3Q26 Investment Markets Review

In the third quarter, stock and bond markets were pretty snoozy – stocks increased a bit, and bonds slightly declined.  I found the bond markets to be the more interesting story.  See my “market commentary” below for my thoughts.

There are four sections: What happened (a read and a watch), a commentary from John, what we expect going forward, and what we are doing as a result.

Investment market performance of stock and bond markets around the world

The investment market performance report is prepared by Dimensional Fund Advisors (DFA), one of our partners in investment management and client support.  If you would like to find out more about DFA, you can visit their website directly at:  https://www.dimensional.com/

The following link is a ~5-minute narrated video  of market performance and other resources in this blog post.  Some people prefer a guided tour over a read.  But, the tour will be too fast to read!

When we look at the state of the global stock and bond markets, we are both intrigued by the long-term opportunity, and cautious about the near-term risks.  The long-term opportunities are no different than normal – capitalism continues to be the “worst-best” system to support human ingenuity and vigor.  By investing in stock and bond markets, we (as investors) are able to participate in the collective efforting of the many individuals and businesses who are figuring out services and products to solve problems.

The near-term risks are always present – interest rates, government policies, cronyism, business-specific risks, or investor enthusiasm can all influence the pendulum.  For the past few years, our expectations for stock market returns have been lower than what was realized.  However, our mindset has not changed – valuations remain high, and therefore we forecast lower-than-normal near term returns.  Will it happen?  We will only know in the rearview mirror.

Even though we watch the markets, and regularly comment on them, we rarely take significant action.  But, we do take fine-tuning action.  For example, we regularly review and revise our global allocation targets to keep pace with the current state of the markets.  Once our targets are reset, we review portfolios to ensure alignment.  Regular re-balancing keeps our managed portfolios in line with the information that is contained within market prices.

As a result of the most recent quarterly movements, we slightly increased our target for US stock market and emerging markets ownership, and lowered the target for international (developed) markets.  By slight, I mean around 0.1-0.2%.  These are fine-tuning changes, nothing drastic.

Our investment philosophy at Trail Financial Planning is to embrace the long-term trends, but keep an eye on streaks and the near-term.  The way this plays out as we design and manage investment portfolios is through our four-pronged approach to portfolio construction:

Risk Tolerance.  What level of return and risk can you live with and sleep well at night?
Financial Planning.  What amount of return and risk do you need to live your best life (this is called “financial planning.”)?
Time-Frame Analysis.  We forecast out when you may need money, and bucket those needs into 3 time-frames:  Short-, Intermediate-and Long-term.  We design your portfolio to match the need, choosing investments with return-risk profiles in alignment with time frames.

Market Conditions.  We consider current market conditions, mostly through our “market assumptions” and therefore, planning forecasts.

Notice that this approach is not a simple “just hold on” strategy.  Rather, it is a dynamic strategy driven by our financial planning and answer the question, “What do you really want out of this life you are living?”

Portfolio construction and and maintenance is not rocket science.  But, neither is it a bingo card.  We believe that a good strategy helps guide the near-term to achieve the long-term.  And the long-term results from investing in the markets are truly remarkable.

Bond values dropped, due primarily to the increase in interest rates associated with the actions of the Federal Open Market Committee (FOMC).  In September 2026, the FOMC raised rates, and we saw the current price of bond holdings drop.  While the response from the bond market was not surprising, the increase in interest rates may have been.

Why might an interest rate rise be surprising?

Rewind the headlines by about six months, and President Trump was on the attack against the FOMC (AKA “the Fed”), and in particular, the chair of the committee, Jerome Powell.  Trump wanted rates to drop.  He said so explicitly, and attacked Chair Powell personally, presumably as part of his effort to exert influence.

Trump is not the first president to try and influence the Fed.  The reason can likely be boiled down to incentives.  The FOMC’s mission is to set monetary policy to promote a healthy, stable U.S. economy.  The president meanwhile, or politicians more broadly, want to get elected, or stay elected, in order to enact their agenda.  The Fed’s incentive to promote economic stability is often a longer-term objective than the political incentive for election results.  This is is a classic conflict of interest between the FOMC and the executive.

In order to address this conflict of interest, we have some structural protections as well as many traditions and norms.  When Trump exerted a high pressure campaign to sway the Fed, many concerns were raised about an assault on the independence.

I was pleased to see that Fed independence appeared to withstand the pressure.  Powell served out his term as chair.  In May 2026, Trump’s new pick, Kevin Warsh, took over the chair position from Powell.  I was wondering if the FOMC (under Warsh’s chairmanship) would lower rates as Trump has wished.  To date, Warsh has held three Federal Open Market Committee (FOMC) meetings.  In the first two, the committee did not move to change rates.  In September, armed with persistent economic data, the FOMC enacted a 25 basis-point increase.

Despite vocal public pushback from the executive branch, the Fed action demonstrated that it can, and will, take action that is independent of executive pressure.  I find that to be a reassuring sign that the system of checks and balances underpinning the strength of the US financial system remains intact.  The strength of the US capital markets is due to many factors.  One of those is good governance, and many (including me) feel that Fed independence is one important pillar in good governance.

Back to the impact of interest rates and bonds.  So the FOMC raised interest rates in September.

What does a rise in interest rates do to your bond investments?

When rates rise, the current price of any existing bonds drops.  That goes if you own an individual bond or if you own a bond fund (a collection of individual bonds).  Why?  Because existing bonds get traded every day to set the price.  If rates go up, brand new bonds look better – they have a higher future return.  Naturally, existing bonds become worth less in comparison.  If you look at your investment return, you will see a negative return for the recent period.  However, it is important to note that future $ returns on an existing bond were not impacted.  It’s future % return will we higher (because the $ return will come from a lower starting price).

An example may be in order.  For understanding, I will present an example of how this works for an individual bond.  The dynamics are similar for bond funds (a collection of individual bonds).

Say you buy a 5-year bond for $1,000, and its “rate” is 5% (matching Fed Rate for simplicity).  If everything worked out like normal, you’d receive $50 each year, and a return of your $1,000 at the end of five years.  Fast forward two years, and the Fed Rate has gone up to 6%.  You think about selling your bond.  A buyer would look at your bond (that will pay $50/year for 3 years, then return $1,000) and compare it to a brand-new bond.  The new 5-year bonds will pay $60/year (new rate is 6%).   A rational buyer would only offer to buy your bond at a discount to the $1,000.  Maybe they would pay you $970 (I picked a simplified discount amount for readability.  The actual discount would be a more complex calculation).

If you looked at your investment account, and the performance of your bond holding, you would see that your bond return was diminished, maybe even turned negative, for a period of time because the price dropped.  I say “diminished” rather than went negative because full return calculations will also include the positive impact of coupon payments received.  Also, I say over a “period of time” rather at a specific time because in actual fact, bond prices will move as expectations for future rates change.  Expectations may change quickly, or slowly.

If you own bonds, it would be natural to look at an investment statement, see an negative % return, and express, “why are my bond investments doing so badly?!”

Although that is a natural reaction, it is not the way we should think about investment performance.  I think that the language itself within the question is one of the issues.  To explain, I need to deviate a bit into language and investing.

The Present Participle

I am often asked the question, “How are my investments doing?”  When someone asks such a question, I try to politely re-direct the language.  The word “doing” is framed in the present progressive tense (where the -ing ending, the present participle, is the structural element).  Typically, when we use such a tense structure, there is a connotation of near-term continuance.  For example, if I called my wife and asked her,

“What are you doing?” and she responded, “I am hiking,” or “I am having a drink with a friend” I would immediately know a bit about what was going on for her, and whether (or not) she would be home soon for dinner.  However, I would NOT immediately know what her weekend plans were.

In other words, the present participle is a good way to frame short-term movements, but a lousy way to communicate long-term expectations.  Since sound investment principles involve a trade-off between return opportunities and risk, and time-frames are one of the key criteria to be used in portfolio design, I dislike the use of the present participle to talk about investment market returns (at least stock-market investments).  When a person asks, “How are my investments doing?” I try to shift the language to a different grammatical framing:

Past tense.  What has happened?
Future tense.  What do we expect in the future?  What would happen if it went badly?  Does the ride look enjoyable?  Is the reward worth the risk?

Information contained within is generalized information about investing and the investment markets.  It should not be considered investment advice, personalized or otherwise.  Past investment performance is not a guarantee of future investment performance.  Investing in markets comes with an inherent risk of losing money.

• No references or end notes this quarter.