A late week rally resulted in the seventh straight up month for the S&P 500. However, the 1.5% drop in the NASDAQ broke the seven month rise in that index. Data over the weekend suggested strong Black Friday sales, an encouraging sign that the economy is still growing. It could even accelerate in the first quarter of 2026 as tax refunds, larger than in the recent past, will help lift spending for lower income families. This week will see data reports that were suspended during the government shutdown. But these will be delayed inflation and employment reports of October. It will be another two weeks before the November employment numbers are released. The October employment report will almost certainly result in a decline in the number of jobs, as it will subtract the Federal workers who opted for early retirement as of September 30. Markets know this and will likely look closely at numbers excluding those job losses.
Everything is seemingly lining up for good equity markets going into year end, with the one caveat that the most speculative names that surged in recent months before correcting 20% or more may face some reticence among investors. In trading late Sunday evening, bitcoin fell almost 4% from Friday’s close, perhaps a market to be cautious about the more speculative names. Given the recent decline was only 5%, the buy the dip mentality is still in place. But to work, buyers have to emerge. The jury is still out.
On the surface, it would seem that 2026 is shaping up as a good year. The impact of the big tax bill will hit early in 2026. The Fed is on course to keep lowering interest rates. Markets will be watching to see two new nominees to the Federal Reserve Board including a new chairman. While we don’t expect a major disruption, the new Board is likely to have a stronger bias to lower rates than the current one. Markets will like that as long as the 10-year Treasury yield stays within its range over the past year.
But there aren’t clear economic skies to the horizon. Bitcoin is down over 30% from recent highs. By itself, what happens to bitcoin values day to day shouldn’t matter much to equity markets. But if the decline is extended in any meaningful way, it could be impactful and crypto investors often bet using leverage. A sudden decline would require them to sell other assets to cover loan balances. Indeed, part of the recent decline may have related to the large decline in bitcoin.
Last week, I talked about balance. This week the key word is private, as in private credit or private equity. Demand for private credit has exploded in recent years. Since the pandemic it has been hard to find investment grade yields over 5%. Even high yield publicly traded bonds yielded a bit over 6%. At the same time, yields of private credit were much more enticing, often in the double figure range. Because these loans trade privately, they were largely restricted to institutions and high net worth individuals who invested in private credit via funds. In 2000, data available suggests about $100 billion was deployed. By 2024, that figure was over $1 trillion. The big private capital investors, like Blackstone, KKR and Apollo formed ever larger funds. They have all begun to issue publicly traded funds opening these markets wider.
With so much money chasing private credit, it isn’t surprising that spreads over investment grade equivalent issues have narrowed. It would also seem logical that with so much incremental demand for private capital opportunities, the risk profile of the incremental borrower would be higher. In a rush to deliver additional capacity to support the growth of artificial intelligence, data centers are a favored investment opportunity. But what if, even for a relatively brief period supply of data center capacity exceeds demand? The big guys, names like Microsoft# or Alphabet#, have more than enough capital to weather the storm. But that won’t be true for all. CoreWeave, one of the secondary companies competing in this space has sold bonds that now yield over 11% in public markets. But in the private markets, it’s up to the fund manager to mark portfolios to market. Some are more responsive than others.
Look now at the private equity markets. In 2010, about $1.7 trillion was invested. By 2022 that figure rose to $6.3 trillion. It has been stagnant since. Private equity funds have estimated lives of roughly 10 years. Money flows in via capital calls and flows out to investors as companies held in each fund are sold or, in some cases, go public. As with private credit there was an explosion in the amount of money chasing private equity. But over the last several years, private equity fund managers have had a hard time liquidating portfolio holdings.
The private equity boom preceded the private credit boom. One might logically ask why have liquidations become so difficult in recent years. The answer is simple. 5-10 years ago too much money was chasing too few top-quality opportunities. Private equity fund managers have to mark their portfolios to market every quarter. Those marks are highly influenced by the price of the most recent funding rounds. But what if there hasn’t been new funding for several years? For obvious reasons, fund managers do not like to mark investments down. But the real reason that these funds are having a hard time liquidating is that they are simply overvalued on the books.
Indeed, new funds are being formed to buy companies held with private equity portfolios at discounts often as high as 50%.
The moral of all this is not to chase what’s hot, particularly when the investment is illiquid. It also suggests that movements are underway to open up private market opportunities to public investors. When you buy a stock, there is ample information available to make a reasoned decision. The same is not true for private investments. Often information is limited. Funds tend to be blind pools; you depend on the acumen of the investor who is motivated to raise as much money as possible.
Private equity and private capital sound appealing. Expected returns are higher because the risk is greater as is the illiquidity. I am not suggesting to stay away but as the largest managers reach out to the public, understand how that impacts future risks and returns. I am not condemning all private funds but suggest you do your homework as you do with your publicly traded investments. When too much money is chasing the same pot at the end of the rainbow, the odds of outsized success go down.
Today, Sarah Silverman is 55. Bette Midler turns 80. Lee Trevino is 86.
James M. Meyer, CFA 610-260-2220