Market Bearings with W. Allen Wallace, Chief Investment Officer

Periods like this can feel uneasy, especially when markets appear calm on the surface. Our role is to look beneath that surface and position your portfolio accordingly—so you can stay focused on your long-term goals.

“I’d rather be vaguely right than precisely wrong.”

-John Maynard Keynes

“…one ought to hold all one’s beliefs with a certain element of doubt, and one ought to be able to act vigorously in spite of the doubt.”

-Bertrand Russell

Millions of very smart people analyze vast amounts of data to predict market movements. Any honest assessment leads us to the same conclusion: the future is unknown. That does not excuse inaction; it demands discipline. We need to ensure that our decisions do not depend on perfect outcomes, while still understanding what is most likely and what happens if we are wrong.

This is the cornerstone of portfolio management. At the most fundamental level, we own a collection of reliable cash flows. These cash flows are continuously priced by markets as asset values. When asset prices fluctuate, we need to determine whether the price is down because the cash flow is impaired or if the price is down simply because the future has become even more opaque. We should only use prices as a guide for what is cheap and what is dear.

Lead Thesis:

Markets are currently priced for certainty, but the world remains uncertain. This is where risk lives. Assets priced for perfect outcomes inevitably decline when the market remembers that the future is unknown.

Market Weather:

We saw a few sprinkles since our last update in February 2026, but not enough to warrant significant action.

• Domestic equity prices remain elevated, and indexes remain concentrated

• Credit spreads remain tight

• Long-term rates have risen

• The dollar has strengthened, and oil prices have spiked concurrently with the military action in Iran

• Private market liquidity has continued to deteriorate

• Inflation fears are starting to return due to the spike in oil prices

• Gold and Silver have fallen, also likely due to dollar strength

While nothing has broken yet, nothing is cheap either.

Charts That Matter:

The following two charts show where uncertainty may be significantly underpriced:

There is an arms race in big tech, and sometimes more can be derived from who is choosing not to participate than from the actions of those fighting on the ground. Apple is currently the Switzerland of artificial intelligence capital expenditures, and it begs the important question: are they right or are they wrong? Amazon, Microsoft, Alphabet, and Meta are all plowing most of their Free Cash Flow into AI, and it remains to be seen if they will be able to earn a return on this investment that justifies all of the spending. Apple, on the other hand, has taken the path of waiting to see who the winner is and then potentially integrating the victor into their existing infrastructure. The impact of this spending is still undetermined. It may drive inflation, raise the cost of capital, compress future returns, or lead to supply shortages. It may also create the future dominant platform. At this stage, what remains unknown outweighs the hope of picking the winner.

Many economists have performed the post-mortem on our recent run of inflation, and this chart shows clear inflection points in the inflation curve at each point of stimulus payments during the COVID pandemic. There have been recent whispers of additional stimulus from tariff collections, to help cover health care costs, or just to stimulate demand. Be careful what you wish for. Direct payments to consumers did in months what monetary policy could not achieve in years. Inflation is a destructive force. It quietly erodes your purchasing power and slowly chokes your standard of living.

What We’re Watching:

Our focus continues to be dominated by inflation, recession, and the US Dollar. We have added long-term interest rates to the list.

Inflation fears have picked back up due to the spike in oil prices in response to military action in Iran and the closure of the Strait of Hormuz. Oil is not just a commodity; it is embedded in every economic activity. The closed Strait of Hormuz has many unintended consequences. It is a major trade route that facilitates the movement of critical inputs: oil, natural gas, sulfur for agricultural inputs, and helium for MRI machines, semiconductor manufacturing, and aerospace and defense. All of these things could potentially lead to supply shortages, reigniting inflation.

Recession risk is still underpriced. A recent analysis by Goldman Sachs increased their estimate for an impending recession from 25% to 30%. In our experience, by the time most major firms have declared a recession imminent, it has already arrived. We are not predicting a recession, but we are unwilling to ignore the consequences should one occur, especially with inflation showing signs of revival and the high price of equities.

The US Dollar has strengthened since our last update in February 2026. This has caused our international stocks, our metals, and our new exposure to international bonds to decline in price. The cash flows on these investments remain solid, and while we are aware of the risks to short-term pricing from an increasing dollar, the US debt situation, the international political environment, and the disparity in valuations lead us to continue our current posture.

Long-term US interest rates have risen since last month. This has put pressure on longer-term bonds and on equity markets. During a typical “risk-off” cycle, we would expect long-term rates to decline. The rise in the long end of the rate curve makes us fear stagflation, and positive correlation between typical safe haven assets and risk assets. Since we have very low exposure to both interest rate and credit risk, this has not overly impacted our core portfolios.

Portfolio Positioning:

Since our last update in February 2026, we have continued to rebalance accounts into asset classes that do not require perfect outcomes:

• We have updated our individual stock sleeve to reflect current valuations

• Catastrophe Bonds provide returns driven by physical events like hurricanes, earthquakes, and fires, not financial events.

• Utilities provide stable income with the potential for a softening regulatory environment

• International bonds provide exposure to multiple economies and provide diversification away from the US dollar

• We have also reduced asset classes that are priced for perfection by reducing metals and domestic fixed income. We have slightly moderated cash in response to declining short-term interest rates.

Principles and Philosophy:

Modern finance defines risk as volatility. We do not. We think about risk more simply. We define risk as the potential to lose asset value or income-generating potential permanently. Complex formulas have been created to predict how to allocate assets to minimize the annual deviation from expectations. The problem with this theory is that it punishes outperformance as well as underperformance, and it is based on the mistaken assumption that future correlations and returns can be derived from the past.

While focusing on minimizing permanent loss may provide more daily fluctuations in asset prices, we are firmly intent on making your money last as long as you need it to, not in making sure the ride is smooth, regardless of whether or not we make it to the destination. We do attempt to limit downside fluctuations, but we do not make decisions with the sole intent of making returns static, and not at the expense of permanent loss of capital.

Closing:

Markets do not decline because risk suddenly appears; they decline because important risks are ignored. Risks are like dynamite; the catalyst is the fuse. Overvaluation, tight credit spreads, inflated currencies, and potential inflation are all risks. Wars, declining cash flows, supply constraints, rising oil prices, and recessions are the fuses.

We must make continuous decisions under uncertainty to achieve our goal of meeting your lifetime return requirements. We do not make predictions; we evaluate the climate that we are operating in and make decisions that we believe will get you closer to your goal of financial security. When the facts change, our actions will change.

It is important to remember that in life, as well as in markets, “it isn’t what you don’t know that hurts you, it’s what you know for certain that just ain’t so.” We are not in the business of making predictions; we are in the business of making sure that when market dislocations happen, your portfolio is prepared.

Thank you for the trust that you give us, we never take it for granted.

Basepoint Wealth LLC is a registered investment adviser.  Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies.  Past performance is not indicative of future performance.  Therefore, no current or prospective client should assume that future performance of any specific investment, investment strategy (including the investments and/or investment strategies recommended by Basepoint Wealth), or product referenced directly or indirectly in this presentation, will be profitable.  Different types of investments involve varying degrees of risk, & there can be no assurance that any specific investment or investment strategy will be suitable for a client’s or prospective client’s investment portfolio. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein.