Market Commentary Q3 26

The S&P 500 managed to gain 2.3% for Q3 2026. The markets have refused to move down. For each event that could be construed as negative, the downswings have been brief. For a complete recap, JP Morgan has a detailed breakdown.

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Interest rates are higher than they have been since 2007! It sounds scary, yet it is important to recognize that rates for the past 19 years have been suppressed by the response to the “crisis” of 2008 and the Covid-19 pandemic response. The Fed and central banks globally took all available measures to move rates lower. Suggesting that there is something unusual ignores the historical context. Rates are moving up, but comparisons to the last two decades are recency bias.

The interest rate on the U.S. Ten-Year Note is a linchpin of the global financial system. On 12-1-1990, the rate was 8.7%. On December 1, 2009, the rate was at 3.2%. One year ago, the rate was around 4%. Now it is trading around 5.25%. The rate increase is the market anticipating the need for central banks to proceed with a cycle of rate increases to address rising inflation. The move is significant, while there is obviously no predictability as to where the trend will lead.

It is unfortunate that much of the inflation now rippling through the global economy has been initiated by U.S. federal policy. Erratic tariffs and draconian immigration enforcement are inherently inflationary. These dynamics are now being galvanized by rising energy prices in the Middle East. The bombing campaign that threw a monkey wrench into the core of global petroleum production has accelerated the trend.

Interest rates represent the price of money. This is always a central factor in the ability of businesses and consumers to finance economic activity and growth. Historical rates of commercial activity have been resilient and able to adapt to a wide range of interest and borrowing costs. The rate of increase is a key factor, as rapid upswings can create instability.

There have been unprecedented presidential complaints about interest rates and how the United States should be granted cheap money. This is not the way money works. Interest rates are a complex interaction between the supply and demand for money, along with a continuous expression of risk. The Federal Reserve sets short term rate targets, but the market for U.S. government securities will determine what must be paid to borrow.

The aggregate federal debt continues to grow and remains unmentioned by the leadership of either party. It appears there will ultimately be a reckoning that will either involve austerity or some type of restructuring. Austerity would involve less federal spending, increases in means testing for federal benefits, and a likely rollback in the fiscally irresponsible tax cuts dating back to the 1980s. Restructuring would most likely involve a gradual devaluation of the U.S. dollar. There is no indication of the political will to cut, so quiet devaluation is likely for now.

The presidential Cabinet is occupied by questionable people, yet the Treasury Secretary, Scott Bessent, has a level of credibility in the eyes of the markets. Prior to serving as Treasury Secretary, he was a relatively unknown figure in the world of hedge fund managers.

The most recent increase in interest rates has fostered actions by the Treasury Secretary to suggest actions to be taken to address bond market activity considered adverse to the president’s wishes for lower interest rates. Incredulously, Mr. Bessent suggested that the Treasury was going to repurchase federal securities. In the face of U.S. borrowing at a rate of more than $150 billion per month, the Treasury repurchased a minuscule $6 billion beginning in August. The WSJ noted on 9-9-26, “But Wednesday’s bond-market move, while relatively contained, demonstrated the risk of that kind of talk—namely, that the Treasury secretary might be setting targets that could be difficult to meet. ‘Any move to bring yields down with buybacks is falling flat,’ said Jack Ablin, chief investment strategist at Cresset Capital. ‘It’s papering over a problem.’”

It is likely that the impetus for these actions came from the top. The president’s frustration with the Federal Reserve has been rerouted to the Treasury Secretary, yet there is little authority and almost no precedent for these types of actions. Buybacks are generally executed by corporations that have surplus cash and want to reduce the amount of shares of stock that are outstanding, thereby making the remaining shares worth more. US debt buybacks are likely to go down as another unconventional and ineffectual gambit to juice the economy.

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Few things get Americans more upset than increases in the price of a gallon of gasoline. The unbridled access to low-cost fuel for oversized sport utility vehicles and pickup trucks is perceived to be permanent. While gas is $10 per gallon in Europe and 50% of new cars in China are now electric, American auto manufacturers cling to the idea that big vehicles are a path to profitability.

The irony of outraged voters engaging in something other than the tiring movement that began in 2015 is being widely predicted. Contrary to the repeated criticism of American military actions in the Middle East, the current president entered a bombing campaign without much regard for the intractable nature of the Iranian political realities. The strategy contained no contingency planning for whipsawing energy prices beyond drawing down the entirety of the Strategic Petroleum Reserve.

The historical protocol for making a case to the American public and involving Congress in military decisions was bluntly ignored. The requirement for public-relations management in large American initiatives runs through all manner of federal decision-making. The disdain for any of these protocols by the reality-television presidency is certainly paying a price in polling data.

On March 12, 1933, President Roosevelt transmitted the very first of 30 speeches that came to be known as “Fireside Chats.” The very first broadcast began, “I want to talk for a few minutes with the people of the United States about banking.” For the next 13 minutes, the president began preparing the American public for a strategy aimed at stabilizing the plumbing of the American financial system. Radio was a technology that was novel and evolving, the first era of “broadcasting” messages.

The 1930s was an era that formed the foundation of the banking system that would proceed to foster decades of domestic and global growth. This was an era of great societal and economic challenges that converged with the charisma and vision of FDR. The novel dynamic of nascent national radio messaging was a significant element that fostered rising confidence in the population. Americans were perplexed and had no trust in the banking system. They needed understanding and guidance.

After 9/11, there was a dire concern regarding what would be the most effective response and strategic vision for the United States. The vague notion of a “War on Terror” began with vigorous activity from the George W. Bush presidency and Congress.

The contentious idea that the Middle Eastern country of Iraq should be the target of an American military invasion and occupation had existed before the 9/11 catastrophe. A group of high-level Bush administration officials who had envisioned this as a viable strategy came to be known as neoconservatives.

The Iraq War communication strategy was built upon fear-mongering speeches and presidential messaging, along with the pressuring of reluctant European allies. It is likely that the 1990 expulsion of the Iraqi military from Kuwait was overly influential in its success. The gambit of a much larger invasion and occupation that would include regime change and nation-building stretched even the most optimistic scenarios.

Geopolitical initiatives and the corresponding messaging are crucial yet extremely difficult. A key criterion that defines great historical leaders is the ability to effectively communicate with the public and shape the narrative. The citizenry may be able to endure sacrifice and economic costs in the pursuit of societal goals and advancement if they feel that they are part of a worthy cause.

The current U.S. leadership is disinterested in persuasion, as the speculative notion of unitary executive theory seeks to run the world with rapid decisions by one man. This misbegotten transgression of the premise of three coequal branches of federal government is being unmasked as counterproductive and ineffective. It is in this context that the American and global economy has been subjected to 13 months of tariffs while the wheels of the American legal system ground slowly toward a repudiation by the Supreme Court. Explanations to the public beyond vague notions of greatness and impending golden-age wish casting would have been nonexistent.

The Republican Party has been completely delinquent in the responsibilities of a Congress that bears the power and responsibility for international commerce and trade. It is arguable that there has been not only a disservice to the American public, but to the president himself, in that Congress has allowed trade proclamations from an American president whose office has no legal right to unilaterally “make deals.”

On September 22, 2026, Bloomberg reported, “Milei’s US Trade Deal Is Under Threat as Argentina Demands Better Terms.” From the reporting: “President Javier Milei’s advisers in Argentina have told the Trump administration they don’t have the votes in the nation’s Congress to ratify the bilateral trade agreement they signed last February, according to people familiar with the matter. Milei’s government wants to renegotiate the terms because of the U.S. Supreme Court’s ruling on President Donald Trump’s global tariffs, according to the people, who asked not to be named discussing private talks.”

The administration assumed it could pick and choose countries around the world and craft murky “frameworks” and other unenforceable arrangements unlikely to withstand legal scrutiny. There was a hubristic sense that the USA would dictate terms, and the globe would line up around America First. Reality has delivered a firm rebuke to this arrogant nonsense. The reason that trade blocs and large multilateral groups of countries evolved to create broad trading rules is that the alternative was endless government meddling and wrangling for advantage and bureaucratic favoritism.

Global trade and rising productivity have always been difficult and contentious issues. Without any proof or theoretical constructs of success, there has been an effort to undermine and demean anything that has come before. Yet open markets and free trade are the only option for real economic growth. Government is the least likely to create effective outcomes.

With no explanation beyond erratic and capricious trade declarations, commerce has undoubtedly been impacted negatively. It is striking to witness the incoherence of tariff and trade policy that arrived directly after the post-pandemic wave of inflation. It is easy to imagine that there was no one with influence to suggest to the president that just because he rambled on at political rallies, it did not mean that you should actually do things like “trade wars” and masked ICE goon squads in American cities.

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It is important to recognize that this entire political era, beginning in 2015, has as much to do with the vast underperformance of the Democratic Party as it does with the reality-TV campaigns in split presidential terms. There has been an absence of charisma on the left, along with muddled counter-messaging. It should be noted that one of the great villains of this path has been the far-left senator from the state of Vermont, with the ironic initials of BS.

There is a movement that has been gaining momentum regarding wealth inequality that looks to the man named Bernie for inspiration. He proclaims to have distinct ideas about the threats and challenges of wealth inequality. One would hope that our political process incorporates an engagement with business rather than the misplaced idea that increased government regulation is a path to better outcomes. It is simplistic and counterproductive to suggest that because there are numerous ultra-wealthy individuals during this time of great technological change, somehow the government could reallocate a portion of that wealth to better people’s lives.

The sloganeering emerging around taxing the rich has great appeal to the masses of Americans who struggle every day to create healthy families and lives with financial opportunity. The is no historical indication that American government is effective at wealth allocation. Democratic capitalism is a brutal crucible with numerous failures along the way. Competition is ruthless, with collateral damage such as those left behind in the Rust Belt or masses of the population without the ability, wherewithal, or simple good luck to succeed. Yet this competitive society towers in comparison to alternatives involving government as referee and paymaster.

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In 2016, three young French tech entrepreneurs envisioned a general-purpose chatbot that wasn’t boring. It was also described as “a sassy chatbot for teens.” By 2018, the venture pivoted to the idea that it would be a platform for hosting “open weight” AI models (whatever that is). The company was recently offered $13 billion to be acquired by Nvidia.

The WSJ recently wrote of this and noted that the exact purchase price, $12,930,300,000, includes the “first six digits of the purchase [which] translate to 1F917 in hexadecimal, which is the numerical portion of the Unicode designation computers use for a specific emoji: the hugging face.”

There are many aspects to this story that can provide distinct examples of the circuitous and random nature of success. One of the primary elements that is often forgotten is to speculate upon how many ventures, startups, or technology teams were working on ideas that ended up scoring an artificial intelligence jackpot. These entrepreneurs are the survivors in a literal ocean of participants in a modern-day gold rush. Investors must always be mindful of the monumental survivorship bias among those that truly succeed. When observing small organizations that can cash in, or in this case cash out, it is impossible to estimate all the other fruitless endeavors that quietly drift off into oblivion.

There is a current frenzy of artificial intelligence investment in data centers that consume massive amounts of costly computer chips, along with extreme energy requirements. None of the large providers of these technologies, which include Google, Microsoft, Facebook, privately held Anthropic and OpenAI, have any AI profits to show. There are certainly significant usage levels and potential profitable business models, although one could argue that similar things were said about internet web browsers. It is notable that in 1995, a company called Netscape went public, closing at $58 and eventually trading into the $170 range before being acquired by AOL and shuffling into a sunset that rendered browsers a giveaway item.

The idea that high-powered computing can emulate or even replicate the human brain and nervous system is unproven and lacks current models of economic profitability. The AI companies that are being valued at a mania level showing significant losses. The lessons of technological development history offer ample stories of pioneering organizations being left out of the profits and rewards of their own products and ideas.

Look no further than IBM, which possessed utter disinterest in the idea of computer operating systems, creating an opportunity of the ages for an entrepreneur named Bill Gates. There were

endless billions of dollars consumed with enthusiasm for companies like Yahoo and America Online, while scrappy entrepreneurs who imagined online book sales (Amazon) or university “Hot or Not” (Facebook) evolved to create two members of what is now known as the oligarchy.

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It is a useless cliché to suggest that we are currently experiencing “uncertain times.” Equally redundant is the idea of unique, unmatched, or rare eras. Each moment of human existence exhibits equal parts uncertainty and singular character. WWI, 1929, WWII, the Cold War, and all seminal events in history happen once.

2026 is certainly strange, or let us just say, idiosyncratic. We are witness to American leadership implementing a series of ideas that are blatantly counterproductive from an economic standpoint. It is difficult to find the origin of resentments toward Canada beyond dairy product disputes or the idea that Canadian lumber is somehow subsidized and targeted at U.S. markets for trade advantage. It seems likely that somehow the idea penetrated the leadership group and so began a series of improvised and contrived threats and spontaneous trade actions that are likely to be rendered illegal.

Fringe ideas that have driven recent federal actions are likely to create a desire in the population for more conventional policy articulated with restraint. It is plausible to imagine new acronyms based on slogans like “Make America Smart Again,” “Make America Classy Again,” or “Your Neighbor Is Not an Enemy Because They Have Differing Political Views.”

The uniqueness of the past decade is not a precursor to the decline of democracy or the capitalist systems that have brought us this far. The postscript is likely to be that the resilience of American governance has persevered righteously in the face of an uncredentialed interloper thrashing about while two ineffectual political parties were cast aside.

Empty punditry regarding the precedents in history is broadcast to an audience eager to hear how things have gone before and where we are headed. The human mind continuously seeks patterns and points of reference. This tendency is a pervasive cognitive error that leads to false indications of understanding. Once the idea that a pattern can be recognized takes hold, it is a small step to the potential for unwarranted predictions.

Keith E. Stanovich is Professor Emeritus of Applied Psychology and Human Development at the University of Toronto. Stanovich and West published “Natural Myside Bias Is Independent of Cognitive Ability.” The study produced indications that the idea of “myside,” in which we filter information through our preconceived beliefs, is independent of cognitive ability. “Smart” individuals are just as likely to be biased as anyone else.

We are all subject to filtering information through a prism of experience and beliefs that have little to do with objectivity. Awareness of these tendencies is the starting point for a higher level of personal decision-making. We are in the midst of something that will likely be looked back upon as a digital revolution that dwarfs the industrial revolution. The impacts of ubiquitous and hyper connected on demand computational capacity will take generations of adaptation. The opportunities that this innovation is creating are as difficult to imagine as the observers of Sputnik visualizing satellite communications.