Higher for Longer

In response to the escalating Middle East conflict and the resulting market turmoil, we have raised cash levels meaningfully higher than normal. The war—particularly the direct targeting of energy infrastructure and severe disruptions to Strait of Hormuz shipping—has injected exceptional uncertainty into global markets. We are positioned defensively and anticipate April to remain highly volatile. We plan to deploy capital opportunistically once the market finds a near-term bottom, which we see potentially forming around S&P 500 levels near 6,000 (an additional 6–10% decline from current levels). This cash buffer allows us to act decisively when fear peaks and valuations improve.

We began drafting a note last week titled "This Too Will Pass." Events overtook the draft almost immediately. Early in the conflict, markets dismissed it as contained, merely another passing headline. That complacency shattered this month as strikes directly hit oil and gas facilities across the region, crossing what had long been considered the ultimate red line.

1. We are updating the header to our thoughts to "Higher for Longer"—adapting the Fed’s post-transitory inflation mantra to today’s energy reality. As Real Vision’s Macro Mondays team (Andreas Steno Larsen and Mikkel Rosenvold) has stressed in recent episodes, including the March 23 installment “The Real Risk Goes Beyond War,” this marks a genuine regime shift. The largest supply disruption in global oil market history—with 8–10 million barrels per day offline, the Strait of Hormuz effectively restricted or halted, and retaliatory damage to key facilities (Saudi refineries, Qatar’s Ras Laffan LNG complex, UAE gas fields, Bahrain refineries, and more)—is not being fully priced in. Steno and Rosenvold highlight that bond yields are already rising as markets grapple with persistent inflation and energy shocks, putting central banks under pressure. Unlike past conflicts, energy assets are now fair game, embedding a structural risk premium that could persist for years rather than months, depending on damage extent and resolution timelines.

We have long favored energy as a core thematic allocation—especially in the early stages of the AI buildout. Talk of the “death of AI companies” is greatly exaggerated, joining the scrap heap with other fleeting narratives like “private credit is doomed.” AI’s power demand continues to surge (with server needs projected to grow +30% annually through 2030 in accelerated scenarios), making reliable, resilient energy supply more critical than ever. Public energy equities have historically disappointed investors beyond modest dividend yields, which is why our preferred vehicle remains the CAZ Energy Evolution Fund. It has generated strong historical returns in a sector where public benchmarks have often lagged, it is particularly well-suited for this higher-for-longer environment, and it has strong cash distributions. We are increasing energy exposure in qualified investor allocations accordingly.

2. Also, in a world being rapidly transformed by AI, this weekend’s All-In Podcast offered up an interesting acronym to describe AI-resistant investing: HALO, or “Hard Assets, Low Obsolescence” portfolio. We have increasingly been interested in real assets and AI-resistant investments while taking down/taking profits in our tech portfolio. This encompasses our energy allocations, but also investments in other areas of the market to include physical assets, infrastructure, defense/dual-use tech and essential goods and services. We are also seeing excellent opportunities to access these in our private investments allocations including Feenix High Income Trust, Acre Home Ownership Fund and Star Mountain Capital. All that said, we are also doubling (well, quadrupling) down on our allocations to tech growth equity manager Friends & Family Capital as they have consistently provided stellar returns in the their fund investments as well as the co-investment opportunities they provide.

3. Last, this past year has reminded us that time is not a neutral backdrop for investing. Duration now sits at the center of three forces shaping our investment opportunity set:

·       the duration of war and its impact on oil and recession risk;

·       the duration of private investment vehicles that lock up capital far longer than their original design; and

·       the duration of investor sentiment in public markets in the face of extended geopolitical stress.

A few market observations:

• U.S. large-caps gave back most of their early-year gains within two weeks of the conflict’s start on February 28, 2026. Over 95% of global funds have posted negative returns since that date.

• International developed markets (MSCI EAFE) have been hit hardest, down more than 10% year-to-date, reflecting Europe’s proximity to the conflict and energy dependence.

• Small-caps (Russell 2000) had a strong start to the year (+8.9% by mid-March in some accounts), but have since given back gains and now sit in a range of flat to +5.7% YTD, pressured by floating-rate debt refinancing risk and rising yields.

• Emerging markets have been relative outperformers, aided by China stimulus hopes and less direct exposure to Middle East energy disruption, though this could reverse if the conflict broadens.

• Commodities, particularly energy, have surged more than 40% since the conflict began, with oil moving from $72 to over $106 per barrel.

The speed and breadth of the repricing underscore that duration of conflict, not just its existence, is what markets are now pricing. If hostilities extend into the second half of 2026, we should expect continued pressure on risk assets, particularly in Europe and among energy-intensive sectors. Politics have rarely been more intertwined with military outcome. Intra- and inter-party dynamics could produce outcomes few expect in the months ahead.

Nevertheless, we still anticipate Fed rate cuts in 2026, even though this view runs contrary to current market pricing and some bearish commentary. We believe higher oil prices will slow the economy by pressuring consumers and businesses, creating room for monetary easing. Compounding this, the incoming Fed leadership is expected to be notably dovish, tilting policy toward lower rates rather than hikes. Lower rates would provide a timely offset, helping revive a housing market that has been largely sidelined for six years. A housing-led rebound could catalyze a meaningful equity rally from late 2026 into 2027. The major risk here is Stagflation – a slowing economy, stagnant employment, rising inflation and falling rates.

We remain comfortable holding elevated cash and stand ready to add opportunistically as dislocations emerge. As we cautioned in January, the first half of 2026 was always likely to be volatile. We continue to monitor for larger equity drawdowns in April/May, potentially followed by seasonal and election-cycle tailwinds.

Warmest early Spring regards,

Jeff & Biff