Originally published for clients on August 24th, 2026:
Climbing the Wall of Worry
An old Wall Street saying holds that markets “climb a wall of worry” — asset prices grind higher even as investors brace for trouble ahead. It tends to happen when conditions are stable and sentiment is far from euphoric: buyers add to positions cautiously as their confidence builds over time.
Given the headlines, many are puzzled that stocks seem indifferent to what may be the deepest pile of bearish news in years: two military conflicts touching multiple countries and key commodity supply chains; sharply higher sovereign borrowing costs; and growing concern over both AI’s profitability and its effect on employment.
The risks are real. But for now earnings remain solid, employment is holding up, and commodity supplies have not been meaningfully disrupted. So the market keeps climbing — investors bidding up stocks in spite of their fears.
The Unloved Are Getting Loved
After years of being ignored and picked on, the market’s smallest companies are finally getting some love. The Russell 2000 — the benchmark for U.S. small-cap stocks — has been one of 2026’s standout performers after more than a decade of trailing large caps.
A word of caution: not all of that leadership is high quality. Much of the rally has run through speculative, richer-valued names rather than proven earners — which is precisely why security selection matters here. As a group, small caps still trade at a wide valuation discount to their large-cap counterparts, and we think that leaves room for genuinely strong companies to be rewarded.
The story rhymes overseas. Many international firms trade at low valuations relative to U.S. peers, and — depending on the dollar’s direction — currency moves can add to or subtract from those returns for U.S. investors. We continue to favor quality foreign companies as a complement to our domestic holdings.
Emerging From the Rubble
Emerging markets — in both equities and fixed income — have been a core allocation of ours for years. Political risk is ever-present, but the long-term growth opportunity is significant. The valuation and growth gap between developed and emerging economies is unusually wide, and we believe it has begun to narrow — potentially a multi-year, even multi-decade, trend. For long-term, growth-oriented investors, now may be a reasonable time to add measured exposure to the more stable emerging economies rather than just dipping a toe.
Rates Are in the Headlines
Interest rates are the headline of the moment. The 30-year U.S. Treasury yield recently reached its highest level since 2007, and commentators confidently insist it can only go higher.
The nuance the headlines miss is that this back-up in long rates is happening even as some recent data has softened: retail sales and producer prices have been weak, and headline inflation has eased from its mid-year, energy-driven peak. In other words, the long end is selling off despite, not only because of, the incoming data. If this were purely an inflation scare, market-based inflation expectations — the gap between nominal and inflation-protected (TIPS) Treasury yields — would likely be widening more than they are.
So what is pushing long yields up? Much of it looks structural rather than a bet on next month’s CPI: record Treasury issuance to fund persistent deficits, a wave of corporate borrowing tied to the AI build-out competing for capital, a rising “term premium,” and softer demand from traditional foreign buyers. Tellingly, this is a global phenomenon — long-term government yields in Japan, Germany, France, and Canada have all pushed to multi-year highs — which argues against any single, simple explanation.
The U.S. clearly has a debt problem. But investors should remember that high debt is not, by itself, inflationary; history is full of debt bubbles that ended in disinflation or outright deflation. In a heavily leveraged system, the uncomfortable place to be is the borrower — not the lender.
Our Positioning
Portfolios are built to meet each client’s stated risk targets and objectives. Within that framework, our dynamically managed allocations remain tilted toward equities — with an emphasis on dividend payers, small- and mid-caps, and international — while keeping a measured allocation to innovative and disruptive technologies.
In fixed income, short-duration positioning (low sensitivity to interest-rate moves) remains dominant, though longer-maturity bonds look more attractive by the day as yields rise. Gold, commodities, and alternatives such as option-income and hedged-equity strategies continue to play a role, as they have for several years. We want clients to take comfort in broad diversification designed to temper volatility if this bull market stumbles.
Riding the Current, but Holding Tight to the Oars
Equity markets are riding a wave of strong earnings and momentum. For now the water is smooth and the current is with us — but markets never stay calm indefinitely. Rapids and waterfalls come with the territory.
Think of active management as our oars: it can’t calm the river, but it can help steer around hazards. Diversification is our life vest — it won’t prevent every drop, but it’s what helps keep us afloat if the water turns rough.