Is there a Market Signal in this noise?
“In the short run, the market is a voting machine, but in the long run, it is a weighing machine.”
– Benjamin Graham (famed value investor)
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In this issue
- Key Market Takeaways (Q1)…and my take
- New Ideas/Products – Kai Wu and Sparkline Capital’s Intangible Value funds
- Case Study: Embedded gains in a client portfolio
- Question from the Audience: Inflation and Stock/Bond portfolios
Key Takeaways – Q1 2026
Market Performance (before and after 2/26/26)*
| Security/Index | Q1 2026 | 1/1/26 – 2/26/26 | 2/26/26* – 3/31/26 |
| Nasdaq | -8.0% | -2.3% | -5.6% |
| S&P 500 | -5.5% | 0.0% | -5.2% |
| Emerging Markets – EEM | 0.2% | 15.8% | -11.5% |
| Global (ex-US) – ACWX | 1.8% | 10.9% | -7.6% |
| Commodities – DBC | 28.7% | 10.1% | 17.1% |
| Oil Futures – USO | 82.8% | 14.6% | 57.6% |
*last trading day before Iranian attack
Source: Yahoo! Finance
- International equity markets had a very strong beginning of the year, but the Iranian military action reversed early gains and push international markets down over 7% (over 11% for Emerging Markets)
- US markets had a tentative start to 2026, as investors rotated out of large cap tech stocks, but the Nasdaq and S&P 500 ended the quarter down more than 5%
- Oil prices spiked, but a broad basket of commodities also rose significantly in price (DBC holds metal and food commodities, in addition to oil)
- Gold was up 7.3% for the quarter, but was highly volatile and did not behave like a traditional investment “safe haven” or hedge against inflation
My Take
If there is a signal in all the market noise, it could be this: the stock markets are currently at the mercy of the geopolitical risk, which carries with it a direct inflationary risk, given Iran’s ability to close the Strait of Hormuz.
Disruptions to global energy supply—particularly through key shipping routes such as the Strait of Hormuz—can contribute to higher commodity prices and inflation pressures. Historically, sustained increases in inflation have created headwinds for both stocks and bonds.
We know from both history and recent experience (2022) that rapid inflation is harmful to both stocks and bonds, and the big question is if the US economy is resilient enough to digest these higher prices and avoid recession.
As of this writing (05.18.2026), corporate earnings (the “weighing” machine) seems to be winning the contest, and stocks are up for April and May. But the geopolitical risk (and the inflation risk that comes from it) could easily stop the trend by changing market “votes”. The interaction between these forces—earnings growth vs. inflation and interest rates—will likely continue to drive market volatility.
Cautious optimism should steer our investment decisions, and maintaining a diversified portfolio, potentially including exposure to commodities and other real assets, may help manage risk in environments characterized by higher inflation or inflation uncertainty.
A New Investment Idea: Intangible Value stock ETFs – Sparkline Capital
Historically, value stocks have outperformed growth over long periods. However, growth has outperformed in more recent decades. For example:
- Growth stocks outperformed value by approximately 2–4% annually over the past 20 years (Source: Dimensional Fund Advisors)
Is it a statistical anomaly, or is it something more foundational? Kai Wu, the founder and Chief Investment Officer of Sparkline Capital, has put forward a compelling theory that should resonate with tech employees and investors.
One explanation is the increasing importance of intangible assets—such as intellectual property, software, and brand value—which are not fully captured on traditional balance sheets.
Value investors have always analyzed the assets of a company, looking for stocks priced cheaply relative to their tangible assets: Plant, Property and Equipment. Valuing assets on a balance sheet is a perfectly reasonable way to assess industrial and manufacturing businesses, but the rise of service companies and the Information Economy has changed that.
The best stock performers of the last two decades couldn’t be called traditional value stocks, because their value has been built on asset-light balance sheets: the price of the stock, relative to their quantified assets, make them “too expensive”.
Enter Kai and Sparkline Capital. Quantifying the intangible assets of asset-light companies allows them to be considered “Value Stocks”. Does the traditional value manager think Google and Amazon are value stocks? No way. But Kai and Sparkline Capital does.
I recently interviewed Kai and we talked about his award-winning funds (Sparkline’s domestic value ETF (ticker: ITAN) was just rated 5 stars by Morningstar). Stay tuned – I will publish the entire conversation and some choice excerpts shortly and let you know.
Case Study: Embedded gains in a client portfolio
A current prospect of mine is a sophisticated investor who holds a prominent finance position at a large local tech company. He has been successful and his portfolio is in pretty good shape, but he has a “1st World Problem”: he has a $2M embedded capital gain in his portfolio, which will result in a ~$750,000 capital gain tax bill as he sells (see my LinkedIn post on CA capital gains rates). This “problem” will only get worse as his investments continue to appreciate. Is it inevitable that he will have to pay this tax bill?
In short, the answer is “given a little time – no”. What we are proposing for him is a two-step strategy.
- Take investments that are not highly-appreciated and begin a direct indexing strategy (see my Q4 2025 newsletter for an in-depth explanation – https://mike.prosperowealth.com/newsletter/q4-2025-newsletter –This strategy should continue to grow his portfolio over time, but allow us to rebalance it and create paper losses on individual stocks.
- As we are generating losses, we will begin “feeding” his highly-appreciated securities into the portfolio, using the losses we create to offset the gains that will come from selling those securities, lowering his long-term tax bill.
There are many experienced and successful vendors who can execute this strategy for clients, but the client must work through an advisor. In most cases the potential tax benefit for the client far exceeds the fees to implement the strategy.
Take a quick look at your portfolio. Have you been very successful during this prolonged bull market? If so, you might have a capital gain tax liability that can be efficiently reduced for you over time.
Question from the Audience: Inflation and Stock/Bond portfolios
The question for this quarter came from a friend who is worried about the inflation we are seeing creeping back into our economy since the military attack on Iran.
“Is my portfolio positioned for higher inflation?”
First of all, let me provide some important context. Like my comment about value stocks underperforming during the last 20 years, the last 20 years of very low inflation are also a meaningful historical anomaly.
Annual United States Inflation Rates*
| Time Period | Annual Inflation |
| 2006 – 2025 (20 years) | 2.5% – 2.7% |
| 1986 – 2025 (40 years) | 2.8% – 3.0% |
| 1970 – 1980 | 7.7% |
| Last 100 years | 3.0% – 4.0% |
*US Bureau of Labor Statistics
Low levels of inflation are great for both stocks and bonds – low inflation usually invites lower interest rates, which allows for increasing price multiples for stocks, and dropping interest rates cause bond values to increase.
Even medium levels of inflation, which are not as favorable, have allowed for healthy stock and bond performance in the past, if the inflation rate has been steady.
But higher levels of inflation (>4%) have historically been a drag on both stock and bond returns.
Example (2022):
- S&P 500: –19.4%
- Bloomberg U.S. Aggregate Bond Index: ~–13%
- U.S. inflation: ~8% (CPI average)
(Source: BLS, Bloomberg index data)
Yes, high inflation can cause both stocks and bonds to drop in value!
What has performed well during inflationary periods and could be a portfolio hedge against pronounced inflation? Real assets. For retail investors, the most common real assets are real estate and commodity funds/ETFs (foodstuffs, metals, oil, etc.). Gold, which has historically been used as an inflation hedge, has become less reliable (see my Q1 market summary).
Most of the last 40 years have been ideal conditions for stock and bond appreciation: globalization, increasingly efficient supply chains and cheap global labor, technology proliferation and rising productivity.
These positive global trends have slowed or stopped in recent years, and now current geopolitical events and national policies threaten an end to this disinflationary period, increasing the likelihood of more volatile, or consistently higher, inflation patterns.
The phrase “what got you here won’t necessarily get you there” comes to mind. That means investors should consider adding inflation hedges to their portfolio.
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— Mike
Important Disclaimers:
This material is for informational purposes only and should not be construed as investment, tax, or legal advice. Past performance is not indicative of future results. All investments involve risk, including loss of principal. Index performance is shown for illustrative purposes only and is not directly investable. Data sources include publicly available information believed to be reliable but not guaranteed.
