Quote for the Week

The most remarkable feature of the bull market of 1982-87 was not its October meltdown. Rather, this bull market distinguished itself by its duration, magnitude and consistency. It lasted for five years, during which stock prices just about tripled, with only five negative quarters out of 20 and no corrections of as much as 10 percent…

What was the secret ingredient that kept investors buying and buying at higher and higher prices? Was it the myths that this market, like all bull markets, created to justify itself? Was it the belief that the Japanese were coming, that raiders paying stupendous prices knew value best, that buy-backs were a viable substitute for dividends, that portfolio insurance would save the day for risk-takers and, most typical of all, that bull markets always climb a wall of worry?

Although the myths helped keep the pot boiling, the basic explanation for the bull market’s longevity and vitality in the face of so much economic difficulty is simpler, more fundamental and more easily generalized. The same simple, fundamental explanation applies to the bull market’s sorry end as well.

The common thread that runs through all equity bull markets is confident expectations of higher earnings ahead. The common thread that ties the onset of all bear markets together is the loss of those confident expectations of higher earnings ahead. History shows that bull markets can go well beyond rational valuation levels as long as the outlook for future earnings is positive. — Peter Bernstein (source)

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Here’s what I’ve been reading the past three months:

• The Perfect Portfolio — Peter Lazaroff’s recent book breaks down what the perfect portfolio looks like. It’s not a one-size-fits-all allocation. It’s a great book for anyone who wants to build a portfolio for their situation, goals, and behavioral disposition. Advisors may find the stories in the book helpful in explaining these concepts to clients.
• The Daily Thomas Paine — The book is a collection of quotes from Paine, a philosopher, activist, and revolutionary writer. It touches on human rights, revolution, religion, science, education, government, and more. It’s meant to be read one quote per day but could be finished in one sitting. I got a copy from the UoC Press Free eBook of the Month.
• The Way to Wealth — Ben Franklin originally wrote this as a preface to his Poor Richard’s Almanack. It’s more of an essay than a book, told as a story, that sits as one of the earliest works on lessons in personal finance. Free copies can be found online.
• The Greatest Sentence Ever Written — Walter Isaacson breaks down the second sentence in the Declaration of Independence — “We hold these truths…” — word by word and provides a history lesson on the writing/editing process that led to its final form.

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Quote for the Week

Not long ago I was told of a counsel being given by a large Wall Street banking firm to the effect that an investor is foolish to own any bonds at all, since all he can expect from them is a decrease in the value by reason of inflation. This may seem like good advice to those familiar only with the history of the past 12 years, but to one like myself, who has experienced personally the ups and downs of the past 47 years and has studied those of many decades previously, this counsel seems to be short-sighted and rash.

My motto would be taken from my favorite poet, Virgil. It has only three words: “In utrumque paratus” — “Ready for either event.”

Own common stocks, if you wish, in order to protect yourself against serious further erosion of the dollar and in order to participate in the excitement of our spectacular bull market. But be sure you own enough bonds to safeguard both your financial strength and your peace of mind against the inevitable day of reckoning for the now happy breed of stock market speculators. — Ben Graham (source)

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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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