Weekly Newsletter: March 2, 2026
In like a lion indeed! The bombing of Tehran over the weekend is setting the markets up for a bit of turmoil coming into an important economic data week. Questions around the Middle East are likely to be answered early in the week. Will this be like Venezuela, which was a rather quick operation that had little reaction from the financial markets? Or, will this be a long slog with energy disruptions and a more involved US military operation? The events over the weekend may temporarily overshadow the issues of AI and private credit, which have been building in the markets for the last few weeks. Private credit has grown over sixfold in the past 12 years, due in large part to banks stepping away from small/mid-sized companies. Lower interest rates pushed investors into the higher-yielding private credit sector as well. With so much money piling into the sector, it was a matter of time before something went wrong. AI plays a role in that as well, as its insatiable need to spend on building data centers and overall capacity has also tapped the private credit sector. Reports recently circulated indicating the potential for company (if not industry) killing impact of AI have also put the financial markets on edge. It may be “the end of the world as we know it, but I (the economy) feel fine.”
Concerns about the job market continue to be overblown. Weekly jobless claims are hovering around their lowest levels for this time of year. Rumblings from the various Fed governors over the past week indicate that a cutting of interest rates is not necessarily a slam dunk, as inflation remains stubborn around the 3% level. Consumer confidence picked up a bit, but the focus should be on what the consumer is doing rather than saying. That usually shows up in retail sales, which is a couple of weeks away. Earnings from various retailers over the past few weeks have generally been upbeat, albeit with the usual dose of caution for the months ahead. This week, in addition to the usual chatter from Fed governors, the focus will be on employment. Expectations for growth of 54k in new jobs is a step down from the over 120k reported in January, but should represent an overall healthy jobs market. Wages will be in focus as well as a tell for the health of the consumer heading into the spring season. As long as wage growth outpaces inflation, the consumer will be spending.
The bond market has been interesting. Treasury securities have been bought, pushing yields to their lowest levels in months. High yields have gone the other way as worries about heavy tech borrowing and issues in the private credit space spook investors. Questions remain as to whether the lower rate environment is a result of weaker economic data, pointing to a Fed likely to cut, or a safety trade as investors scramble out of riskier bonds and into the safety of treasuries. Over the past four weeks, the yield difference between high-yield and treasuries has been widening, indicating concern. Typically, spreads widen ahead of an equity market “event”.
That equity “event” could be the continued erosion of technology stocks in the market. Yes, Nvidia put up terrific numbers, but investors were hoping for even more, and the stock sold off after the earnings release. Much like other stocks that carried the SP500 last year, their decline has masked the good performance of the rest of the market. Mid and small cap stocks are up over 7% this year already, and international (including emerging markets) are up 10%+. The rush to consumer staples, energy, and utilities (all up over 10% this year) has typically been a sign that investors are trying to find a hiding spot in the market, rather than thinking these sectors are the “new” growth portions of the economy. It is in line with what has been happening in the high-yield market, investors gravitating toward safety and away from risks. The huge outperformance of value over growth of the past three months is merely a blip in the 20 year dominance of growth over value. If value does indeed take the performance baton from growth, it could mean a few years of technology stocks being relegated to the back bench, even if they post good earnings numbers in the years ahead.
Employment will take economic center stage this week, but the spotlight will be on the geopolitical events unfolding in the Middle East. Continued worries about AI and private credit should keep the markets volatile this week.
The opinions expressed in the Investment Newsletter are those of the author and are based upon information that is believed to be accurate and reliable but are opinions and do not constitute a guarantee of present or future financial market conditions.