The third quarter began with investors looking forward to another period of economic resilience, expanding corporate profits, and extraordinary technological progress. Artificial intelligence remained at the center of the investment story. The companies building its infrastructure were committing enormous sums to data centers, semiconductors, electrical generation, and the computing capacity needed to support a transformation that many believe will redefine large parts of the global economy.
There were good reasons for optimism. Corporate earnings remained substantial. Equity markets reached new highs during the summer, supported by expectations that artificial intelligence would generate lasting improvements in productivity and profitability.
Yet by September, something had changed.
US government yields surged, with the global benchmark 10-year Treasury rising from lows of about 3.96% in February to 5.36% early this month — the highest in two decades. It is now trading at about 4.98%. The 30-year yield recently peaked at a level not seen since 2002.
The first cause is the tech-driven private-sector growth boom and the surge in bond issuance that came with it. The second is persistently wide fiscal deficits that have coincided with the need to refinance maturing debt at a time of diminishing availability of funds from traditionally reliable long-term holders of US fixed income securities.
Inflation concerns amplified the pressure. Oil prices surged as tensions between the United States and Iran intensified, particularly around the Strait of Hormuz, a critical shipping route for global energy supplies. Higher prices for gasoline, diesel, and other petroleum products began feeding through transportation, manufacturing, and distribution costs, threatening to push inflation more broadly through the economy.
U.S. inflation accelerated to 3.7% in September, up from 3.4% in August. The increase complicates the Federal Reserve’s interest-rate decision later this month, particularly against a backdrop of slower employment growth.
A Market Beginning to Exercise Caution
Dimensional Fund Advisors characterized the third quarter as a period in which cautious investors began applying the brakes.
The S&P 500 gained 2.3% for the quarter, while the broader Russell 3000 Index advanced 1.41%. Large U.S. value stocks gained 2.61%, compared with 0.92% for large growth. Small growth companies lost 9.39%. The broad U.S. investment-grade bond market declined 3.51%, while global real estate fell 6.03%. Commodities, meanwhile, advanced 16.19%.
Global equities, as measured by the MSCI All Country World Index (net dividends), rose 1.6% as of September 30. Stocks in developed international markets outside the US added 0.9%, as measured by the MSCI World ex USA Index (net dividends). The MSCI Emerging Markets Index (net dividends) dropped 0.4% but remained well higher for the year, up 23.4%, nearly doubling developed markets’ gains.
New Leaders, Unexpected Places
The strong year for emerging markets has been led by Taiwan and South Korea, vaulting the countries into the ranks of the world’s 10 largest stock markets. Much of this outperformance has been driven by semiconductor leaders such as TSMC, Samsung, and SK Hynix, which provide chips for AI-related companies. These strong returns are a reminder that outperformance can emerge anywhere and that diversified portfolios that include a broad range of companies can allow investors to capture returns where they appear.
Small cap and value stocks, or those with low relative prices, beat large caps and growth stocks in developed markets outside the US and in emerging markets. But in the US, while value topped growth, small caps lagged large caps. Elsewhere, high profitability stocks outpaced low profitability stocks in global developed markets, while the opposite was true in emerging markets.
A Unified Fed Lifts the Level
The US Federal Reserve raised the federal-funds rate to a range between 3.75% and 4% at its most recent meeting in September. The vote in favor of a rate hike, which was the first since July 2023, was unanimous, unlike some other recent Fed decisions.
In the bond market, US Treasuries fell 3.0%, sending the yield on the benchmark 10-year Treasury up to 5.29% as of September 30. The broader bond market was also lower, with the Bloomberg US Aggregate Bond Index down 3.5% and the Bloomberg Global Aggregate Bond Index (hedged to USD) falling 2.5% as of September 30.
With yields at their highest levels in years, investors may ask whether it makes sense to trade some equity exposure for more weight in relatively high-yielding fixed income. But discount rates for stocks factor in current interest rates. All else equal, higher bond yields should lead to higher expected stock returns. In other words, the premium for stocks over bonds may not shrink just because of higher rates.
When Financial Markets Begin to Question the Assumptions
Developments following the quarter’s close added another dimension to the story. Investors began examining more carefully how the enormous capital requirements of artificial intelligence were being financed, and whether the anticipated economic returns would justify the borrowing undertaken to build that infrastructure.
Businesses financing new data centers, computing equipment, and electricity infrastructure were confronting a very different interest-rate environment from the one that had prevailed only a few years earlier.
In an October 23 article for The New York Times, economist and journalist Peter Coy examined whether financial markets were beginning to exhibit some of the vulnerabilities that preceded earlier financial crises.
His inquiry led to research with a surprisingly direct conclusion: although the precise timing of financial crises is extraordinarily difficult to predict, the conditions that make them more likely are not entirely mysterious.
A study of 42 countries over more than six decades found that rapid increases in borrowing, when accompanied by rapidly rising asset prices in the same sector, were associated with a substantially greater likelihood of a financial crisis during the following three years.
The housing boom preceding the 2008 financial crisis illustrates the danger. Rising property values encouraged additional borrowing, while increasingly available credit helped sustain demand and further increases in property prices. Housing became both the object of investment and the collateral supporting an expanding volume of debt. When property values began to decline, the consequences spread through mortgage lenders, financial institutions, and eventually the broader economy.
Today’s circumstances are different. Banks are generally better capitalized, and the rapid expansion of artificial intelligence is being financed through a variety of sources, including the considerable internal cash flows of major technology companies. Nevertheless, some of the financial relationships that characterized earlier credit booms are beginning to attract attention. According to the Financial Times, trading in credit-default swaps tied to major AI-related companies increased sharply during the summer, while the cost of insuring against potential defaults skyrocketed.
An equity-market correction can impose substantial losses on shareholders. A credit crisis can become more damaging because lenders and borrowers are connected through contractual obligations. When borrowers cannot meet those obligations, lenders may suffer losses, restrict new lending, or sell other assets to raise liquidity. What begins as a problem in one industry can then spread beyond it.
But the distinction is equally important in the other direction. Not every credit expansion produces a financial crisis, and a decline in technology valuations would not, by itself, establish that a systemic crisis was underway.
Harvard economist Samuel Hanson, one of the researchers Coy interviewed, described the warning indicators as flashing orange rather than red. The purpose of recognizing those indicators is not to predict an imminent collapse, but to acknowledge vulnerabilities that may become more consequential if financial conditions deteriorate.
Recognizing Risk Is Not the Same as Predicting Markets
Higher borrowing costs, rapid credit expansion, and elevated asset valuations may provide legitimate reasons for concern. They do not, however, tell us precisely when markets will adjust, how far prices might decline, or which investments will ultimately deliver the strongest returns.
Financial markets continuously incorporate expectations about economic growth, inflation, corporate earnings, and the availability of credit into security prices. Investors who respond to a widely recognized risk by abandoning an established allocation must therefore make two successful decisions: when to reduce their exposure and when to restore it.
Neither decision is straightforward.
The challenge, then, is not simply deciding whether stocks or bonds offer the more attractive return today. It is determining how capital should be allocated when future returns are uncertain but financial obligations remain.
At Cardiff Park, we address that challenge through a liability-driven approach to capital allocation. We begin with the timing and magnitude of future financial obligations and align appropriate assets with those commitments.
High-quality fixed-income securities, Treasury inflation-protected securities, and carefully structured maturities provide the foundation for meeting anticipated liabilities. Capital not required for those obligations can be allocated to diversified equities and other growth investments, allowing participation in long-term economic growth.
Higher bond yields may improve the ability to fund future obligations, but they do not change the underlying discipline. Our allocation decisions are guided by the relationship between assets and liabilities, rather than forecasts of interest rates or near-term market performance.
Looking Toward Year-End
The bond market’s lesson this quarter, that time matters and money has a cost, applies just as much to the next nine weeks. Three year-end decisions are in front of many of our clients. Each one has a deadline, and each one has a price if it is missed. Our goal is to have all three settled before Thanksgiving, November 26. December is when custodians are busiest and the holidays leave the least room for anything to go wrong, so we would rather not be working against the calendar then. That work begins now.
Your report has changed. This quarter’s report opens with new Cardiff Park summary pages. The detailed performance and holdings pages that follow are the underlying data behind them. We’d ask you to give these pages some consideration, and to start with page 2. The line at the top tells you what needs attention before year-end. The rest of the page shows the details behind each item.
Required minimum distributions. If you own an IRA or inherited retirement account that requires a distribution this year, the deadline is December 31, but we are aiming to complete every one before Thanksgiving. Your report shows the amount required for 2026, what has been taken so far, and what remains. There are only two reasons to leave a balance open past Thanksgiving: the distribution is already on a schedule set up to finish it by year-end, or you are holding the remainder for qualified charitable distributions you plan to make from the IRA yourself. If either applies, let us know and we’ll note it. Otherwise, starting this week, we will contact every household with a balance left to take and get it done.
Year-end capital gain distributions. In November and December, many mutual funds pay out the capital gains they realized during the year. In a taxable account those payouts are taxable, even when they are reinvested. We have estimated, fund by fund, what is expected, and we are weighing those estimates against the losses available to offset them.
Tax-loss harvesting. Higher interest rates left some holdings below what was paid for them. Selling a holding at a loss and replacing it with a similar one keeps you invested while banking a loss that can offset gains this year or in the future. It only works if it is done before the year ends.
You will hear from us on each of these, household by household. Please don’t wait for us if something is on your mind. And if you’re waiting on anything from us, kindly let us know.
If you have questions about how any of this applies to your own portfolio, reach out. That is the conversation worth having now, not a prediction about the next turn.
Regards,
John Gorlow
President
Cardiff Park Advisors
888.332.2238 Toll Free
760.635.7526 Direct
760.271.6311 Cell
Appendix: Market Returns, Third Quarter 2026
The tables below give the index returns and yields behind this quarter’s review. They are market benchmarks, not client results.
Global Market Returns · As of September 30, 2026
| Asset Class | Q3 2026 | YTD | 1 Yr | 3 Yr | 5 Yr | 10 Yr | 15 Yr | 20 Yr |
|---|
| US Stock Market | 1.41% | 12.42% | 15.13% | 22.26% | 12.64% | 14.73% | 15.27% | 10.99% |
| International Developed | 0.89% | 10.16% | 15.89% | 18.89% | 9.66% | 9.27% | 8.47% | 5.51% |
| Emerging Markets | -0.37% | 23.38% | 29.22% | 24.09% | 8.94% | 9.09% | 7.03% | 6.49% |
| Global Real Estate | -6.03% | 4.89% | 4.04% | — | 1.69% | 3.16% | 6.31% | 3.50% |
| US Bond Market | -3.51% | -2.91% | -1.84% | 4.06% | -0.64% | 1.14% | 1.78% | 2.95% |
| Global Bond ex-US | -1.79% | -0.24% | 0.28% | — | 1.04% | 1.87% | 2.92% | 3.27% |
| Commodities | 16.19% | 32.87% | 40.64% | 15.63% | 11.27% | 7.85% | 1.78% | 1.05% |
Returns are index returns and do not reflect client-specific performance. Past performance is not a guarantee of future results. US Stock Market: Russell 3000. International Developed: MSCI World ex USA (net div.). Emerging Markets: MSCI Emerging Markets (net div.). Global Real Estate: S&P Global REIT (net div.). US Bond Market: Bloomberg US Aggregate. Commodities: Bloomberg Commodity Total Return. 3-, 5-, 10-, 15- and 20-year returns annualized; 3-year figures for Global Real Estate and Global Bond ex-US are not in the source and are shown as dashes. Source: Dimensional Fund Advisors, Quarterly Market Review, Q3 2026.
US Stocks by Size and Style · As of September 30, 2026
| Asset Class | Q3 2026 | YTD | 1 Yr | 3 Yr | 5 Yr | 10 Yr | 15 Yr | 20 Yr |
|---|
| Large Value | 2.61% | 19.27% | 23.81% | 20.07% | 11.92% | 11.43% | 12.98% | 8.60% |
| Large Cap | 1.80% | 12.30% | 15.01% | 22.48% | 13.01% | 15.04% | 15.50% | 11.16% |
| Marketwide | 1.41% | 12.42% | 15.13% | 22.26% | 12.64% | 14.73% | 15.27% | 10.99% |
| Large Growth | 0.92% | 6.30% | 7.50% | 24.26% | 13.66% | 18.16% | 17.64% | 13.41% |
| Small Value | -4.91% | 16.96% | 20.77% | 17.93% | 7.80% | 9.40% | 11.38% | 7.58% |
| Small Cap | -7.23% | 13.71% | 16.20% | 17.72% | 6.34% | 9.84% | 11.80% | 8.45% |
| Small Growth | -9.39% | 10.71% | 12.05% | 17.55% | 4.72% | 9.90% | 11.94% | 9.09% |
Returns are index returns and do not reflect client-specific performance. Past performance is not a guarantee of future results. Russell indices; 3-, 5-, 10-, 15- and 20-year returns annualized. Source: Dimensional Fund Advisors, Quarterly Market Review, Q3 2026.
US Sector Returns · Q3 2026 and Year to Date
| Sector | Q3 2026 | YTD | Jul | Aug | Sep |
|---|
| Energy | 14.95% | 38.38% | 11.51% | 6.99% | -3.65% |
| Health Care | 5.94% | 10.92% | 1.85% | 4.97% | -0.91% |
| Information Technology | 5.20% | 33.84% | -5.36% | 6.48% | 4.40% |
| Communication Services | 3.70% | -0.90% | -1.25% | 2.54% | 2.41% |
| Materials | -0.54% | 16.72% | -2.15% | 9.31% | -7.00% |
| Financials | -1.20% | -1.45% | 5.58% | 1.34% | -7.66% |
| Consumer Staples | -2.83% | 5.00% | 2.05% | -0.36% | -4.44% |
| Consumer Discretionary | -7.76% | -6.79% | -1.26% | 0.02% | -6.60% |
| Industrials | -10.99% | 8.07% | -4.48% | -2.57% | -4.35% |
| Utilities | -12.07% | -5.66% | -2.36% | -4.41% | -5.78% |
Returns are index returns and do not reflect client-specific performance. Past performance is not a guarantee of future results. Total returns of the sector ETFs used to represent each sector. Source: Stock Rover, as of September 30, 2026.
International Developed Stocks · Returns in USD as of September 30, 2026
| Asset Class | Q3 2026 | YTD | 1 Yr | 3 Yr | 5 Yr | 10 Yr | 15 Yr | 20 Yr |
|---|
| Value | 3.71% | 14.96% | 24.33% | 23.71% | 14.72% | 10.40% | 8.79% | 5.42% |
| Small Cap | 2.88% | 10.63% | 14.50% | 19.02% | 6.48% | 8.39% | 8.83% | 6.23% |
| Marketwide | 1.17% | 10.23% | 15.69% | 18.92% | 9.19% | 9.14% | 8.51% | 5.61% |
| Large Cap | 0.89% | 10.16% | 15.89% | 18.89% | 9.66% | 9.27% | 8.47% | 5.51% |
| Growth | -1.89% | 5.35% | 7.66% | 14.12% | 4.58% | 7.84% | 7.92% | 5.41% |
Returns are index returns and do not reflect client-specific performance. Past performance is not a guarantee of future results. MSCI World ex USA indices, net of withholding tax; 3-, 5-, 10-, 15- and 20-year returns annualized. Source: Dimensional Fund Advisors, Quarterly Market Review, Q3 2026.
Emerging Markets Stocks · Returns in USD as of September 30, 2026
| Asset Class | Q3 2026 | YTD | 1 Yr | 3 Yr | 5 Yr | 10 Yr | 15 Yr | 20 Yr |
|---|
| Value | 3.07% | 26.78% | 34.86% | 23.86% | 10.98% | 8.91% | 6.13% | 6.31% |
| Small Cap | 0.24% | 13.16% | 15.01% | 15.28% | 7.67% | 8.71% | 7.36% | 7.33% |
| Marketwide | -0.30% | 22.04% | 27.30% | 22.87% | 8.76% | 9.02% | 7.06% | 6.60% |
| Large Cap | -0.37% | 23.38% | 29.22% | 24.09% | 8.94% | 9.09% | 7.03% | 6.49% |
| Growth | -3.59% | 20.16% | 24.14% | 24.24% | 7.00% | 9.16% | 7.82% | 6.57% |
Returns are index returns and do not reflect client-specific performance. Past performance is not a guarantee of future results. MSCI Emerging Markets indices, net of withholding tax; 3-, 5-, 10-, 15- and 20-year returns annualized. Source: Dimensional Fund Advisors, Quarterly Market Review, Q3 2026.
Country Returns · Third Quarter 2026, in USD
| Market | Q3 2026 | Rank of 47 |
|---|
| Brazil | 7.52% | 8 |
| Japan | 5.69% | 11 |
| Taiwan | 4.24% | 14 |
| China | 3.42% | 17 |
| UK | 2.41% | 19 |
| Australia | 1.81% | 20 |
| Canada | 1.64% | 22 |
| US | 1.41% | 23 |
| Germany | 0.25% | 27 |
| India | -4.67% | 39 |
| France | -5.21% | 40 |
| Switzerland | -5.37% | 42 |
| Korea | -8.28% | 45 |
Returns are index returns and do not reflect client-specific performance. Past performance is not a guarantee of future results. Country components of the MSCI All Country World IMI Index (net dividends); the US is the Russell 3000. Best of 47 markets: Colombia 17.72%. Worst: Turkey -12.21%. Source: Dimensional Fund Advisors, Quarterly Market Review, Q3 2026.
Real Estate Investment Trusts · Returns in USD as of September 30, 2026
| Asset Class | Q3 2026 | YTD | 1 Yr | 3 Yr | 5 Yr | 10 Yr | 15 Yr | 20 Yr |
|---|
| US REITs | -5.72% | 10.86% | 9.98% | 13.07% | 4.21% | 4.94% | 8.38% | 5.37% |
| Global ex US REITs | -5.01% | -6.16% | -4.73% | 7.32% | -1.68% | 0.77% | 3.91% | 1.66% |
Returns are index returns and do not reflect client-specific performance. Past performance is not a guarantee of future results. Dow Jones US Select REIT Index; S&P Global ex US REIT Index; 3-, 5-, 10-, 15- and 20-year returns annualized. Source: Dimensional Fund Advisors, Quarterly Market Review, Q3 2026.
Fixed Income · Returns in USD as of September 30, 2026
| Fixed Income Segment | Q3 2026 | YTD | 1 Yr | 3 Yr | 5 Yr | 10 Yr | 15 Yr | 20 Yr |
|---|
| 3-Month Treasury Bills | 0.89% | 2.65% | 3.65% | 4.49% | 3.70% | 2.42% | 1.64% | 1.67% |
| 1-Year Treasury Notes | 0.62% | 1.84% | 2.85% | 4.18% | 2.83% | 2.14% | 1.53% | 1.84% |
| World Government 1-5 Yr (hedged to USD) | -0.55% | 0.53% | 1.60% | 4.35% | 1.97% | 1.93% | 1.82% | 2.36% |
| World Government 1-5 Yr | -0.51% | -0.41% | 0.38% | 4.34% | 0.41% | 0.70% | -0.01% | 1.62% |
| High Yield Corporate Bonds | -1.82% | 0.10% | 1.41% | 8.03% | 3.60% | 5.05% | 6.14% | 6.37% |
| US TIPS | -3.24% | -2.12% | -1.99% | 3.75% | 0.00% | 2.15% | 2.07% | 3.31% |
| US Aggregate Bond Index | -3.51% | -2.91% | -1.84% | 4.06% | -0.64% | 1.14% | 1.78% | 2.95% |
| Municipal Bonds | -6.35% | -4.18% | -2.68% | 2.89% | -0.21% | 1.51% | 2.49% | 3.12% |
| Long-Term US Government | -8.02% | -7.61% | -7.65% | 0.97% | -7.23% | -2.09% | 0.37% | 2.82% |
Returns are index returns and do not reflect client-specific performance. Past performance is not a guarantee of future results. ICE BofA, Bloomberg and FTSE indices; 3-, 5-, 10-, 15- and 20-year returns annualized. Source: Dimensional Fund Advisors, Quarterly Market Review, Q3 2026.
US Treasury Yields · June 30 vs. September 30, 2026
| Maturity | June 30 | Sept. 30 | Change |
|---|
| 1-Month Bill | 3.70% | 4.02% | +32 bp |
| 1-Year Bill | 3.98% | 4.54% | +56 bp |
| 2-Year Note | 4.14% | 4.88% | +74 bp |
| 5-Year Note | 4.19% | 5.09% | +90 bp |
| 10-Year Note | 4.44% | 5.29% | +85 bp |
| 30-Year Bond | 4.91% | 5.64% | +73 bp |
One basis point (bp) equals 0.01 percentage point. Source: U.S. Department of the Treasury, daily par yield curve.
10-Year Government Bond Yields · Q3 2026
| Country | June 30 | Sept. 30 | Change |
|---|
| United States | 4.45% | 5.26% | +81 bp |
| United Kingdom | 4.81% | 5.41% | +60 bp |
| Germany | 2.88% | 3.55% | +67 bp |
| Canada | 3.38% | 3.99% | +62 bp |
| Australia | 4.74% | 5.33% | +59 bp |
| Japan | 2.68% | 3.05% | +37 bp |
Source: ICE BofA government yield curves, as reported by Dimensional. The US figure (5.26%) differs slightly from the Treasury’s own 10-year yield (5.29%).
What Bonds Pay Now · Yields at September 30, 2026
| Issuer | Yield |
|---|
| 10-Year US Treasury | 5.29% |
| State and Local Municipals (yield to worst) | 4.70% |
| AAA-AA Corporates | 5.84% |
| A-BBB Corporates | 6.08% |
Municipal yield is before any tax benefit. Sources: Federal Reserve; S&P National AMT-Free Municipal Bond Index; ICE BofA corporate indices; as reported by Dimensional, Quarterly Market Review, Q3 2026.
Commodities · Returns in USD as of September 30, 2026
| Index | Q3 2026 | YTD | 1 Yr | 3 Yr | 5 Yr | 10 Yr | 15 Yr | 20 Yr |
|---|
| Bloomberg Commodity Index (total return) | 16.19% | 32.87% | 40.64% | 15.63% | 11.27% | 7.85% | 1.78% | 1.05% |
Returns are index returns and do not reflect client-specific performance. Past performance is not a guarantee of future results. 3-, 5-, 10-, 15- and 20-year returns annualized. Gold returned 3.15% for the quarter. Best Q3 commodities: Gas Oil 76.86%, Heating Oil 58.98%, Brent Crude 45.05%. Worst: Natural Gas -13.60%, Lean Hogs -7.29%. Source: Dimensional Fund Advisors, Quarterly Market Review, Q3 2026.
Past performance is no guarantee of future results. Index returns are for illustrative purposes and do not reflect actual fund performance. You cannot invest directly in an index. The opinions expressed are those of Cardiff Park Advisors and are subject to change without notice. This material is for informational purposes only and should not be considered investment advice.
Sources: Dimensional Fund Advisors Quarterly Market Review (Q3 2026) and Returns Program, U.S. Department of the Treasury, Federal Reserve, U.S. Bureau of Labor Statistics, Stock Rover, ICE BofA, The New York Times (Peter Coy, October 23, 2026), Financial Times. Market data as of September 30, 2026 except where a later date is noted.