You’ve probably noticed it before: The stock market drops sharply, and the financial news scrambles to explain why. No major earnings misses. No economic disaster. No obvious catalyst. Yet, your portfolio is down significantly.
A February 2026 paper by Clemens Struck—"Private Asset Distress and Public Market Volatility"—offers a compelling explanation for exactly this kind of mystery. The short version: What happens in the vast, hidden world of private assets often shows up first and most painfully in your stock portfolio.
The private world overshadows the stock market
Most investors think of ‘the market’ as stocks and bonds. But publicly traded equities are a fairly small slice of total global wealth. Private assets—real estate, private equity, private businesses, farmland, infrastructure—are roughly 10 times larger than the entire public stock market (about $67 trillion in value versus several hundred trillion dollars).
And here’s the critical detail: Most of those private assets are heavily borrowed against. Private equity buyouts routinely carry debt loads of 4 to 6 times their annual earnings. Commercial real estate is typically financed at 60% to 75% loan/value. That leverage is mostly locked in—it can’t be quickly adjusted when times get tough.
Says Struck, “The combination of illiquidity and leverage means that the household’s equity stake in privately held assets—the residual claim after debt service—is highly sensitive to fluctuations in privately held sector cash flows.”
What happens when private assets get into trouble
When cash flows from private assets start falling—maybe because property values drop, or a leveraged buyout hits headwinds—the fixed debt payments don’t fall with them. That gap between shrinking income and fixed obligations is where the pain gets amplified. A 1% drop in rental income, for example, can translate into a 3% or more drop in the actual cash available to equity holders, because the debt service must be paid first.
As the stress deepens, investors who need to sell private assets find there are very few willing buyers. Secondary markets for private equity stakes or real estate funds can be thin even in good times. Under pressure, sellers have to accept steep discounts—sometimes 20% to 50% below the fund’s stated value, as was seen during the 2008 financial crisis.
How this spills into your stock portfolio
The private market losses don’t stay contained. They ripple through the broader economy in two distinct ways.
First, when institutions take large losses on forced private asset sales, spending across the broader economy contracts. That shifts the rate investors use to value all future cash flows—including those from publicly traded companies that had nothing to do with the original problem. Stock prices are falling not because those companies are worth less on their own merits, but because the economic backdrop has darkened.
Second, when the private sector contracts, workers and resources shift between sectors. That reallocation takes time and creates friction, changing productivity and, therefore, the value of public companies, even indirectly. As Struck put it, public equity markets absorb the shock, acting as the “release valve” for private sector stress—even when public companies are not the source of the problem.
Why downturns hit harder than upturns help
The paper also explains something most investors sense intuitively but rarely see explained clearly: Bad markets feel worse than good markets feel good.
That asymmetry isn’t just psychological—it’s mathematical. When private market conditions deteriorate, secondary market discounts escalate rapidly and nonlinearly. They don’t just grow; they can balloon. Consider a hypothetical: A fund trading at a 10% discount in mild stress might widen to a 40% discount under severe stress, while in good times, that same discount may compress from 10% to only 7%. The downside moves are bigger than the upside moves.
When conditions improve, those same discounts compress slowly and modestly. A negative shock in private markets hits public stocks much harder than an equally sized positive shock helps them. This is the mathematical engine behind the pattern statisticians call negative skewness in stock returns—the reason crashes tend to be sharper and faster than rallies. It’s not investor irrationality. It’s structural.
Sound familiar? The 2022 denominator effect
If you were paying attention to institutional investor news in 2022 and 2023, you saw this exact dynamic play out in real time.
Public stocks and bonds fell quickly. Private asset valuations, which are marked infrequently, stayed relatively higher. The result was that pension (or superannuation) funds and endowments found themselves technically ‘overweight’ private assets—not because privates had done well, but because public holdings had fallen faster.
To rebalance back to their targets, many institutions had to sell their liquid public holdings. That selling pressure hit markets that were already under stress, amplifying the downturn. The private market tail was wagging the public market dog.
His findings led Struck to conclude: “Equity market volatility arises from the interaction of private market size, the leverage structure of private investment, and general equilibrium forces that link valuations across asset classes.” He added: “The privately held sector is the dark matter of asset pricing: invisible to standard equity-market analysis, yet gravitationally dominant.”
Takeaways for investors
You don‘t need to become an expert in private credit markets to take something useful away from this research. Three practical ideas worth considering:
- When stocks drop sharply with no clear public news, look to private markets. The cause may be private market stress that isn’t yet visible in headlines. This argues for restraint—resist reaching for a narrative invented after the fact and think twice before making a large reactive move based on an explanation that doesn’t quite fit.
- Think carefully about where your liquidity will come from in a stress scenario. If private markets seize up, capital calls can spike, and public stocks can fall simultaneously—which has happened before. What would you have to sell, and at what price? Running that scenario in advance is more useful than reacting in the moment.
- Be appropriately skeptical of smooth private market valuations. Quarterly marks in private markets, particularly private equity and real estate, that barely move don’t mean the underlying risks have gone away. They often mean the pain hasn’t been fully recognized yet—and that recognition, when it comes, can be sudden.
The bottom line
The stock market is the most visible part of the financial system, but it isn’t always where financial stress originates. The vast, leveraged, opaque world of private assets is a powerful gravitational force—and when it gets into trouble, public equities are often the first place you feel it.
Understanding that connection won’t prevent the next downturn. But it might help you make sense of it when it comes—and resist the kind of poorly timed reaction that turns a temporary decline into a permanent loss of capital.
Larry Swedroe is a freelance writer and author. The views expressed here are the author’s. For informational and educational purposes only and should not be construed as specific investment, accounting, legal, or tax advice. The author does not own shares in any of the securities mentioned in this article.