A World That No Longer Exists - Q1 2026

The first quarter of 2026 produced no shortage of noise. A war. An oil shock. AI disruption. Threats to annex Greenland. The removal of Venezuela’s president by force. In periods like this, the temptation is to focus on the events, to treat a war, an annexation threat, or market volatility as the story. We think the events are symptoms. The story is something larger. The environment that shaped investor assumptions for the past three decades has structurally shifted, and many portfolios were not built for the world that now exists.

This letter addresses three of those shifts. Each one is distinct. Together, they point toward the same conclusion.

The Post-Cold War Order, In Memoriam

In February 2026, the Munich Security Conference, the premier annual gathering of Western heads of state and defense officials, published its conference report titled "Under Destruction." German Chancellor Friedrich Merz told the assembled leaders that "the world order as it has stood for decades no longer exists" and that we are now in a period of "great power politics" where freedom "is no longer a given." French President Emmanuel Macron urged leaders to "reorganize our architecture of security", arguing that Europe must take full responsibility for defending its own economic and geopolitical interests. U.S. Secretary of State Marco Rubio declared that we have entered a new era of geopolitics, acknowledging that the old-world order has passed.

We write this not to alarm, but because it matters for how we think about investment portfolios. These are not outside analysts making a provocative call. These are the stewards of the post-Cold War system, the system that shaped three decades of investor assumptions about dollar stability, rules-based trade, and geopolitical risk. When those stewards declare the system finished, investors who are still positioned for it face a structural mismatch with today’s reality.

The post-Cold War era was, by any historical measure, an anomaly. U.S. military and economic dominance enforced a set of predictable rules: trade disputes went to the WTO, conflicts stayed peripheral, the dollar anchored global finance, and supply chains optimized for efficiency rather than resilience. Markets adapted by assigning virtually zero geopolitical risk premium into asset prices. It was a rational response to conditions, but those conditions are no longer valid.

Iran and Ukraine are not the story, but the symptoms. The story is the simultaneous renegotiation of the rules on trade, energy, reserve currencies, and military alliances, a process that takes years to resolve. BRICS+ nations are building payment infrastructure that routes around the dollar. Germany reversed its constitutional debt brake to fund military spending, its largest fiscal shift since reunification. China now prices meaningful volumes of oil in yuan. The dollar fell 9.4% against major currencies in 2025. These are not idiosyncratic events. They are the infrastructure of a new order being built.

History suggests that world orders rarely break in one dramatic moment; they erode at the margins, then suddenly become impossible to ignore. The British pound still retained an important international role in the early 1950s, years after Bretton Woods had formally established the dollar as the anchor of the global financial system. Britain’s financial position weakened over time, and the Suez Crisis of 1956, when U.S. financial pressure forced Britain to retreat, exposed Britain’s financial vulnerability and confirmed a transition that was already underway. The lesson is that systems can look durable long after their foundations have begun to shift. In that kind of environment, prudence argues against portfolios built on a single geopolitical or monetary assumption and in favor of diversification and resilience across assets and regimes.

The Correlation Is Not “Broken”

Across financial media and publications from major banks and asset managers, there’s frequent mention that the stock-bond correlation is "broken". Implicit in their statement is the assumption that stocks and bonds should always move in opposite directions. The stock-bond correlation is not broken. It is behaving exactly as it should, given the current macroeconomic environment. Those who call it "broken" are treating the past 30 years as the norm and calling anything that deviates from what they’ve observed during their careers a malfunction. A more careful reading of history reaches the opposite conclusion. In the chart below, we show the 5-year US stock-bond correlation going back to 1875. What stands out as the anomaly is the past three decades.

Here is how the correlation actually works. There are two key macroeconomic risks: growth and inflation. In a growth-driven recession, stocks lose value in response to economic contraction, inflation expectations plummet, bond yields decline and bond prices rally. Stocks and bonds genuinely offset each other. The portfolio works as advertised. This is the foundation for the 60/40 portfolio (60% stocks, 40% bonds) prevalent across the wealth management industry.

In an inflation-driven shock, inflation expectations rise and bonds plummet as the bond market demands a higher return to compensate for the erosion of purchasing power. Both stocks and bonds suffer simultaneously. The 60/40 portfolio provides no shelter.

This is not new. The 1970s delivered a decade of precisely this dynamic. After the 1973 OPEC embargo, Fed Chair Arthur Burns raised rates only modestly and reversed course prematurely under political pressure, allowing inflation expectations to become entrenched. Workers demanded higher wages. Companies passed costs to consumers. What was supposed to be a temporary shock became a decade of stagflation. From 1973 to 1981, both stocks and bonds produced negative real returns. Only Volcker's appointment in 1979, and the punishing recession that followed, broke the cycle.

Markets in 2022 updated this precedent. The S&P 500 declined 18.1%. The Bloomberg U.S. Aggregate Bond Index declined 13%. Both fell simultaneously for the same underlying reason: inflation at 9.1% forced the bond market to reprice, raising yields and compressing equity valuations at the same time.

The first quarter of 2026 delivered the same signal. The S&P 500 fell 4.3%. The 10-year Treasury yield increased from 4.17% to 4.32%. Bonds and stocks declined together. Rate cut expectations, which stood at two to three cuts at the start of the year, were entirely removed by quarter-end, with talk of rate hikes returning as oil prices surged.

The parallel to the 1970s is instructive not because we are predicting a repeat, but because the policy mistakes of that era are precisely the ones to watch for today. Several of the conditions that enabled Burns's error are present now. Political pressure on the Fed from the White House echoes the Nixon-era dynamic. Government debt levels are far higher than the 1970s, limiting fiscal flexibility. Year-over-year inflation, as measured by the CPI, increased to 3.3% by the end of the quarter. And the Iran war has pushed oil above $100 per barrel, a supply-side shock of the exact variety that the 1970s taught us can be persistent and deeply resistant to monetary tools designed for demand-driven problems.

In 2021, out of concern that inflation was not “transitory” as the Fed communicated, we conducted an extensive study of every major asset class and investment strategy under inflationary conditions. We were looking for diversifiers that would hold up when the standard tools could not. Two emerged with strong historical records: commodities and trend-following strategies.

Commodities belong in an inflation-regime portfolio for a reason that goes beyond correlation. They are frequently the source of inflation. Oil prices drive transportation and manufacturing costs. Agricultural prices flow directly into food prices. When commodities are the engine of inflation, they rally in the precise environment when traditional portfolios suffer most. The Bloomberg Commodity Index gained 24.4% and the S&P GSCI Commodity Index rose 40% in Q1 2026. The S&P 500 Energy sector surged 38.3% during the quarter. This is the inflation regime expressing itself through the assets most directly linked to it.

Trend-following strategies tend to do well during inflationary periods for a different reason: inflationary periods produce sustained, persistent directional moves across asset classes, the kind of moves trend following strategies are designed to capitalize. Bonds sell off for months or years as the inflation premium is continuously repriced. Commodities rally for extended trends. Equities reprice in a grinding adjustment. In 2022, the SG Trend Index returned 27.3%. In Q1 2026, the same index of trend-following managers returned 7.1%, again outperforming both stocks and bonds during a quarter when the traditional toolkit failed.

A portfolio built to withstand multiple regimes does not require anyone to predict which regime is coming. It requires an understanding of the fundamental drivers of each asset class and investment strategy, and of thoughtful construction to build portfolio resilience.

A Structural Problem in Private Credit

In 2023, we published a letter titled "Private Markets: Buyer Beware." In it, we outlined three concerns: the opaque and stale valuations of private holdings, the rise of continuation funds that seemed to prioritize the interests of private equity firms over their investors, and the risks embedded in private credit funds lending to heavily leveraged companies (a subset known as “direct lending”). We cited KKR's own annual report, which disclosed that its public stock holdings fell 57% in 2022 while its private holdings fell just 1%. We asked the obvious question and concluded the private marks were artificially inflated. We advised caution.

Today, we want to describe a problem that has developed in the years since, one that resembles the classical case of a prisoner's dilemma (a dynamic where individually rational decisions produce a collectively harmful outcome). Private credit funds structured as non-traded BDCs and interval funds hold loans with typical maturities of three to seven years, while offering investors quarterly redemptions. In normal conditions, this gap between asset duration and liability terms is manageable. The structure works because not everyone wants out at the same time.

The prisoner's dilemma emerges when that assumption breaks down. If all investors remain in the fund, it functions as designed: loans mature, interest payments come in, capital is returned. But once any meaningful group of investors believes that others are heading for the exit, the individually rational response is to redeem first, before the NAV marks are revised down and manager’s gate investors from exiting. Early movers exit at currently stated values. Those who wait hold an increasingly illiquid portfolio at marks that may no longer reflect what a buyer would actually pay. The structure rewards those who act first at the expense of those who stay. This is not panic; it is game theory.

The inflated NAV marks are the accelerant. Private credit assets are valued quarterly using models and third-party appraisers, but the inputs are sufficiently subjective, leading to biased outputs as appraisers are selected by the fund managers, who the appraisers want to satisfy. When early investors redeem at marks that are above where the secondary market would actually clear, they are extracting value from the investors who remain.

For investors who participated in private credit over recent years, the experience thus far has been positive. The high-interest rate environment generated attractive income, and default rates remained remarkably low relative to historical norms. Those who captured that income and have not yet been subjected to NAV markdowns have a window to exit at a premium to where these assets would clear in today's market.

The evidence that this dynamic is active is no longer theoretical. Blue Owl Capital faced redemption requests of 22% on its $36 billion flagship credit fund and 40% on its Technology Income fund. In addition to Blue Owl, Ares, Apollo, Carlyle, Cliffwater and BlackRock all had unmet redemption requests. Unlike non-traded BDCs, publicly traded BDCs are valued by the open market. According to Reuters, most publicly traded BDCs are trading below the net asset values stated by their managers.

The collectively rational response would be for investors to remain patient and allow loans to mature. In a structure with genuinely locked-up capital and aligned incentives, that patience is structurally embedded. But the individually rational response with funds that offer quarterly liquidity is to redeem. When investors can buy shares in publicly traded versions of these same funds at meaningful discounts to stated NAV, the math is straightforward: exit the private fund at the inflated mark, buy the traded equivalent at the lower price, and profit off the spread. Every quarter where redemption requests exceed the gate creates anxiety among remaining investors, which generates more redemption requests, which forces managers to either gate further or sell assets at distressed prices, which validates the concern that started the cycle.

We expect this dynamic to persist. The underlying structural mismatch between illiquid assets and semi-liquid wrappers cannot be resolved by a single quarter of improved sentiment. The refinancing cliff for many of the software companies in these portfolios lies ahead. And the AI disruption that triggered the initial repricing is accelerating, not moderating. Until fund managers can convince investors that the loans they hold are worth what they say they are, the incentive to be first through the door will remain powerful.

For our part, our skepticism was tactical, not permanent. The dysfunction we avoided is now creating a supply-demand imbalance that favors patient, disciplined capital. A recent article in the Financial Times ran with the headline “Distressed-debt funds target private credit downturn as 'greatest opportunity' since 2008”. We are launching our private markets fund in Q2 2026 specifically to target these dislocations: secondaries at meaningful discounts to stated NAV, niche specialists in the lower-middle market where deal sizes are too small for the mega-funds, and real estate where valuations have diverged sharply from replacement cost.

Closing Thoughts

The three themes of this letter share a common thread. An environment shaped investor assumptions. Those assumptions shaped portfolios. The environment has changed. The post-Cold War order trained investors to price almost no geopolitical risk. The long disinflationary era trained them to treat the 60/40 portfolio as permanently reliable. The past decade trained them to accept illiquid private credit structures at face value. Each of those assumptions has now either reversed or is under serious pressure.

Our work is not to predict what comes next. We have written at length about why that exercise produces a false sense of confidence. Our work is to build portfolios that are honest about the world that already exists: one with a higher geopolitical risk premium than any model built in the last 30 years, one in which inflation can make the standard toolkit unreliable, and one in which some of the most aggressively marketed investment structures carry risks that are not visible on the surface.

A portfolio designed for multiple regimes does not require certainty about the future. It requires the insight to stop treating the last 30 years as a permanent baseline.

Thank you for your continued trust and partnership.

Razmig Der-Tavitian, CFA, CAIA
Chief Investment Officer & Managing Partner
Evolve Private Wealth

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