Sacrifice – Q2 2026 Market Commentary

As we prepare to celebrate America’s birthday, let us take the opportunity to reflect not only on our great nation’s history, but also on the enduring values that have driven our country’s democratic and economic success for so many years: perseverance, optimism, long-term vision, and sacrifice. This year’s commemoration marks an outstanding achievement, the 250th anniversary of our nation's founding, which is a remarkable milestone and an appropriate time to reflect on the lessons history continues to offer investors.

Over the past four months, the global economy has navigated heightened geopolitical tensions and uncertainty. Conflict in the Middle East, volatility in energy markets, and evolving diplomatic developments have reminded investors how quickly geopolitical events can influence economic conditions and market sentiment. While recent developments have helped ease some immediate concerns, uncertainty remains elevated as markets continue to adjust to an evolving global landscape.

We remain optimistic that the worst of this conflagration is over and that many of the immediate risks have moderated, although the economic effects of recent events continue to be felt. History reminds us that all wars require sacrifice. Sacrifice of people’s lives, time, financial resources, equipment, energy, and emotion. Beyond the human cost, periods of conflict often result in higher inflation, supply chain disruptions, increased energy costs, and greater economic uncertainty. The foundation of the United States was built by generations willing to endure hardship, uncertainty, and short-term discomfort in pursuit of long-term opportunity and freedom. The willingness of our country’s founders to think beyond immediate circumstances and their own welfare created the prosperity that has benefited generations since.

During World War II, Americans were asked to ration food, groceries, clothing, and fuel to help control inflation and ensure fair distribution of goods. The US government also made significant financial sacrifices, funding the war through deficit spending and bringing the debt to GDP ratio to an all-time high of 119%. Once the war was over, we entered the golden age of the 50s, industry thrived as wartime factories were repurposed, and pent-up demand fueled consumer spending. Americans once again began purchasing more high-end discretionary goods, such as Chevrolets, washing machines, and refrigerators. In addition, like most developed countries we also began consuming more calories and expanding our waistlines.

Fast forward to 2026, and while we have not been asked to ration, many areas of Southeast Asia have, as deliveries of oil and other goods remained stalled in the Strait of Hormuz. Although the direct effects have been less severe domestically than in many other regions of the world, the economic consequences have still required sacrifice, most notably through persistent inflation (May CPI was up 4.2% year over year) and the loss of purchasing power of our dollar. This all began during COVID when supplies were short, and demand and stimulus were high. Restaurants reduced portions and substituted cheaper ingredients, and manufacturers shrank packaging sizes to counteract cost increases and maintain margins. Even GLP1s did their part to help shrink American appetites! Unfortunately, the only thing that has not been shrinking is our national debt.

Despite the Federal Reserve’s attempt to fight inflation with higher short-term interest rates (to which new Fed Chair, Kevin Warsh, held course at his first meeting in June), and notwithstanding greater domestic energy independence, oil prices continue to filter into nearly every corner of the economy. In addition, longer-term rates also remain high, due to our growing deficit (current debt to GDP ratio is 100.2%) and reduction in foreign purchases of Treasuries. As Mark Twain said, “history doesn’t repeat itself, but it often rhymes,” and we have seen this story before. In the late 90’s we saw the default of Russia and the overleveraging of emerging market balance sheets, leading to the downfall of Long-Term Capital Management. The dot-com days saw the overextension of the corporate balance sheet. Next came the fall of the consumer balance sheet, during the subprime lending bubble that led to the Great Financial Crisis. And now we enter a period of overleveraged government balance sheets. Some countries are forced to “inflate” themselves out of this situation, but perhaps there is another solution? Grow.