This July finds us with a lot going on in both markets and the world more broadly. Rather than a deep dive into any one particular topic, I’d like to give some brief updates on some of the key factors driving markets. For this month’s Insights, we’ll cover how markets have been performing, and some of the political, geopolitical and economic headwinds and tailwinds that we’re currently experiencing.
Politics
Midterm elections are starting to occupy many headlines and will be a hot topic as we enter fall in about six weeks. Midterm elections historically haven’t been favorable for the incumbent President’s party and this year is shaping up to be no different. Consider current surveys around the State of the Union:
Source: RealClearPolitics
Each of these three indicators are consistent with a likely net loss for Republicans and a net gain for Democrats. When we look at specific seats up for grabs in both the House and the Senate, we see the following:
Source: RealClearPolitics
Observe the large number of toss up seats in both the Senate and in the House. In the Senate 16% of all seats are a coin flip and about 9% of the House fall in that category. Conditions on the ground in late October will be critical in driving both voter turnout and voter disposition. Much can and will happen between now and November, but as it stands today, the Democrats appear to have an edge.
It does appear likely that either the House or the Senate (and perhaps both) flip in November. What does this potentially mean for us as investors? In all likelihood, political gridlock. If we see this outcome, we’ll likely see no significant legislation passed, debt ceiling and budget fights, and policy being driven primarily via executive order than via legislation. Markets often do well in gridlock scenarios, but the worst combination historically for markets has been a Republican President and a full Democratic congress (which we could plausibly see). We’ll be watching developments here closely.
Geopolitics
The US-Iran War has been a primary driver of market performance since the start of the conflict in late February. As it has appeared that the war is going to conclude, markets have rallied; when it appears that conflict is ramping back up, markets retrench. Observe the following chart where we see the steady decline from 2/28 (start of conflict) through 4/1 (ceasefire announced, highlighted). We then see a strong recovery on the back of the ceasefire and then fits and starts impacted by the day-to-day changes of the outlook for the conflict:
As it stands as of this writing (7/15/26), the conflict is escalating again without a clear end in sight. It appears that for the near term we’ll continue to see markets whipsawed by the news around the war. Eventually we’ll either see the conflict reach some sort of resolution or markets will adjust to the “new normal” of interrupted hydrocarbon supply. If history is any indicator and provided that that conflict remains bounded by what we’ve seen thus far, we’d expect the war to gradually start to have less and less of an impact on markets.
Economics
We are currently seeing a mixed bag of economic data that on the whole is neither running hot nor showing significant signs of weakness. The latest GDP estimates show modest growth at just over 1%:
While inflation is slightly declining but still elevated:
While corporate profits have been strong and trending upward:
While interest rates have been increasing since the start of the war:
Overall we see a mixed picture where recession does not seem imminent, but where the economy is underperforming relative to its potential.
Markets
Market performance this year has largely been net positive, with some notable exceptions. Below is a chart of various asset classes and their year-to-date performance:
Commodities (driven by oil prices with the war), small cap stocks and international stocks have all had strong years, while the S&P 500 has been strong as well. Laggards have been bonds and gold. Bonds have lagged because of rate expectations (higher energy costs=>higher inflation=> higher rates which harms the value of current bonds). Gold has been a curious story. Normally these conditions (high energy prices and inflation, geopolitical conflict) are a huge tailwind for gold, but it has actually fallen this year. Our working thesis is that because gold had appreciated so much over the past several years (up 132% from 2022-2025) it had come to be treated as an inflated risk asset rather than an inflation hedge/store of value. At these retrenched levels, we feel that gold is closer to reassuming its historic role. Moreover, we continue to like gold as part of a well-diversified portfolio in modest quantities.
Conclusion
If I were summarizing the current overall state of affairs based on what we’re seeing across these various themes with one word, it would be uncertainty. The world has always been a complex and chaotic place, but these conditions are particularly acute today with combination of demographic and geopolitical shifts and rapid technological advancements. Diversification is always important, but in times such as these, it is particularly more so. For example, international and small cap stocks have lagged in recent years and many had excluded these from their portfolios. This year we’ve seen the tables turn and these stocks have outperformed the S&P 500. US large cap stocks remain expensive and having exposure to a broad spectrum of assets helps reduce risk.
We’re also well served during times of uncertainty to keep in mind the historic ability of markets to deliver over time. For any given year, markets have a 74% chance of being up rather than down and this dynamic has made investing in capital markets one the best long-term accumulators of wealth in history.
We hope you’re all enjoying your summer and look forward to visiting with you in the coming months.
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