Quarterly Market Review
If you saw stocks hitting record highs this summer and then opened your statement, the numbers might not have lined up. Stocks had a good quarter. Bonds didn’t, and for most balanced portfolios, bonds made more of a difference. Interest rates climbed to their highest level in more than twenty years, and the Fed raised rates for the first time since 2023.
Meanwhile, AI’s biggest winners this year weren’t the companies most people would guess. They were chipmakers in Taiwan and South Korea.
Key Takeaways
Rising rates and a $40 trillion national debt made for unsettling headlines, but a well-built bond portfolio and a globally diversified plan are designed for quarters like this one.
Bonds had a tough quarter. Long-term interest rates climbed to their highest level in more than twenty years, and the Fed raised rates for the first time since 2023.
U.S. stocks hit new highs in August but gave back some ground in September, finishing the quarter modestly higher.
Emerging markets were roughly flat this quarter but remain the year’s standout, led by AI chipmakers in Taiwan and South Korea. Both countries now rank among the world’s ten largest stock markets.
What the Headlines Don't Show
MSCI All Country World Index with selected headlines
How Markets Performed
Returns as of September 30, 2026
Bonds, AI, and a $40 Trillion Question
Many headlines this quarter warned of a sharp bond market sell-off. It’s fair to wonder whether you should be worried.
The concerns are real. Inflation has been stubborn, the federal government keeps borrowing heavily, and investors want higher returns to lend it money. Interest rates climbed to their highest level in more than twenty years, and the Fed raised rates in September for the first time since 2023. When rates go up, existing bonds lose value. Say you own a bond that pays $30 a year, and a new one costing the same amount pays $50. Nobody will pay full price for yours anymore, so its value drops.
How much a bond falls depends mostly on its term, meaning how long it has until it matures. A bond that matures next year barely moves, since you’ll get your money back soon and can reinvest at the new rate. A 20- or 30-year bond can fall a lot because its owner is stuck with the old rate for decades. That’s why long-term Treasuries had one of the worst stretches in their history after rates started rising in 2022, while shorter-term bonds held up much better.
When a headline talks about “the bond market,” it usually means long-term Treasuries. A well-built bond portfolio looks different. It spreads money across different maturities and credit qualities, so a jump in long-term rates doesn’t hit as hard.
Bonds also aren’t designed to do well in every environment. They struggle most when rates and inflation rise. We own them for income, to balance stocks, and so your plan doesn’t rely on stocks for all its returns. Higher rates have an upside, too. As bonds mature, they’re replaced with new ones that pay more, and over time that extra income makes up for the drop in price.
AI’s Biggest Winners Were Overseas
Some of this year's biggest AI winners were elsewhere. The companies that make the chips AI runs on, including TSMC in Taiwan and Samsung and SK Hynix in South Korea, grew so much that both countries now rank among the ten largest stock markets in the world. Emerging markets took a breather this quarter and finished about flat, but those chipmakers have been the market's strongest driver this year.
The $40 Trillion Question
The national debt passed $40 trillion this summer, and much of the bond-market worry stems from it. It’s worth watching, and we are. But the cost of insuring against a U.S. default has barely moved in three years. Investors know about the debt, and stock and bond prices already reflect it.
Looking Ahead
Think about what happened when oil prices spiked this summer. Within minutes, traders worldwide adjusted what they’d pay for airline stocks, energy companies, bonds, and nearly everything else. By the time the story led the evening news, prices already reflected it. The same thing happened with the Fed’s rate hike and with the national debt passing $40 trillion. That’s why we don’t make portfolio moves based on what we expect to happen next. Whatever we might predict, the market has usually priced it in already.
Emerging markets show why this matters. They had a huge first half of the year and then went sideways this quarter. An investor who piled in after reading about Taiwan and South Korea in the spring got the headlines without the gains. An investor who already owned a globally diversified portfolio got the gains without needing to see them coming. Diversification isn’t just about protecting the downside. It’s how you make sure you’re already there when a part of the world you’d never have picked has a great year.
That doesn’t mean we just buy everything and hope. Decades of research point to a handful of reliable sources of higher expected returns, and we build portfolios to lean into them. Smaller companies and value companies, those trading at lower prices relative to their fundamentals, have historically paid investors more over time, partly because they’re less comfortable to own. More profitable companies have tended to outperform less profitable ones. None of these pay off every quarter. This quarter, value beat growth in the U.S. and abroad, while smaller U.S. companies lagged larger ones. That’s normal. These premiums build over years, not months, and reward patience.
The same thinking applies to bonds. Longer-term bonds usually pay more because you’re taking on more interest-rate risk, and lower-quality bonds pay more because the borrower is more likely to default. We take those risks on purpose, not by accident. This quarter was a good example. Rates jumped, and very long-maturity bonds took the brunt of it.
What ties it together is that we control most of what drives long-term results. Fees, taxes, diversification, and staying invested add up quietly year after year, and none of them depend on getting the next quarter right.
What Actually Matters
How you split your money between stocks and bonds will influence your results far more than any individual investment we pick. So when someone asks whether they should change something after a quarter like this, the real question is whether that mix still fits your life.
The answer usually comes down to when you’ll need the money. Stocks are the best tool we have for long-term growth, but they can drop sharply in any given year, so they’re best for money you won’t need for a while. Bonds are steadier and better for money you’ll need in the next few years. Cash covers what you need soon. That’s why higher bond yields are good news even though they don’t change the long-term case for stocks. The money set aside for the next few years is now earning more.
This quarter also shows how rebalancing works. Stocks went up and bonds went down, so many portfolios drifted toward more stock than they’re supposed to hold. Bringing them back means selling some of what has gone up and buying bonds, which now pay more than they have in decades. It can feel backwards. In practice, it means buying more of something right when it pays better. In taxable accounts, bonds that have lost value can sometimes be sold to lower your tax bill and replaced with something similar, so the bad quarter does a little good.
A headline about the bond market says nothing about whether your portfolio still fits your life. A change in your job, your family or your retirement timeline does. If something like that is on your mind, give us a call.
That’s the most useful conversation we can have with you.
Disclosures
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