders that it had marked down the value of certain loans in their portfolios, which serve as the collateral the funds use to borrow from the bank, according to people familiar with the matter.
The move will limit how much money JPMorgan lends to private credit groups against those loans going forward – a sign traditional Wall Street banks are growing cautious of an industry that has grown rapidly as non-bank lenders became top creditors to higher-risk borrowers.
The loans that have been devalued are to software companies, which are seen as particularly vulnerable to the onset of AI.
Not surprisingly, the stocks of private-credit funds have taken a beating this year. As this Wall Street Journal chart shows, many are down between 25% and 35% year to date:
My friend Chris Irons (aka Quoth the Raven) has been warning about this for a while and thinks it's going to get worse, per these posts on his Substack (paid subscription required):
- Banks Sell Off Hard: This Is How Credit Cracks (February 27)
- The Private Credit Collapse Accelerates (March 3)
- Another One Bites the Dust (March 5)
- Private Credit Just Turned Into Public Panic (March 6)
- Another One and Private Credit Is Officially F***** (March 11)
In the latter, he concludes:
As I've said repeatedly over the last month, the cracks in private credit were already forming beneath the surface. When liquidity tightens in a market built on long-duration loans and limited secondary trading, redemption pressure becomes the catalyst that exposes those weaknesses.
Stocks closest to the situation include private credit managers like Apollo Global Management, Blackstone, Ares Management, and Blue Owl Capital, along with regional bank exposure through the SPDR S&P Regional Banking ETF.
For years private credit worked perfectly.
Right up until investors started asking for their money back. Funny how that works.
I think Chris is right that there's going to be a retrenchment in the sector – but there will also be opportunities in "babies thrown out with the bathwater," as this WSJ article argues:
There may be little that Blackstone or BlackRock can do to stop the runaway train of negativity about private credit. Yet investors should keep in mind that private credit is hardly their only business.
Last week, the two giant fund managers both reported that they faced jumps in first-quarter redemption requests from their flagship nontraded private-credit funds, which cater to wealthy individual investors.
What got much less attention, however, was that Blackstone's flagship nontraded real-estate fund recently had its best month for investor flows in years. That points to the potential for the biggest and most diverse managers to have other strategies on the upswing even while credit struggles.
My team and I at Stansberry's Investment Advisory will be following developments in the sector closely. If we find a compelling idea to recommend, as always, our subscribers will be the first to know.
If you're not already an Investment Advisory subscriber, you can become one by clicking here.
Best regards,
Whitney
P.S. I welcome your feedback – send me an e-mail by clicking here.