The Cornerstone Investment Commentary: 3rd Quarter 2026

Concerns that inflation will remain elevated in the coming years put a damper on stock market returns and
sent interest rates higher and bond prices lower this quarter in what is likely somewhat of an over-reaction.

The third quarter ended with global equity markets rising about 1.0% and, in a turnaround from the first
half of 2026, U.S. stocks outgained international, growth stocks outperformed value stocks, and small-cap
gave up its prior lead over large-cap. Once again, the overall equity diversification in your portfolio
allowed it to take advantage of these conditions as did your overall stock/bond allocation mix.

It has been quite a while since the bond market received so much attention and perhaps even longer since
a bond market ‘sell-off’. With annual inflation running higher than a year ago, interest rates have risen,
sending bond prices lower. This quarter, the overall bond market fell nearly 3.5% while the holdings in
your bond allocation declined only about half that amount. As we wrote in July, we added short-term
corporate bonds to this part of your portfolio midway through the quarter.

It is worth pointing out that the bond market’s decline was nowhere on the horizon in early 2026. It
began with the sharp increases in energy costs resulting from war in Iran, improved this Spring as progress
was made toward re-opening the Strait of Hormuz and declined further as progress stalled and fighting
resumed. When progress resumes and ships can again move freely, energy prices should fall and the bond
market’s recovery can begin in earnest. Until then, ‘selling low’ is not prudent.

In mid-September, the Federal Reserve raised interest rates. This, however, cannot reverse the jump in
2026 inflation; only more barrels of oil being supplied again can do that. Through August, one-year core
inflation (which excludes energy and food) was a calm 2.4%, but total inflation was 3.4% with food at
2.7% and energy at 16.3%(!). The Fed’s aim was to show its resolve in keeping core inflation where it is.
The risk, though, is that its rate hikes will slow the economy today while trying to influence inflation
expectations about tomorrow. Late September’s stock market decline showed that the market took notice.

As we regularly monitor and update economic conditions against this backdrop, our approach continues to
emphasize a thoughtful diversification that does not speculate on who short-term winners and losers will
be. Periodic rebalancing helps to protect 2026’s strong overall gains, and we will continue this as well.

As always, we welcome your comments or questions and look forward to our next conversation. We wish
you a meaningful upcoming holiday season thank you for the continuing opportunity to work together.