Our Deep Value Portfolio Shines As This Bull Cycle Grows Old

Premium Flagship Update

The world economy entered 2026 carrying momentum from a resilient 2025. Private markets adapted to an uncertain trade environment, US tariffs came in below their most alarming April 2025 announcements, and a technology-driven earnings expansion buoyed equity valuations across major indices.

The Russell 2000 advanced 12.8% for calendar 2025, while micro-cap stocks ran even harder, with the Russell Microcap posting a 23% gain for the year.

From the market bottom of April 8, 2025 through January 30, 2026, the Russell 2000 advanced 50% and the Russell Microcap gained 72.6%.

After years of underperformance relative to mega-cap technology names, small-cap and micro-cap stocks finally delivered the mean reversion that value investors had long anticipated.

That momentum ran directly into a new geopolitical shock.

Armed conflict erupted in the Middle East at the end of February 2026, closing the Strait of Hormuz and damaging critical hydrocarbon infrastructure in a region that remains central to global energy supply.

The International Monetary Fund responded by downgrading its global growth forecast to 3.1% for 2026 and 3.2% for 2027, both figures sitting well below pre-pandemic averages. Global headline inflation, which had been declining toward central bank targets, is now expected to rise modestly in 2026 as higher energy commodity prices work through supply chains.

Oil is assumed in IMF projections at approximately $82 per barrel for 2026, a figure that could prove conservative if the Strait of Hormuz closure extends beyond mid-year.

The IMF identifies three channels through which the conflict transmits to the broader economy. Higher commodity prices act as a textbook negative supply shock, raising costs, disrupting supply chains, and eroding purchasing power for consumers and businesses alike.

A second channel runs through tighter financial conditions: the prospect of renewed inflation is likely to keep central banks from easing as aggressively as markets had priced in heading into 2026, and any sudden repricing of risk assets could tighten conditions materially.

The third channel is geopolitical fragmentation itself, which discourages cross-border investment and accelerates the reorientation of global trade that began during the US-China tariff cycle.

On the trade front, the situation is considerably calmer than the worst fears of 2025 suggested. The Xi-Trump meeting in Busan on the sidelines of APEC Korea 2025 produced a trade truce that cooled bilateral tensions and allowed risk assets in both the US and Chinese equity markets to recover.

Effective US tariff rates, while still elevated, peaked at roughly 13% in early 2026 following deals, exemptions, and mitigation strategies employed by importers. That is still more than four times the pre-tariff baseline, but it is also roughly half of what was announced on April 2, 2025. Companies have had a year to adapt, and the most disruptive supply chain disruptions are now largely priced into earnings estimates.

For the United States specifically, the tariff episode hit employment harder than prices in 2025, with nearly 85% of annual employment gains front-loaded into the January through April window before the most aggressive tariff measures took effect.

Inflation, while re-accelerating modestly, added an estimated 50 basis points to the core personal consumption expenditures index in 2025 alone, a figure that now risks being amplified by energy price pressure from the Middle East conflict. The Federal Reserve faces a difficult policy environment: growth is slowing, inflation risks are rising, and fiscal deficits remain historically elevated.

That combination does not argue for aggressive rate cuts, and investors who positioned for a 2026 easing cycle may find themselves disappointed.

The US equity market, as measured by the S&P 500, has essentially gone nowhere in recent weeks despite posting a 30% gain over the trailing 12 months.

Large-cap technology stocks that drove the 2024 and 2025 advance are showing signs of fatigue. The Magnificent 7 basket is up approximately 0.3% over the past month, while the Russell 2000 has outperformed by a meaningful margin over the same period. That rotation dynamic is consistent with what historically happens late in a bull cycle, when valuations in the leadership names have stretched to levels that require continued earnings perfection to justify, and capital begins searching for cheaper territory.

For the deep value investor, this environment presents both hazard and opportunity in roughly equal measure.

The hazard is straightforward: if the Middle East conflict expands, energy prices spike to levels that trigger a true recession, and credit conditions tighten sharply, the kind of small and micro-cap names that populate this portfolio will not be immune.

They have no Bloomberg terminal armies covering them, no institutional liquidity floors, and limited access to capital markets. The opportunity is equally clear.

When the next wave of indiscriminate selling arrives, these names will be sold down with everything else regardless of their balance sheet quality, their asset coverage, or their ability to generate cash through a downturn. That is precisely when the patient value investor earns his return.

The Stoics had a phrase for it. They called it the view from above. From that elevation, the noise of any given crisis looks like every other crisis that preceded it, most of which turned out to be buying opportunities for those with the discipline to act while others were fleeing.