GLOBAL MARKETS
Geopolitics Takes Center Stage
The second quarter of 2026 reminded investors that markets rarely move in a
straight line. While corporate earnings generally remained resilient and the U.S.
economy continued to expand at a moderate pace, geopolitical developments,
persistent inflationary pressures, and uncertainty surrounding Federal Reserve
policy combined to produce another volatile quarter for global financial markets.
For the quarter, the S&P 500 returned 15.2% while the Dow Jones Industrial
Average gained 13.4%. The technology-heavy Nasdaq Composite returned 21.6%
and the MSCI All Country World Index finished up 13.9%. Fixed income investors
experienced continued volatility as longer-term Treasury yields fluctuated
throughout the quarter. The Bloomberg U.S. Aggregate Bond Index returned 0.7%
At quarter-end, the ten-year Treasury note yielded approximately 4.5% compared
to 4.3% at the beginning of the quarter. The two-year Treasury yielded
approximately 4.2%, leaving the yield curve positive after nearly two years of
inversion. Bond investors continue to struggle with balancing moderating
economic growth against inflation that remains above the Federal Reserve’s long-
term objective.
Perhaps the defining event of the quarter was the military conflict involving Iran
and the subsequent disruption of energy markets. Although the duration and
ultimate geopolitical consequences remain uncertain, investors immediately
focused on the potential impact on global energy supplies, shipping lanes through
the Strait of Hormuz, and worldwide inflation. Crude oil prices briefly surged
above $112 per barrel, moderating at quarter-end to $70 per barrel as markets
evaluated the likelihood of prolonged supply disruptions.
Historically, geopolitical shocks tend to have their greatest influence through
commodity prices rather than direct economic destruction. Once again, higher
energy prices quickly translated into renewed concerns regarding transportation
costs, manufacturing input prices, fertilizer production, and ultimately consumerinflation. These developments serve as another reminder that inflation often
arrives through unexpected channels.
Gold continued to attract investor interest as geopolitical uncertainty increased.
Although prices experienced significant volatility during the quarter, precious
metals generally benefited from increased demand for perceived safe-haven
assets. We continue to believe that ownership of real assets remains an important
portfolio diversifier during periods of elevated geopolitical uncertainty.
Economic growth remained positive, although the pace appears to be
moderating. Preliminary estimates suggest second-quarter GDP growth of
approximately 2.1% Consumer spending has remained relatively healthy despite
higher borrowing costs, while business investment has become increasingly
selective. Labor markets continue to exhibit resilience, although hiring activity has
slowed modestly compared to earlier in the year.
INFLATION AND MONETARY POLICY
Inflation remains one of the defining economic themes of 2026. Through June,
headline Consumer Price Index inflation measured 4.2%, while core inflation
remained at approximately 2.9%. Although inflation has moderated considerably
from its post-pandemic peaks, progress toward the Federal Reserve’s two-percent
objective has slowed during recent months.
The renewed increase in energy prices associated with the Middle East conflict
introduces an additional layer of uncertainty. Even if oil prices ultimately stabilize,
higher transportation and production costs frequently filter through the economy
with a lag. Consequently, policymakers face the difficult challenge of
distinguishing temporary supply shocks from more persistent inflationary
pressures.
The Federal Open Market Committee maintained a cautious posture throughout
the second quarter. Under the leadership of Kevin Warsh, policymakers
emphasized that future decisions would remain data dependent while
acknowledging that inflation risks have become more balanced with concerns
surrounding economic growth.
Financial markets continue to debate the timing and magnitude of future interest-
rate changes. Current expectations suggest zero reductions before year-end;
however, these expectations have shifted repeatedly as incoming economic data
have surprised both positively and negatively.The Federal Reserve also faces the practical reality that significant Treasury
issuance will continue throughout 2026 as existing government debt matures.
Financing these obligations at today’s interest rates represents a meaningful
increase in interest expense compared to securities issued several years ago.
While this dynamic does not directly determine monetary policy, it does
underscore the importance of maintaining confidence in long-term price stability.
INVESTMENT OUTLOOK
We continue to believe investors should prepare for periods of heightened
market volatility for the balance of 2026.
Although equity valuations have moderated from their most extreme levels,
portions of the market—particularly companies associated with artificial
intelligence and other rapidly developing technologies—continue to trade at
valuations that assume exceptionally optimistic long-term growth. History
reminds us that remarkable technological innovation does not always translate
into attractive investment returns when expectations become excessive.
Conversely, periods of elevated uncertainty frequently create opportunities in
areas of the market that have been overlooked or temporarily discounted. Our
investment philosophy continues to emphasize identifying businesses and assets
trading below our estimate of intrinsic value rather than attempting to predict
short-term market movements.
Credit markets also deserve continued attention. Spreads between investment-
grade and below-investment-grade debt remain relatively narrow by historical
standards despite increased geopolitical risk, elevated government borrowing
requirements, and slowing economic growth. We believe investors should remain
appropriately compensated for assuming additional credit risk, and today’s
market does not always provide that compensation.
The combination of persistent inflation, changing Federal Reserve policy, elevated
government borrowing, ongoing geopolitical tensions, and historically high equity
valuations suggests that volatility should remain a defining characteristic of
markets throughout the remainder of 2026.
As always, we remain disciplined in our investment process. We continue to
emphasize quality, valuation, diversification, and patience. While periods such as
these often test investor resolve, history has consistently demonstrated thatmaintaining a long-term perspective remains one of the most valuable investment
disciplines.
Rather than attempting to forecast every short-term market movement, we
believe successful investing continues to be grounded in thoughtful analysis,
prudent risk management, and the willingness to capitalize on opportunities
created by periods of uncertainty.
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