Three Key Thoughts:
1.     Ceasefire and Relief…for now
2.     Diversification Proves its Value, Again
3.     About Those Alternatives

Ceasefire and Relief…for now
Since the start of hostilities against Iran at the end of February, risk assets of virtually all types have declined in value. It is typical during unexpected shocks like this one that correlations among asset classes start to converge. In other words, there weren’t any great places to hide, making March a very difficult month for investors, but staying diversified did help.

Last night (April 7), an agreement on a two-week ceasefire was announced to allow negotiations on a broader peace deal. Almost immediately, each side accused the other of violating the terms of the ceasefire and trying to change its terms. To say that the ceasefire is shaky is an understatement.

Markets reacted accordingly. Stocks around the globe rallied strongly, particularly outside the US, while oil prices plummeted and interest rates declined. While the reaction was strong, it was somewhat measured in the US as investors recognized that the situation could easily reverse quickly.

Meanwhile, the US economy continues to grow on the back of financially healthy consumers, strong corporate earnings and optimism about the future of artificial intelligence. However, higher oil prices act as a regressive tax, affecting lower income consumers far more than higher income consumers. This so-called “K-shaped” growth has been a feature of the US economy for some time – the oil shock from the Iran war just made it worse.

In last quarter’s Thoughts, we talked about the two biggest risks we believe investors now face: inflation and a major geopolitical event. With the Iran war, we got a taste of both. Interestingly, while the markets’ reaction was negative, it was surprisingly subdued given the very negative implications of a prolonged conflict. We believe investors simply don’t believe the conflict will go on for a long time.

Diversification Proved its Value, Again
We have preached the benefits of diversification repeatedly in these pages. A global portfolio of stocks and bonds, combined with a reasonable amount of alternatives, is the best way to cope with an uncertain investment climate. The first quarter’s ups and downs demonstrated this value once again. For the first two months, international stocks led the way, appreciating far more than US stocks. In March, that partially reversed, with international stocks down more than domestic stocks, but still finishing the quarter ahead. The stars in March were alternative investments, most of which held their value well, even while stocks were falling.

With the geopolitical uncertainty still very high, we see no reason to change this time-tested approach. We are constantly on the lookout for investments that can produce attractive returns that aren’t highly correlated to stocks. Most important, however, is another point we have repeatedly stressed: stay invested. So long as you have a longer-term time horizon, it virtually always pays to stay invested.

About Those Alternatives
In the business of media, bad news sells. The latest target of the financial press is an area of the bond market called private credit. Private credit is mostly comprised of direct loans to private companies which either cannot or choose not to use more traditional banking channels to borrow. The loans are typically short-term and, by their nature, are not liquid. Most often, these borrowers are either partially or fully owned by private equity investors and the private credit funds (which take some form of limited liquidity entity) are usually offered by large investment firms who have been in the business of private equity and credit for a long time.

As we consider these types of investments for clients, we evaluate the experience and financial stability of the sponsor, the trade-off of liquidity for potentially higher returns and our clients’ potential need for liquidity. We intentionally keep our individual investments small and diversified by sponsor. The negative press has created a strain on several funds’ liquidity (most notably, a couple we do not own for clients), which is constrained by design – it is a feature not a bug. Like all investments we make for clients, we monitor the situation closely and we are comfortable that the sponsors we have invested with will serve our clients well over time.

Investment Implications
Near term uncertainty usually gives rise to opportunities for good long-term investments. The current economic fundamentals are good, which should come to the fore as the current fog of uncertainty clears.