Category: Chart of the Week

The Secondary Option

Private equity is known for being an illiquid asset class, with investments typically locked up for several years and limited options to access cash before a fund winds down. Investors have largely accepted these restrictions in exchange for the potential of higher returns, but this lack of liquidity has become a challenge more recently. For instance, DPI (distributions to paid-in capital) as a percentage of net asset value for 2024 was 12%, significantly lower than the 25-year average of 21%. As a result of these dynamics, there has been rapid growth in the private equity secondary market, which allows investors to sell their existing stakes in ongoing private equity funds. Indeed, what was once a niche option for distressed sellers is now a mainstream tool for managing portfolios, with global secondary market transactions on pace to exceed $200 billion in 2025. This figure would constitute a record high. Interestingly, more than 50% of secondary transactions in the first half of this year came in the form of Limited Partner (“LP”)-led secondaries, which occur when existing LPs sell fund interests to other investors.

The rise of LP-led secondaries is about more than investors simply “cashing out.” Specifically, LPs may tap the secondary market to rebalance portfolios when private equity exposure becomes too high, move away from underperforming funds, or free up capital to invest in new opportunities. Institutions of all types are embracing this strategy. For instance, the University of Illinois Foundation recently announced the sale of roughly $245 million of net asset value of private market assets, aiming to reduce exposure to high-risk, illiquid positions and reposition its endowment for greater long-term stability. Additionally, CalPERS announced a potential $3 billion secondary transaction earlier this year, and Yale University is currently in talks for its first-ever secondaries sale to convert older private equity holdings into liquid assets for reinvestment. These developments reflect a broader trend among institutional investors seeking flexibility and liquidity amid a challenging private equity environment. Indeed, as private equity funds continue to hold assets for longer and exit activity remains slow, the secondary market may become a standard part of portfolio management for both large institutions and smaller investors in the years ahead.

Big “Issues” for Big Tech

While technology-oriented firms have made their presence known in equity markets for several years, these companies have made waves in the fixed income space recently as well. Companies such as Alphabet, Meta, and Oracle, which in the past have funded initiatives via balance sheet cash, have increasingly turned to the bond market to finance the buildout of AI-related infrastructure. Specifically, a total of nearly $240 billion worth of investment-grade bonds have been sold by technology giants on a year-to-date basis through the end of November. Some notable deals in 2025 include Meta’s $30 billion bond sale, the largest in the U.S. high-grade market this year, Oracle’s $18 billion issuance in September, and Alphabet’s deal that raised $17.5 billion in the U.S. and another €6.5 billion (roughly $7.5 billion) in Europe.

This surge in supply carries meaningful implications for the broader investment-grade corporate market, which is one of the most heavily traded areas of fixed income. For instance, the sheer volume of new issuance from technology companies can put upward pressure on corporate spreads as investors demand slightly higher yields (despite the strong balance sheets and generally low leverage of these firms). There is also the question of the potential return on AI-related spending (or lack thereof). Indeed, a recent MIT study found that around 95% of companies have yet to see any meaningful payoff from their generative AI efforts. At the same time, investors and creditors are growing more cautious, increasing their use of derivatives designed to pay out if specific technology firms fail to meet their debt obligations. That said, investment in AI-related infrastructure seems likely to continue at full speed in the years ahead, meaning technology firms may continue to tap the investment-grade market for financing.

An “Imbalancing” Act

Germany is on pace for a record-breaking trade deficit with China this year, with Chinese exports originally intended for the United States now flooding European markets. Specifically, Germany currently exhibits a trade balance with China of roughly -1.7% of German GDP, which is close to a multi-year low. Germany’s increasingly negative trade balance with China can be observed in this week’s chart. While trade imbalances are not necessarily cause for concern, this growing deficit is part of a long-term structural shift in the trade relationship between Germany and China. Despite ideological differences, the two countries have been economic allies since establishing a trade partnership in the early 2000s, which led to the exporting of German cars, machinery, and specialty chemicals to China. This, in turn, fueled economic growth in China, and the relationship benefited both countries for years (though not without growing concerns around potential economic dependence of Germany on China). This dynamic changed in 2020 given pandemic-induced supply chain shocks and China’s alignment with Russia at the outset of its invasion of Ukraine. These headwinds reaffirmed Germany’s commitment to diversifying its economic relationships, and last year the United States overtook China as Germany’s number one trading partner for the first time in nearly a decade. While China has reclaimed the top spot this year, trade between the two countries is not what it once was. For instance, many Chinese households now prefer the latest car model from BYD (a multinational manufacturing company domiciled in China) as opposed to the once coveted German Volkswagen. Chinese officials have also threatened to limit exports of certain rare earth minerals and semiconductor chips, which are crucial inputs for goods manufactured in Germany.

The future of this once vibrant and amicable economic partnership remains unclear. German manufacturers now face stiff competition from what was previously significant end-markets, and the country seems to be adopting the more cautious stance on China exhibited by the rest of Europe. Indeed, while some German firms are deepening their relationship with China to stay connected with technological innovation, the nature of aggregate German manufacturing may be changing, especially as the country’s economic output becomes increasingly tied to services rather than goods. Eventually, China and Germany will reach a trade equilibrium, though current trends suggest it will look vastly different from their prior decades of collaboration.

The Asymmetry of Unemployment

A fundamental characteristic of U.S. labor markets is the pronounced asymmetry in unemployment dynamics, as joblessness rises anywhere from three to five times faster during recessions than it falls during recoveries. This “sawblade” pattern has important implications for economic forecasting, monetary policy, and investment portfolio positioning. Amid recessionary conditions in the early 1980s, unemployment surged from 7.0% to 10.8% in just 16 months (an average increase of more than 0.2% per month). The subsequent recovery took 54 months, with unemployment declining at a rate of less than 0.1% each month on average. The Global Financial Crisis of 2008 exemplifies this pattern even more dramatically, as unemployment jumped from 5.0% to 10.0% in 22 months and normalized over a period of more than six years, during which time millions of workers faced extended joblessness. Most striking was the COVID-19 pandemic of 2020, when unemployment exploded from 3.5% to 14.7% in just two months (the sharpest spike in modern American history). While the initial recovery was faster than historical norms due to unprecedented fiscal and monetary stimulus, the unemployment rate still took 33 months to return to pre-pandemic levels. This illustrates that even with extraordinary policy support, labor market normalization remains gradual. The pattern described above reflects fundamental labor market frictions. On one hand, companies can execute mass layoffs within weeks when facing existential threats or demand shocks. At the same time, hiring is usually carried out with caution, as firms slowly restaff as confidence improves, workers require time to locate appropriate positions, and many require retraining for structural shifts in demand. Indeed, this friction is not a policy bug but rather a feature of how the labor market functions.

Understanding unemployment asymmetry is critical for investors today as the Federal Reserve navigates an increasingly complex challenge related to its dual mandate of stable prices and maximum employment. Specifically, the Fed faces an unprecedented data vacuum due to the recent government shutdown, and traditional labor market indicators are sending mixed signals. For instance, payroll growth has moderated but remains positive, initial jobless claims are elevated but have not reached recessionary levels, and the unemployment rate has risen yet remains relatively low. Some have also linked the rise of artificial intelligence to recent hiring trends, though it remains unclear whether these trends represent a meaningful secular shift in labor demand. Complications are intensified by inflation that remains stubbornly above the Fed’s 2% target. In short, looser monetary policy could lead to even higher price levels, while restrictive policy could trigger higher unemployment if actual labor market conditions are worse than available data points suggest.

Going forward, the Fed will likely be forced to prioritize one side of its dual mandate over the other, as interest rate policy is too blunt an instrument to fine-tune both price and employment levels simultaneously. The current environment represents precisely the knife-edge scenario in which an understanding of asymmetric labor dynamics becomes essential for economic forecasting.

Don’t Call It a Comeback, Gold’s Been Here for Years

With gold now trading near $4,000 per ounce after a steady multi-year climb, investor attention has turned to the potential role of the commodity in markets and portfolios. Some may view gold’s rise cautiously given shifting perceptions of U.S. policy and debt sustainability, questioning whether the rally reflects a meaningful shift in safe-haven preferences or simply the latest stretch of momentum.

The opinions of most investors have been shaped by an era in which attractive real yields, credible policy, and deep liquidity positioned Treasuries as the world’s premier safe-haven asset. As global reserves and risk frameworks increasingly centered on Treasuries and the dollar, gold’s role as a monetary anchor naturally faded. This week’s chart helps highlight this transition, and the events detailed above underscore how shifts in confidence have shaped market behavior. The Nixon Shock in 1971 ended gold convertibility and closed a monetary era in which trust in the dollar rested on the gold anchor, giving way to one in which confidence hinged on U.S. policy credibility. That credibility was tested early in 1978, when the Dollar Crisis revealed how unsettled the fiat transition remained and required coordinated intervention to steady the currency. By 1981, rate hikes had pushed real yields higher and helped tame inflation, providing the foundation the new system needed. As inflation cooled and credibility strengthened, Treasuries became the stabilizing asset of choice, helping set the conditions for the multi-decade bond bull market that followed (a dynamic that would surface again with the 1994 rate hikes). Decades later, the landscape shifted again with the Global Financial Crisis and quantitative easing by the Federal Reserve. Long-term yields compressed, central bank balance sheets expanded, and the dollar’s share of total reserves began a gradual decline. The pandemic shock in 2020 accelerated these dynamics as debt expanded and real yields turned negative. In recent years, central banks and affiliated institutions have been gradually increasing their gold holdings as a precaution against persistent macroeconomic and geopolitical strains.

Viewed through this lens, gold’s renewed relevance carries a familiar echo. Specifically, the commodity often strengthens when global confidence in the dollar feels tenuous. From this perspective, the recent rally may signal a shift away from a Treasury-centric period rather than any departure from gold’s longstanding function (i.e., a store of value). In that context, conversations regarding the role of gold may broaden from here.

Central Bank Examination

After a largely synchronized hiking cycle beginning in 2022, there has been a slight divergence in interest rate policies across the Federal Reserve, European Central Bank, and Bank of England in recent time. Both the ECB and BoE initiated their easing cycles in the middle of last year, ahead of the Fed, which has since followed suit with its latest rate cut coming last month. The target range for the effective federal funds rate is now 3.75– 4.00%. The policy rate of the BoE also hovers near 4% following its August 2025 cut, and the central bank is expected to maintain this positioning through November. Meanwhile, the latest rate reduction by the ECB in June has brought its policy rate down to roughly 2.2% given the relatively weaker growth and lower inflationary pressures faced by the euro area.

While it is critical for central banks to maintain independent monetary policies tailored to the conditions of their respective economies, disparate rate regimes across the developed world could have significant implications. For instance, global currency markets remain highly sensitive to interest rate differentials, and currency movements can meaningfully shift trade balances since goods from the country with the stronger currency become more expensive abroad. Additionally, investors may redirect capital toward regions with higher yields, impacting security prices and creating volatility in global financial markets as funds move across borders. In conclusion, if these central banks opt for different policy paths going forward, an additional layer of uncertainty will likely be added to the broader economic outlook.

Assessing the Damage

Over the weekend, the Senate overcame a key procedural obstacle in its attempt to end the record-breaking government shutdown, as enough Democrats agreed to advance a bill aimed at resolving the weeks-long stalemate. While previous government shutdowns have only caused short-term economic impacts since furloughed employees eventually receive back pay and federal spending typically rebounds quickly once operations resume, experts warn that the current shutdown has proved more damaging for several reasons. First, the economy is in a more vulnerable position than it was during previous closures, with households already strained by inflation and labor market uncertainty. Additionally, the current impasse has affected not only federal employees but also millions of Americans who are seeing their food assistance disrupted just as the holiday season approaches. As can be seen in this week’s chart, analysts estimate that the shutdown has cost the U.S. economy anywhere from $10 billion to $30 billion per week, with total losses already surpassing those of any previous government closure.

Looking ahead, economists note that while some of the output lost to the shutdown might eventually be recovered once the government reopens, a growing share (particularly in private sector services and tourism) will likely be permanent. The Congressional Budget Office warns that the shutdown could shave as much as two percentage points off fourth-quarter GDP growth, threatening to amplify existing weaknesses in manufacturing and consumer sentiment. Forecasts from major financial institutions have also been revised downward in recent days, with many groups citing rising uncertainty over fiscal policy and declining confidence. As it relates to capital markets, previous government shutdowns have had little impact on equity performance, with the S&P 500 Index averaging a return of roughly 1.5% during closures dating back to the 1980s and generating a positive return in 8 of the last 10 shutdowns. While these figures suggest that investors have largely considered past shutdowns insignificant, economic fallout and weaker sentiment stemming from the current closure could weigh on stocks going forward. For reference, the S&P 500 Index has returned roughly 0.7% since the shutdown began on October 1 through the end of last week, despite four days that saw the benchmark drop by nearly 1% during the period.

No Small Headwind for Small-Cap Managers

Small-cap equities are in a prolonged period of underperformance relative to large-cap stocks, but this trend has shown early signs of reversing in the aftermath of intra-year market lows on April 8, with the Russell 2000 Index up roughly 41% since that time. Interestingly, unprofitable companies within the benchmark have led the way, gaining more than 72% compared to a relatively meager 29% for profitable constituents of the Russell 2000 Index. Although the overall small-cap equity market is currently in line with its average bull market return amid this run, recent performance of unprofitables far exceeds historical norms. This dynamic can be observed in the chart above.

One of the major consequences of this trend is significant underperformance of actively managed small-cap strategies, which typically eschew companies with poor fundamentals. Specifically, the average active small-cap blend manager (as represented by the Morningstar category average) has underperformed the Russell 2000 Index by more than 10 percentage points since April 8, an extreme not seen in roughly 25 years. On the positive side, active small-cap strategies have slightly outperformed profitable small-cap companies, which are more likely to be included in these types of funds. Should this persist, it may be a tailwind for active managers, as profitable companies may have additional upside from here based on trends observed in prior bull markets. That said, more accommodative monetary policy and fiscal support may lead to additional strength from unprofitables and, as a result, further underperformance of active managers.

Don’t Make Me Repeat Myself

To paraphrase a quote from former President George W. Bush: “Fool me once, shame on… shame on you. Fool me — you can’t get fooled again.” This botched attempt at quoting the common phrase aside, the below-investment grade market shows that it can, in fact, get fooled again. High-profile defaults from subprime auto lender Tricolor and auto parts manufacturer First Brands have recently made waves, but additional default trends exist below the hood (automotive pun intended) and are currently flying under the radar.

This week’s chart shows a meaningful increase in the percentage of leveraged credit borrowers conducting repeat distressed and default actions. A repeat action is defined as when a borrower that has previously undergone a distressed transaction or default undergoes either another distressed transaction, defaults after a distressed transaction, or defaults again. Since 2008, an average of 19% of borrowers who underwent either a distressed transaction or default went on to conduct a repeat action according to J.P. Morgan. This figure has increased meaningfully to 33% since the beginning of 2023. There are many factors fueling this increase, including a sustained environment of higher interest rates and the increased desire of lenders to recoup portions of their investments. However, repeat actions don’t have favorable outcomes for all parties, as approximately 72% ultimately end in the borrower defaulting. While a repeat transaction can serve as a lifeline to a stressed borrower, it typically just ends up “kicking the can” on the eventual default.

Broadly, headline defaults remain below or near long-term averages within leveraged credit, even when incorporating distressed transactions. Additionally, leveraged credit fundamentals remain resilient. The high yield bond market is now of significantly higher quality than it has been historically, as some of the lowest quality borrowers in the space have opted to transact in private markets. Additionally, interest costs should begin to ease for borrowers as the Federal Reserve continues its easing cycle. However, the increase in repeat actions shows that the most stressed borrowers remain under pressure and are trying to delay defaults as long as possible. This is a dynamic that certainly bears monitoring. Going forward, while additional defaults like First Brands may generate headlines, idiosyncratic developments likely won’t offset a fundamental environment that has not shown broad-based deterioration. Some may get fooled, but the key is to not get fooled again.

Two Sentiments Diverged

This week’s chart compares institutional and retail investor sentiment using two established indicators. Institutional sentiment is represented by the National Association of Active Investment Managers (NAAIM) Exposure Index, which measures the average U.S. equity market exposure reported by NAAIM member firms (i.e., organizations that actively manage client portfolios). Reported exposures for this index include -200% (leveraged short) to -100% (fully short), 0% (market neutral), +100% (fully invested), and +200% (leveraged long), capturing the breadth of positioning from extremely bearish to highly bullish. Retail sentiment is represented by the American Association of Individual Investors (AAII) Sentiment Survey, which reflects the bullish-minus-bearish spread regarding the six-month outlook for stocks across individual AAII members (i.e., retail investors). When analyzed together, these indicators offer perspective on how both institutional and individual investors view the near-term prospects of equity markets.

Readers will note that these two indices have moved in tandem throughout most of the last several years but have diverged significantly in recent weeks as retail investor sentiment has plunged. It is not entirely clear what’s driving this latest divergence, but several factors likely play a role. Specifically, renewed U.S.–China trade tensions, the ongoing federal government shutdown, and interest rate uncertainty have likely weighed more heavily on retail investors, who tend to be more influenced by headline noise. Institutional money managers, on the other hand, appear to be maintaining confidence in healthy corporate fundamentals and the broader economic backdrop. Regardless of its exact cause, this divergence underscores the notion that sentiment data should be viewed as context-dependent rather than as a market timing signal.