These Perilous Cracks in the Economy Could Spread to Wall Street in 2026
Crypto is in an official bear market, and other asset classes are also at risk. Here's what I see as two key concerns heading into the New Year.
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We have continued worries about huge budget deficits, inflation that remains far above the Federal Reserve’s official target and increasing concerns around fiat currency in some quarters. At the same time speculative crypto has seen a large selloff over the past two months. Even with a recent rebound, Bitcoin is still down more than 25% from its highs two months ago. Other cryptocurrencies like Ethereum dropped even further. Gold and silver, meanwhile, are benefiting as safe havens.
I am fairly confident that 2026 is going to see more cracks develop in different areas of the market. Other contributors to TheStreet Pro and I have also covered the potential AI bubble extensively in recent months, so I will leave that 800lb gorilla in the room alone in today’s column. There are plenty of other potential problem areas across the markets to highlight.
In the pursuit of brevity, I will focus on two major problem areas I believe will continue to develop in the coming year. Both could have ramifications to the credit ecosystem, the economy and eventually the equity markets.
First, I am fully aligned with Jamie Dimon’s recent observation that there will be more than one "cockroach" in the private credit markets. The recent bankruptcies of First Brands and TriColor Holdings rattled the market as they seemingly came out of left field. These events also triggered substantial write-offs by the likes of JPMorgan Chase & Co. (JPM) , UBS (UBS) and Jefferies Financial Group Inc. (JEF) . We have seen some lesser credit events like the default of Renovo Home Partners since then hit the space.
The approximately $1.7 trillion private credit market receives much less regulatory scrutiny than banks do, although the latter is a key funding source for the private equity firms, hedge funds, and other entities that largely make up this market. The industry grew like it was on steroids following the new regulatory regime that was put in place after the Great Financial Crisis. With interest rates significantly higher than they were a few years ago and corporate bankruptcies tracking toward a 15-year high, it is hard to imagine there are not other potential landmines in this market.
Then we have the commercial real market or CRE, which I expect will continue to deteriorate in 2026. Delinquency rates on Commercial Mortgage Back Securities or CMBS against office properties are near 12%, and higher than they were at the peak of the financial crisis. This does not include numerous loan modifications by lenders that have been granted. Trepp recently reported that office values in many major cities have started to stabilize and even increase in some areas in the third quarter. That said, they are still far below pre-pandemic levels. I expect delinquencies to stay quite elevated and for defaults to continue to increase on the approximate $1.3 trillion in commercial real estate loans around this sub-sector of the market.
And multi-family is becoming the new office sector in terms of credit stress. There is some $2.2 trillion of commercial real estate debt outstanding here and commercial mortgage-backed securities' delinquency rates have doubled over the past 13 months to just under 7%. Apartment List just disclosed that national rents fell by 1% year-over-year in November. This was the fourth-straight month of declines. This is great news on the inflation front. Not so much for multi-family property owners whose business models rely on increasing rents.
More new apartments came online in 2024 than in any year in more than 50 years. In addition, the entire increase in renter households from 2022-2024 was due to migration flows. These have not only stopped but are starting to reverse. This signals more pain ahead for multi-property owners, apartment real estate investment trusts, and their lenders in the year ahead.
What impact will further cracks in commercial real estate and private credit spaces have on the economy and markets in 2026? We will find out together in the coming year.
At the time of publication, Jensen had no position in any security mentioned.
