October Charts and Considerations: Midterm Markets, The Byzantine Empire, and Value

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Ian Fleming chose the name, “James Bond,” for his 007 character, because he wanted it to sound dull and uninteresting. Investors often choose fixed income “bonds” for a similar reason - no surprises and predictability. But, investment bonds were certainly not dull in the last few months, garnering headlines (more on this below) alongside the usual daily ups and downs of the stock market. The economic backdrop of the third quarter of 2026 featured a number of challenges, but like any time period, there were positive data points, and well-positioned investors benefited from them.

Amid this mixed bag of information, the midterm elections are upon us (FYI in case your phone battery isn’t dying, due to spam). One way or another, Americans will communicate their expectations for elected leaders moving forward. As we always say, markets crave clarity above all else. As November approaches, take note of the historical data below. Now, let’s dig into key considerations, and more practically, the impact to your plan and portfolio last quarter and onward into 2027.

Despite drawbacks in Q3, emerging markets and smaller companies lead the broad stock market performance to date. Positive returns for the broad bond market index were erased in the third quarter, due to bonds with longer terms.

• Emerging Market Stocks (MSCI Emerging Index): -0.21% Q3, +23.73%YTD
• U.S. Small Company Stocks (Russell 2000): -6.87% Q3, +13.71%YTD
• U.S. Stocks (Russell 3000): +1.64% Q3, +12.42% YTD
• International Stocks (MSCI EAFE ): +1.36% Q3, +10.81%YTD
• U.S. Bonds (Bloomberg Barclays Aggregate Index): -3.33% Q3, -2.91% YTD

Value stocks maintain their lead against growth oriented companies to date by 13%. As a reminder, value stocks are purchased at an attractive or discounted price that is representative of its current value. Growth stocks are purchased at a higher price than its current value, in hopes of future growth. Imagine a value stock is like an apple tree that’s already producing apples, but a growth stock is a seedling that is expected to produce apples in the future. We aim to think rationally with all investment decisions, but we know markets sometimes behave irrationally. This is why we repeat: not all the time, but over time. We expect value to provide a premium for your investment, but we don’t know exactly when. To date, the nod goes to value.

Markets crave certainty as we approach midterms. Looking back to 1960, the cycle of midterm election years consistently rhymes. The typical leadup from August to October was flat or slightly negative depending on the index, just as we witnessed in 2026. Once we have certainty to satisfy the insatiable craving of markets, history shows positive market movement, regardless of the winner. In fact, the U.S. broad market has never been negative in the 12 months following mid-term elections since 1962. And the average return during those 12 months is 16.3%, well above the typical year.

Input pricing pressures continue driving higher than target levels of inflation. As a result, the Federal Reserve (“Fed”) voted 12-0 to increase the Fed Funds rate for the first time since 2023. Inflation remains the priority, and the rate increase was warranted. However, the current situation isn’t comparable to that of 2020-2021 when inflation was nearly triple what it is today. In those two years, checks mailed directly to households flooded the economy with money while COVID hindered supply (high demand + low supply = prices adjust). That flood of money does not exist today. Input costs are the issue. The chart below shows the extraordinary spike in 2020-2021. Notice we are below average today.

Bond headlines were more prolific and concerning than usual in Q3, as longer-term rates moved above 5%. Does this mean that bonds are no longer the dull? We don’t think so! For context, since 2001, and certainly 2008, the economy has been anchored in a historically low-rate environment. The average interest rate for a 10-year treasury bond is 5.52% (still higher than today’s rate), and has been as high as 15.52%! The first bonds issued by Venice to finance a war against the Byzantine empire paid 5%, and Anthony Hamilton’s first Treasury bonds paid 6%. The current rate move is a convergence back to the mean, not necessarily an indicator of doom. (P.S. been waiting a long time to work Italy and the Byzantine empire into the conversation).

Now, we aren’t saying the interest rate move in Q3 is not important. Household financing, companies' cost of capital for projects (aka future economic growth), and added cost to financing the US federal deficit are all affected by rate increases. However, when rates rise, there is also opportunity for investors who share our philosophy. Bonds can have variable terms, ranging from 30 days to 30 years, and they are affected very differently by rate increases. We use a technique to “immunize” portfolios, ensuring the terms of the bonds are shorter than the timing when the funds are needed. This means we can hold bonds through price decreases, and we can reinvest at the higher rates more quickly! Both of which can have a positive impact for you.

For the math nerds reading this commentary, take a look at how bond immunization worked since rates began increasing in 2022. The “immunized” portfolio emphasizes the purple line, compared to the orange and blue lines, which represent longer term bonds. A 40% spread with rising rates!! Holding only long term bonds is what ultimately doomed Silicon Valley Bank! Had the bank held an immunized bond portfolio when rates were dramatically hiked, they would have been able to meet their deposit obligations with stable, shorter terms, and therefore stayed in business.

Statistics and probability remind us that average returns don’t occur in a straight line, and accepting variability is a necessary part of investing (and life). For example, the average S&P 500(r) return is 10%, though it has never returned exactly 10%! Being a disciplined investor during volatile markets is really tough, but being a disciplined investor with a framework and repeatable, rational philosophy to follow is doable. Prediction is perilous, and portfolio returns are earned, not received, only if your plan keeps you on course. With that, please reach out if there are any changes in your family’s personal headlines.

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Sources: Sources: Ycharts.com, Dimensional.com, Fred.com, ATLFed GDPNow, Factset.com, Lord Abbett Midyear outlook, Schwab midyear outlook

This material represents an assessment of the market and economic environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. Forward-looking statements are subject to certain risks and uncertainties. Actual results, performance, or achievements may differ materially from those expressed or implied. Information is based on data gathered from what we believe are reliable sources. It is not guaranteed as to accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions. It should also not be construed as advice meeting the particular investment needs of any investor. Past performance does not guarantee future results.

Diversification does not guarantee a profit or protect against a loss in a declining market. It is a method used to help manage investment risk.

Index Disclosures:

Indices are unmanaged and investors cannot invest directly in an index. Unless otherwise noted, performance of indices do not account for any fees, commissions or other expenses that would be incurred. Returns do not include reinvested dividends.

Index Definitions:

The Consumer Price Index (CPI) is a measure of inflation compiled by the US Bureau of Labor Studies.

Barclays U.S. Aggregate Bond Index: The Bloomberg Barclays U.S. Aggregate Bond Index is an unmanaged index of fixed rate debt securities rated investment grade or higher by Moody’s, Standard & Poor’s, or Fitch rating services. All issues in the index have at least one year to maturity and an outstanding par value of at least $25 million to $1 billion based on the type of security. Indices are not available for direct investment and do not reflect any fees that may be charged.

S&P 500®: The S&P 500® index is an unmanaged index of 500 companies used as a representative sample of the United States economy. The S&P 500® index consists of only stock holdings. Indices are not available for direct investment and do not reflect any fees that may be charged.

MSCI EAFE: The MSCI Ex-US index is an unmanaged index used as a representative sample of the global developed economy outside of the United States and Canada. The MSCI EAFE index consists of only stock holdings. Indices are not available for direct investment and do not reflect any fees that may be charged.

MSCI Emerging Markets: The MSCI Emerging Market index is an unmanaged index used as a representative sample of the global emerging market economy outside of the United States. The MSCI Emerging Market index consists of only stock holdings. Indices are not available for direct investment and do not reflect any fees that may be charged.

The Russell 2000 index is an unmanaged index of the 2000 smallest companies in the Russell 3000 index. The Russell 2000 Index is used as a representative sample of the small companies in the United States economy. The Russell 2000 index consists of only stock holdings. Indices are not available for direct investment and do not reflect any fees that may be charged.

The Russell 3000 index is an unmanaged index of 3000 companies in the United States. The Russell 3000 Index is used as a representative sample of the United States economy. The Russell 3000 index consists of only stock holdings. Indices are not available for direct investment and do not reflect any fees that may be charged.

The Russell 1000 Growth index is an unmanaged index of the 1000 largest growth companies in the Russell 3000 index. The Russell 1000 Growth index consists of only stock holdings. Indices are not available for direct investment and do not reflect any fees that may be charged.

The Russell 2000 Value index is an unmanaged index of the 2000 smallest value companies in the Russell 3000 index. The Russell 2000 Value index consists of only stock holdings. Indices are not available for direct investment and do not reflect any fees that may be charged.

The 'Magnificent Seven' refers to a group of seven prominent U.S. technology-related companies: Apple (AAPL), Microsoft (MSFT), Alphabet (GOOGL), Amazon (AMZN), Nvidia (NVDA), Tesla (TSLA), and Meta Platforms (META).