Volatility, Hype, and Opportunity in Early 2026

The markets have been quite volatile so far in 2026: 

• Record high valuations in private AI companies

• Volatility in semiconductor, internet, and software companies

• A ferocious rally in precious metals 

• A major decline in crypto currencies 

• Cracks in the private credit markets

There’s no shortage of angles to explore, however our focus will be on where we see the most actionable opportunities right now — public equities (plentiful) and fixed income (more scarce). 

Total Returns (Time Weighted / Distributions Re-invested)

Source: Bloomberg

Note: Equity Indices - DJIA, S&P 500, NASDAQ; Fixed Income Indices - SPDR Bloomberg 1-3 Month T-Bill, BBG Municipal Bond Index, BBG US Corporate High Yield, BBG US Agg. Total Return, BBG US Gov.t 10 Year, respectively.

An investor in the S&P 500 has almost doubled their capital (+86%) over the last three years, and an investor in the NASDAQ (+127%) has more than doubled their capital.  We believe this rapid run up has attracted many new investors.  Despite the rapid increase in stock prices, we are seeing quite interesting opportunities across several companies with strong business models. 

As Artificial Intelligence (AI) investors enter their collective “Hype Era,” many investors are indiscriminately divesting from other companies, especially in the software vertical.  While there may be software businesses that may be disrupted in the next few years, there are many other software companies that provide mission critical services that will be difficult to replace. Especially those that provide services related to security, systems of record, and integrations into existing workflows. 

Furthermore, software companies with large customer bases have a built-in distribution advantage over new entrants. These businesses may have to compete on price more than they have in the past, and they may need to offer more features, but AI capabilities are incredibly democratized such that well run companies should be able run with leaner teams and deliver more features and capabilities to their customers. 

Marketplace businesses are now available at highly compelling valuations.  Whether the market is ride sharing (UBER), home sharing (ABNB), or ticket reselling (STUB), these businesses have capital light business models with secular growth vectors, profitability, and attractive unit economics.  They also benefit from network effects that make them more valuable and useful to their hosts/customers as they grow larger in scale.  We believe these companies may generate significant wealth for investors at current prices.

Public & Private Fixed Income

Source: Bloomberg, HY (High Yield ) Bond: LF98TRUU, IG (Investment Grade) Bond: LBUSTRUU, Municipal Bond: LMBITR, respectively. Income Tax Rate Assumptions: Federal (37%), State (10%)

Investors in fixed income have had much more modest returns during the last three years than public equity investors.  In fact, investors in 10 Year Treasuries and Investment Grade bonds would have been better off staying in cash equivalents like T-Bills.

Cash vs. Other Fixed Income

Fixed income yields are now slightly above after-tax cash yields.  That means there is slightly more rationale to invest in riskier fixed income assets.  The return differences, after tax, are still quite small, and not large enough, in our opinion, to justify significant investments into traditional fixed income opportunities. 

We believe it is prudent to continue to operate under the assumption that interest rates will be significantly higher over the next 3-10 years.  As a result, we are continuing to favor strategies where growth is robust, valuations are reasonable, and interest rates on liabilities are fixed.

Short Term Interest Rate Market Predicted Path (as of 1/28/26)

Source: Bloomberg, World Interest Rate Probability (WIRP) as of 7/8/2026

High Yield Bonds (Junk Bonds)

High Yield Credit Spreads: Additional yield received above US Treasuries for debt of riskier companies

Source: Bloomberg, BarCap US Corp HY YTW 10-Yr Spread (CSI BARC Index)

The above chart displays a modest credit spread for high-yield bonds issued by companies with riskier balance sheets. We think investing in high-yield bonds will make more sense once credit spreads increase substantially.   

If the United States does enter a recession over the next few quarters, we believe that the 2.30% credit spread will provide poor compensation for defaults in high yield bond portfolios.  Given the high yield default rates have averaged 4.5% since 1996 (according to Moody’s), and that losses tend to be 60%, it’s quite possible that a High Yield investor will be losing 2.5% (4.5% * 60%) per year due to default.  In other words, in an average environment, a high yield investor would underperform a Treasury investor.   

Investment Grade (IG) Bonds

Investment Grade Credit Spreads: AAA 10-Yr premium received above US Treasuries (in basis points; 1 basis point = 0.01%)

Source: Bloomberg, BASPCAAA Index

Investment Grade bonds are debt instruments issued by companies that rating agencies deem high quality and have a low risk of default.  An investor is receiving very minimal additional compensation to treasuries (1.10%) for investing in this asset class. 

On an after-tax basis, we see minimal additional yield for investment grade bonds compared to US Treasuries. 

Municipal Bonds

Municipal Bond Index (YTW)

Source: Bloomberg, LMBIYW Index

Municipal bonds can be a tax-efficient way to generate yield and have recently reached levels that are more favorable. We recommend allocating exposure to the short end of the curve (maturities <1 year) as long-duration bonds still do not give adequate yield to compensate for interest rate and duration risk.

It’s important to understand one’s marginal tax rates and jurisdiction before investing in municipal bonds as those factors determine one’s after-tax yield and the attractiveness of the asset relative to treasuries or corporate bonds.  Recently, we haven’t seen many compelling opportunities in high quality municipal bonds.