Broader markets in Q3 appeared almost stagnant. On the surface not much happened.

The S&P 500 gained 2.3% in the third quarter. The MSCI International markets index (EAFE) gained 0.9%. The MSCI emerging markets index fell 0.2%.

As is usually the case, what goes on under the surface is anything but calm. The chaos from competing narratives in markets sometimes gets cancelled out in broader index performance. Yet the AI/tech, war, and interest rate stories in Q3 were still felt.

US small caps declined 7.2% in the third quarter. REITs fell 6%. Seven of the eleven US sectors were lower in Q3. Utilities were the worst at -12.4%.

Yet the healthcare sector was up 6.6%. Tech was higher by 7.2%. Energy, the best performer in Q3, was up 17.2%.

It’s safe to say that rising interest rates hit the more interest sensitive stocks like REITs and Utilities. Supply issues from the war showed in Energy stocks. While interest rates affect company valuations, so does future growth. The continued growth story in tech, seems to be winning the narrative game, so far.

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Quote for the Week

Something which at first appears random or unpredictable may actually be predictable. Claude Shannon and I built a machine to beat roulette. Roulette normally appears to be a random process. But, sometimes, way back, players exploited defects in roulette wheels. Maybe one of the frets or dividers between the pockets is a little loose, so some pockets would be preferred over other pockets, so the numbers would come up with frequencies that deviated from random to some extent. The machine we built was even more advanced, it predicted position and velocity of ball and rotor, and from that we were able to forecast what region of the wheel the ball would fall into. We got a big edge. The machine is now in the MIT museum. So this is an example where, if you have more information about something that appears to be random, it could turn into an edge.

That’s also how markets are. The problem is that, even though markets aren’t strongly efficient in the sense of EMH, it’s still difficult to find edges. By “edge,” I mean excess return after adjusting for risk, net of costs. Also, when an edge is discovered, the money that’s poured into it makes the edge go away, because it moves prices toward correct pricing. So, I don’t think EMH is quite the right mental framework for thinking about markets, but it’s a good start for almost everybody. – Ed Thorp (source)

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We’re officially nine months into the year. The asset class, sector, and global market quilts are up to date for Q3 2026. Links to the updated versions are below:

• Asset Class Returns
• Sector Returns
• International Market Returns
• Emerging Market Returns

You can download copies here or save the images below.

Stocks have done well so far this year. While broader markets are higher on the year, most were relatively unchanged in the third quarter. Emerging markets still lead with a 24% total return. The two exceptions were REITs and US small caps. Both fell in Q3 but are still positive year to date.

The energy sector ended the quarter on top with a 40% return through the third quarter followed by the tech sector. All other sectors underperformed the S&P 500’s 13% return.

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Quote for the Week

Back in 1963, I was in a training program at Wertheim & Co., and one day the firm’s senior partner, J.K. Klingenstein, was our guest speaker. As he was about to leave, one of the trainees blurted out, “Mr. Klingenstein, you’re rich. How can we become rich like you?” Everyone else was mortified, and J.K. was clearly not amused. But then his face softened, and you could see that he was taking the question very seriously and trying to sum up everything he’d learned in a lifetime on Wall Street. The room was silent as a tomb, and finally Mr. Klingenstein said firmly, “Don’t lose.” Then he stood up and left. I’ve never forgotten that moment. That’s what investors should really care about: Don’t lose. Don’t make mistakes. They cost too much. Most of the destruction of investment value occurs in small, private, anguishing experiences that are never discussed and never recorded, because people were doing things they never should have done…

In investing, losing means taking decisive action at the worst possible times — being driven by your emotions precisely when you need to be the most rational.

Trying too hard to win eventually means losing. To win the Indianapolis 500, you first have to finish the Indianapolis 500 — that’s five hundred laps around and around that oval. If you try too hard on just one lap, you won’t live to finish. — Charley Ellis (source)

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How do you define the perfect portfolio?

It’s probably not the most optimal allocation based on historical market data. The perfect portfolio up to the 1970s, was less perfect in the 1980s. The same can be said for the ’80s in relation to the ’90s, the ’90s relative to the 2000s, and so on to today. The market changes and is too unpredictable for that type of consistency. The data only tells us what happened not what will happen in markets.

It’s probably not whatever offers the highest returns either. That requires foresight, which we all lack. Too much dumb luck and risk involved to be worth considering. You’re far more likely to end up broke instead of rich.

It’s also not some cookie cutter portfolio you copied online. Not the worst choice but it’s missing an important consideration.

So, what is it then? One might argue that the perfect portfolio “is the one you can stick to.” Except that catchy phrase is incomplete.

A new book by my friend Peter Lazaroff, titled The Perfect Portfolio, breaks it down for you.

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Quote for the Week

Risk and time are opposite sides of the same coin.

This conclusion suggests that duration — the concept of risk that the fixed-income people use — has relevance for all kinds of risks, not just for bonds and mortgages. Duration is a weighted average of cash flows over the life of an investment, with the present values of those cash flows as the weights. Duration does not always fit the bill precisely, because it does not reflect the uncertainty of those cash flows, but it does capture the sense of what we are after.

Indeed, in a fundamental sense, duration conveys more information about riskiness than volatility can convey. As fixed-income investors learned long ago, duration explains volatility — long-term bonds are more volatile than Treasury bills, and stocks are more volatile than long-term bonds. Thus, as I argued at the outset, volatility is a useful concept but an incomplete one. We are closer to the essence of risk when we look at it through the prism of duration. — Peter Bernstein (source)

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