Daily Commentary

MarketMinder’s View: As private investments’ popularity grows and the US Labor Department greenlights their inclusion in 401(k)s and other retirement plans, this piece highlights a couple of important considerations: these assets’ opaque valuations and liquidity issues. As the article mentions, these issues have made headlines recently. But mostly in private credit, with lots of eyeballs on one lender’s recently curbing redemptions and locking up client funds. (Which reminds us, MarketMinder doesn’t make individual security recommendations and highlights this for the broader theme only.) However, these problems are just as prevalent in private equity, with fund managers often applying fair-value accounting rules in head-scratching ways. “Private-equity funds, for example, have ample opportunities to book large gains with subjective valuations and hold them in place for years. Unlike a debt-focused fund, where the upside is capped, a private-equity manager can manufacture home-run performance on paper by marking up ownership stakes in closely held companies or other private-equity funds. … Like their counterparts in private credit, private-equity funds are supposed to mark their assets at fair market value each quarter. These assets usually lack market quotes and are difficult to value. This opens the door for managers to rely on subjective pricing models. And when they invest in other funds, the accounting rules let them simply adopt the net asset values, or NAVs, provided by other fund managers.” This gives the veneer of stability and high returns—hence the industry’s reputation—but in reality, your private investment’s value could be fluctuating sharply, including to the downside. And as with recent private credit fears, redemption gates can deny investors access to much-needed liquidity if an emergency or big purchase pops up. Both of these differ from funds owning liquid assets like publicly traded stocks and very liquid bonds like US Treasurys, which don’t have that liquidity mismatch. We aren’t inherently against private investments, mind you, but it is vital for investors to know what they are buying and any potential downsides. And when it comes to private investments, liquidity and valuation are two key ones. For a more in-depth look at this concept, see our 2022 commentary, “The Trouble in Conflating Illiquidity and Stability.”

MarketMinder’s View: As always, MarketMinder is politically agnostic, preferring no politician nor any party and assessing developments for their potential economic and market implications. And we bring you this discussion of Hungary’s election, which saw center-right Tisza party leader Peter Magyar unseat Victor Orban as prime minister after 16 years, because people say it has big implications. Orban and his Fidesz party governed with an authoritarian bent, stacking the judiciary, asserting control over the central bank, nationalizing private pensions and reducing economic freedom overall. With Magyar now in charge with a supermajority, people are optimistic that the rule of law and economic freedom will be restored and that Hungary will stop trying to veto EU initiatives. Hungarian stocks rallied hard on those hopes Monday. But whenever a reformist government takes over amid lofty expectations, investors benefit from taking a deep breath and thinking like markets. Stocks move on the gap between reality and expectations. If hopes get too high and reforms are disappointingly slow, that can weigh on markets. That is a risk here, with institutions stacked with Fidesz loyalists who might not smile and accept Magyar’s calls to resign. Note, too, that Hungarian stocks weren’t exactly swirling the drain under Orban. They priced the authoritarian turn early in the 2010s and moved on, trouncing Emerging Markets and global markets even when denominated in USD (to account for the weak forint’s skew). Stocks moved on the gap between reality and expectations under Orban and will do so under Magyar. (Also, Hungary’s market is tiny—an Emerging Market constituting just 0.04% of the MSCI All-Country World Index, per FactSet—and the MSCI Hungary contains just three companies, so sector/company-specific issues matter a great deal to returns.)

MarketMinder’s View: We don’t see direct investment implications here, but it is an interesting read that hints at why sentiment isn’t exactly roaring as Americans’ net worth grows. We will skip the discussion of a supposedly K-shaped economy where only high-income households are driving growth and refer you to our past writings for more on that if you wish. We don’t dismiss lower-income households’ concerns, but we don’t think that is the telling thing here. Yes, Fed data show one in six families are now worth more than $1 million, yet many in this cohort don’t feel like the archetypal high roller without a financial care in the world. This piece dives into why that might be. A big reason is simple inflation: Living costs are up alongside net worth, and millionaire apartment dwellers in high-cost areas still can’t afford to buy a home. So for a lot of folks, having a million bucks feels nothing like the movies promised it would when they were young. Older millionaires, meanwhile, may have much of their wealth tied up in their home or socked away in a traditional retirement account, which will be subject to income taxes (and, depending on their age, early withdrawal penalties) if they tap it. These are all things that cut against feeling rich. At the same time, there is something encouraging to take away from this: Steady investing and compound growth are still helping people build wealth even if $5 million is the new $1 million or whatever. Financial security isn’t out of reach, even if you have to adjust your expectations and raise your long-term targets as you eye retirement.