Third Quarter 2026

Dianne Duva, Managing Partner at Arlington, was asked by the Pacific Coast Business Times to be part of a panel sharing investment thoughts regarding current markets. The Business Times asked the panel to weigh in on market risk, the new Fed Chair and the upcoming midterm elections.

Question #1: While U.S. equities are hitting records, there’s been talk of a rotation away from the Mag 7 toward traditional names, internationals and small caps. How do you see the rest of the year playing out?

Answer: The rotation away from the Mag 7 towards “traditional” value companies, international, and small cap stocks has been real.  Counter to most expectations, the Mag 7 stocks have provided only minimal returns this year through June 30.

Large cap value stocks are up 16.4%, outperforming large cap growth stocks by over 10% through June 30. Both the Russell 2000 small cap index and the MSCI Emerging Markets index returned 22.6%, versus the S&P 500’s 10.3% return over the same period. Developed markets internationally have matched the S&P’s return this year, and have outperformed the S&P over the last two years.

In recent panels we have highlighted the historically large valuation discounts of value, international and small cap markets, anticipating a reversion to the mean in investor returns. Even with their recent significant outperformance, we still see opportunities for strong relative returns these markets, especially as AI productivity enhancements are widely adopted.

Question #2: Fed Chair Kevin Wash has been making big changes at the Federal Reserve. How do you evaluate his performance and what will be his first real test?

Answer: Kevin Warsh’s tenure as our Federal Reserve chair has been somewhat surprising. During his confirmation hearings and prior comments, he was seen as being somewhat dovish on rates, in line with President Trump’s stated desire to see lower interest rates. Instead, the Fed’s early statements have been, we think, appropriately hawkish on inflation: “The committee has unambiguous and unanimous resolve to deliver price stability.”

We really like this commitment from the Fed, even though bond yields moved up anticipating tighter interest rate policy. It demonstrates the discipline and independence needed to effectively guide policy through inevitable challenges. Warsh’s first real test may well be sustained tongue lashings from the President, who keeps expecting lower interest rates to materialize.

We also like the 5 policy review task forces set up by Warsh, covering communications, balance sheet policy, data, productivity, and inflation. The leaders of the task forces have strong, independent qualifications.

Question #3: How do you see the midterm elections impacting the investment climate, and particularly the bond market and the dollar? Anything investors should do now to brace for impact?

Answer: We don’t see the midterm elections having significant impacts on the markets if the Democrats win the House and Senate. Without a veto-proof majority in the Senate, we can’t see how major financial legislation from a Democratic House could pass. We think interest rates and the dollar will be much more impacted by macroeconomic conditions, Fed policy, and geopolitics than the midterm elections.

Longer term, a decisive Democratic midterm victory combined with a seeming lack of charismatic Republican leaders to carry forward the Trump coalition could lead to broader Democratic Party victories in 2028, including the Presidency. Combined with our ever-expanding deficits and debt, the effects could be generational shifts in tax policy, regulation, health care policy, Social Security, and defense spending.