Category: Financial Markets Commentary

Monthly financial markets commentary from Sabino Investment Management, LLC

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First Quarter Economic Reports

The US Department of Commerce – Bureau of Economic Analysis (BEA) released its GDP preliminary figures for the first calendar quarter.  Real (after inflation) gross domestic product (GDP) increased at an annual rate of 2.0 percent compared to the prior quarter.

Personal consumption increased at an annual rate of 1.6%, while gross private domestic investment increased at a rate of 8.7%.  Nonresidential structures and residential structures both declined at rates of -6.7% and -8.0%, respectively.  Nonresidential equipment and intellectual property products increased at rates of 17.2% and 13.05%, respectively.  Government consumption and investment increased at an annual rate of 4.4%.  Imports grew at a faster rate of 21.4%, compared to exports, which increased at a rate of 12.9%.

The BEA breaks down how much each GDP component contributes to total GDP growth.  Personal consumption expenditures contributed 1.08% to the 2.0% increase in GDP for the quarter.  Gross private domestic investment contributed 1.48% to GDP.  Net imports had a negative impact of -1.30% on GDP growth.

Some economic analysts are concerned that most of the GDP growth was due to investment related to the artificial intelligence (AI) buildout and returns on investment for many of the AI initiatives remain uncertain.

Personal consumption is unlikely to be a major source of economic growth in the near future as it has grown at a faster rate than personal income during the past year.  The personal savings rate has declined to 3.6% as of March 2026, which is the lowest rate since November 2022.

Federal government spending may increase substantially for the next fiscal year beginning October 1.  The White House budget request includes $1.5 trillion for defense spending, a 42% increase from the current level of $1.05 trillion.  The Congressional Budget Office is projecting that the budget deficit for the current fiscal year ending September 30 will be $1.9 trillion with total expenditures of $7.4 trillion.  The budget request is currently under review by Congress and analysts expect an “uphill battle” for approval, even with the current Republican majorities in both chambers.

According to www.multpl.com, the S&P 500 index remains at a high valuation level with a P/E ratio of 31.0 based on reported earnings for the last twelve months.  The Shiller P/E ratio which is cyclically adjusted for the past ten years is higher at 40.9.

FINRA margin debt also reflects a high level of speculative interest, at $1.22 trillion as of March 31, more than double the $607 billion for December 2022.

Research Affiliates is currently showing a projected nominal annualized return for the next ten years of 3.5% for US large cap stocks.  Research Affiliates avoids prognostications on the US economy or geopolitics.  Their expected returns simply reflect a steady state economy and a return to more normal valuation levels.

While expectations are low for the S&P 500 index, there are some stocks that sell at reasonable valuations with good fundamentals.  Companies that we own include Verizon, SM Energy, Paypal, Allstate, Danaos, and Global Ship Lease – all of which continue to report revenue growth and sell at P/E ratios in the single digits.  The exchange-traded funds that we own also have a similar value orientation.

If you have any questions or comments, please contact me.

Robert G. Kahl
CFA, CPA, MBA

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This Too Will Pass

As I write this on Sunday, many reports are coming out of the Middle East.  Some of them cannot yet be verified, and the future course of the war remains uncertain.  It is probably best that I refrain from expressing my political opinions on the matter.  But let’s take a look at the early impact on the financial markets.

TradingEconomics.com gathers data from a variety of sources from international markets.  As of 5:30PM MST on Sunday afternoon, they were showing the following:

DXY US Dollar Index                          +0.41%
S&P 500 Futures                               -1.09%
US 10-year bond interest rate      -0.01%
Gold                                                           +1.70%
Silver                                                        +1.31%
Brent crude oil                                    +7.46%

Our current allocation to precious metals will provide some positive ballast.  Larger accounts that hold individual stocks have two energy companies.  SM Energy and Petrobras produce oil, gas, and natural gas liquids.  SM Energy has properties in Colorado and Texas, while Petrobras has properties mostly in Brazil with a few more in Africa.  Both should benefit from the higher prices, while the major oil companies that have operations in the Middle East will have supply disruptions.

At this point, the Middle East war can be expected to have some impact on the financial markets as long as it lasts.  While Russia, China, and North Korea have provided support to Iran, none have yet taken direct military action against the United States or Israel.  I doubt that either side will accept the prior status quo.  We are likely to have a heightened level of kinetic action until one side surrenders.

Our portfolios are positioned to weather the storm.  If you have any questions or comments, please contact me.

Robert G. Kahl
CFA, CPA, MBA

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Here We Go Again

US federal government had a 43-day partial shutdown from October 1 to November 12 last year, as appropriations legislation for the 2026 fiscal year failed to pass.  Congress then passed legislation to provide full-year funding for agriculture, military construction, veteran affairs, and the legislative branch.  A continuing resolution extended flat funding for the remaining agencies through January 30, 2026.  There are six major appropriations bills that have not been passed and the following departments remain unfunded for the remainder of the fiscal year:

      • Defense
      • Homeland Security
      • Labor
      • Health and Human Services
      • Education
      • Transportation
      • Housing and Urban Development
      • Financial Services and General Government
      • State Department
      • National Security programs

After the House passed a $1.2 trillion spending bill that included the Department of Homeland Security, Senate Democrats are demanding that DHS-related agencies – Immigration and Customs Enforcement (ICE), Customs and Border Protection (CBP), and Border Patrol – be reformed or separated from the broader funding package before they approve anything.  There are several obstacles to quick resolution:

      • The House of Representatives is in recess until February 2, so any revisions to their version of the spending bills will be delayed.
      • A major winter storm is delaying Senate negotiations and voting.
      • Republicans hold a majority of Senate seats (53-47), but 60 votes are required to overcome a filibuster by Democrats.

The obvious catalyst for Senate Democrat opposition was the shooting of Alex Pretti in Minneapolis, but opposition had already been building rapidly to the actions of ICE in Minneapolis and other cities.  Now, Senate Democrats want to use their legislative leverage to change immigration enforcement policies.

The partial shutdown of federal agencies will result in the furlough of approximately 480,000 federal employees in affected agencies.  Another 500,000+ federal employees are expected to work without pay as they are considered essential.  All employees are likely to receive backpay after the situation is resolved.  The partial shutdown will also result in the disruption of some services and affect federal contractors.

Deficit spending is not an issue for the two political parties at this point.  The US government debt ceiling was raised to $41.1 trillion when the One Big Beautiful Bill Act was passed in July 2025.  The current federal debt outstanding is $38.5 trillion, and the Congressional Budget Office (CBO) is currently projecting a budget deficit of $1.7 trillion for the current fiscal year ending September 30, 2026.  If there is one thing that Republicans and Democrats can agree on, it is that they should borrow more money rather than raise taxes and reduce spending.

If you have any questions or comments, please contact me.

Robert G. Kahl
CFA, CPA, MBA

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Signs of Economic Slippage

The Atlanta Fed’s GDP Now forecasting model shows that the latest estimate of GDP growth for the third calendar quarter is 3.9% as of December 1.  While the US economy appears strong now, some economic commentators believe that the US economy has some signs of weakness that are likely to inhibit economic growth.  READ MORE