Market Thoughts: Cauldron bubble…?

With skirmishes continuing between the U.S. and Iran, investors are concerned about the increasing pressure seen across oil and gas prices. Reserves have significantly been drawn down. Refiners are working full-throttle, with limited capacity. Winter lies ahead. Double, double, toil and trouble.

Fiscal laxity and rising debt burdens across developed economies are also weighing on animal spirits. It’s not going away. In many instances, it’s being added to. Because it’s not of immediate concern to politicians, it’s left unattended. It’s someone else’s problem, until it isn’t.

Several years ago I made a few Carhartt baseball caps engraved with: “DO YOUR JOB!” It was funny in the moment. It also helped make a point; I’m not great at subtlety. Today I’d send them to Congress. They wouldn’t resonate. We’re in ‘bread and circuses’ season, mid-term elections.

Had a ceasefire between the U.S. and Iran prevailed, investors would be a great deal more upbeat. They’d be looking at the possibility of a divided government in Washington, after mid-term elections. A constrained government is generally viewed favorably by markets.

Job markets are stable. They’re the little engine that could as it relates to employment and consumption. Real global growth looks to be tracking close to 3%. In the U.S., we’re right around 2%. That sets us up for nominal growth of +5-ish %. A strong number by any measure. Good news for revenue growth ahead.

Reopening of the Strait could have curtailed concern about inflation. Is inflation high relative to policy targets? Yes. Unreasonably so? No. Recall it was trending lower before the U.S. went to war. We may yet have been talking about rate cuts from the Federal Reserve (Fed), rather than the tightening currently priced in.

The European Central Bank just delivered a defensive rate hike. They, like broad markets, are rightfully worried about the energy complex and knock-on effects to inflation. Eventually, to growth. The Fed has less pressure currently to hike but faces a similar dilemma.

Investors are pushing back at U.S. Treasury bond market intervention. Treasury ‘hyped’ expected buybacks. They’ve just announced buybacks of $6 billion in longer-dated Government bonds. Markets were expecting $10 billion (or more). Bond investors bit back.

The U.S. and Japan may be ‘the house’ in attempting to stabilize the yen. Bond investors are ‘the fortress’ as it relates to the U.S. Government bond market. Speculators’ wings can be clipped by policymakers if they press too hard. But the bond market always wins. That’s worth keeping in mind.

So where does all of this leave us with portfolio positioning and outlook? Constructively cautious. Constructive because macro fundamentals are solid. But we’re getting closer to a tipping point. If the energy market truly riots, it’s taking everyone along for the ride.

Earnings growth remains robust. We won’t kick off the U.S. third-quarter earnings season until October 13th. Earnings seem set to repeat again the extraordinary growth we’ve seen. Until announced, investors are left to bounce between fear and greed.

In multi-asset portfolios we’ve trimmed back duration. We’ve added to liquid alternatives in portfolios that hold them, funded from core bonds. We’re sticking with our equity and extended credit overweights. The fundamentals argue for it.

I expect a bumpy ride ahead. Seasonality will play its part, as will the distraction and rancorous headlines spit out for mid-term elections. Each navigable turbulence. The wild card is the war and, by extension, energy prices.

We’re getting to a point where a full reopening of the Strait will become the default demand by investors to calm markets, refocusing on what remains a strong backdrop for risk assets. We’re not there yet, but it’s swirling. Cauldron bubble…?

“Double, double, toil and trouble; Fire burn and cauldron bubble.” William Shakespeare

Unless explicitly stated otherwise, all data is sourced from Bloomberg, Finance LP, as of 9/10/26

Opinions, estimates, forecasts, and statements of financial market trends that are based on current market conditions constitute our judgment and are subject to change without notice. We believe the information provided here is reliable but should not be assumed to be accurate or complete. The views and strategies described may not be suitable for all investors.