Markets remained mixed for a second month in July, based on a set of ETFs tracking the major asset classes. The main event in last month’s performance review: commodities rebounded after a sharp selloff in June, outperforming the other asset classes by a wide margin. Another notable development in July: the recent rally in real estate continued and widened into foreign shares.

A broad measure of commodities (GSG) was the big winner last month, soaring 12.0% as the resumption of hostilities in the Middle East lifted energy prices. Year to date, commodities (GSG) retain a strong edge over the rest of the major asset classes, posting a near‑39% advance.

US stocks (VTI) fell for a second straight month in July, although the loss was a mild -0.5%, in line with the previous month’s decline. Year to date, VTI is up a solid 10.5%—a respectable gain in the context of the long‑run record, although by recent standards it’s below average.

US bonds (BND), by contrast, were among the weakest performers last month, shedding 1.3% in July. For the year so far, BND slipped into the red, dipping 0.5%.

US real estate shares (VNQ) extended their recent strength, rallying 2.6% last month and posting a 14.0% year‑to‑date gain—second only to commodities (GSG) in the current 2026 ledger. Foreign property shares (VNQI) joined the party, matching VNQ’s advance in July.

The Global Market Index (GMI) fell for a second straight month, easing 0.6%. GMI is an unmanaged benchmark (maintained by The Capital Spectator) that holds all the major asset classes (except cash) in market‑value weights via ETFs and serves as a competitive benchmark for globally diversified, multi‑asset‑class portfolio strategies. For the year so far, GMI is ahead 9.3%, outperforming most of its components in 2026.

● Positive Sum: How Zero-sum Thinking Broke Capitalism – and How We Can Fix It
Roy Swan
Summary via publisher (Wiley)
Zero-sum thinking has cost the American economy an estimated $50 trillion over the last 30 years. Roy Swan, reveals why this primitive instinct continues to cost businesses $600 billion annually, and offers a practical roadmap for recognizing the economic power of fairness to create broadly shared prosperity. Through Positive Sum Swan questions the outdated economic theory that for someone to win, someone else must lose.

● Data Empire: The Power of Information to Organize, Control, and Dominate
Roopika Risam
Essay by via Next Big Idea Club
Most people think data began with computers. In reality, data is one of humanity’s oldest technologies. Nearly five thousand years ago, someone named Kushim carefully recorded deliveries of barley on a clay tablet in ancient Mesopotamia. Kushim wasn’t a king or a priest. He was an accountant—and he is the first person with a name in recorded history.
Usually, we imagine history beginning with rulers, battles, or monuments. Instead, the first named person is someone doing paperwork. Kushim was tracking grain because survival in the ancient world depended on it. Cities needed to know who had contributed food, how much was stored, and how it would be redistributed. Without records like these, large settlements simply couldn’t function.

● Fintech Capital: The Digital Transformation of Everyday Money and Finance
Paul Langley and Andrew Leyshon
Summary via publisher (Princeton U. Press)
How people pay, make savings and investments, buy insurance, and take on debt is undergoing digital transformation across the globe. This book argues that FinTech is a distinct form of intermediary and rentier capital that is radically reorganizing the routine social relations of money and finance. People are being configured by FinTech capital as users and data rather than as consumers, a phenomenon we increasingly take for granted in our everyday lives. Langley and Leyshon analyze the rise of FinTech capital through the intersecting processes of digital and financial capitalism that underpin it: platformization, datafication, monopolization, colonization, and capitalization.

● Investing in America: Expanding Access to Finance to Solve Our Shared Challenges
Antony Bugg-Levine
Review via Antidote to Autocracy
In Investing in America, Antony Bugg-Levine, with whom I co-authored perhaps the first book on impact investing, makes a simple argument: the promise of America depends on capital. Not capital in the billionaire sense of concentrated wealth, but capital as a democratized tool—available to workers buying their companies, to first-time homebuyers with limited down payment savings, to entrepreneurs building companies that improve job quality, to communities preserving their land.
Our friend and colleague traces this insight back to Benjamin Franklin, who established revolving loan funds in the 18th century to help young workers become business owners. By 1990, those funds had made thousands of workers into owners and channeled millions of dollars toward positive public impacts of various types. What could be a more appropriate tribute to the 250th celebration of our nation’s declaration of independence?

Please note that the links to books above are affiliate links with Amazon.com and James Picerno (a.k.a. The Capital Spectator) earns money if you buy one of the titles listed. Also note that you will not pay extra for a book even though it generates revenue for The Capital Spectator. By purchasing books through this site, you provide support for The Capital Spectator’s free content. Thank you!

The Federal Reserve may be downplaying inflation risk, but financial markets are less confident. The central bank left interest rates unchanged on Wednesday, implying that it could remain patient in deciding whether there’s a threat to price stability — a commitment Chair Kevin Warsh has vowed to deliver multiple times since taking the helm in May. Market sentiment, by contrast, is somewhat less convinced that monetary policy is fine as is.

The ongoing Middle East conflict isn’t helping. As the war drags on, it remains a threat by lifting inflation and slowing growth. Flat‑out risk‑off signals, however, have yet to arrive, based on a review of several indicators using comparisons of ETFs.

We may be at an inflection point for the risk appetite, but the jury is still out, according to a big‑picture profile of global asset allocation strategies based on the ratio of two ETF proxies: an aggressive strategy (AOA) versus its conservative counterpart (AOK). Despite all the macro turmoil in recent months, this ratio is churning in a range, holding on to the rebound from the sell‑off in the early days of the Iran war. The implication: investors are still processing the risk outlook.

Within some asset classes, by contrast, changes in sentiment are starker. Notably, investors have sharply dialed down the collective risk appetite, as shown by the steep decline in the ratio of the U.S. stock market (SPY) vs. a low‑volatility counterpart (USMV), a proxy for a relatively conservative equities strategy. Although a clear risk‑off signal has yet to emerge on this front, the stock market’s tolerance for shock and awe has been severely depleted, and a tipping point may be near if additional negative surprises arise.

A more sensitive proxy for equity‑market risk tolerance reveals a greater degree of weakness, which could be an early warning sign and deserves close attention in the weeks ahead, based on the ratio of U.S. cyclical stocks (XLY) to defensive shares (XLP).

By contrast, the recent recovery in relative strength for small‑cap stocks (IJR) vs. large caps (SPY) remains resilient.

Similarly, the rebound in value stocks (IWD) over growth (IWF) still looks robust.

The bond market, by contrast, is is leaning into a risk‑off signal, based on the ratio of medium‑term Treasuries (IEF) vs. their short‑term counterparts (SHY).

If the IEF–SHY ratio sinks further and triggers a clear risk‑off signal, the shift could spill over into the stock market and spark a new leg down for equities.

Across asset classes, investors are increasingly uneasy even as the Federal Reserve maintains a patient stance on inflation risk. Taken together, the indicators suggest that markets may be approaching a critical juncture.

Learn To Use R For Portfolio Analysis
Quantitative Investment Portfolio Analytics In R:
An Introduction To R For Modeling Portfolio Risk and Return
By James Picerno

Federal Reserve Chairman Kevin Warsh is playing a dangerous game. Explaining the central bank’s decision to leave its target interest rate unchanged yesterday amid mounting inflation concerns, he tried to walk a fine line, saying that price stability remained the goal. But the bond market is skeptical and Treasury yields rose yesterday.

Incoming inflation data could yet validate the Fed’s cautious approach to rate hikes. But there’s also the crucial aspect of credibility, which was dented, if only slightly, by Warsh’s comments in yesterday’s press conference.

“We will deliver the 2% inflation target,” he said. “That is the definition of price stability.” That was an unfortunate formulation with inflation still running well above that mark. His lack of clarity on explaining and framing the gap suggests his communciation strategy needs revising.

Today’s June update on personal consumption expenditure prices (PCE inflation) is expected to cool, provide a bit of respite on the data front, but the expected report will still leave a yawning gap between the Fed’s target and the actual year-over-year trend, as the previously published numbers for consumer prices in June imply.

When asked why the Fed was waiting to raise rates, he was evasive and failed to persuasively outline the rationale. The bond market wasn’t impressed. Treasury yields rose, including the 30-year yield, the most inflation-sensitive maturity, which spiked to 5.20% — the highest close since 2007.

The Fed chairman asked for patience in judging the central bank’s record on managing inflation, reasoning that his short tenure since taking the helm in May is too soon to judge. Fair point, but the bond market won’t distinguish inflation risk between his predecessor’s challenge and current conditions. It’s all one continuous stream, a non-trivial point with inflation running meaningfully above the 2% target for more than a year, accelerating in recent months.

The current moment is especially fraught as a new escalation in the Iran war unfolds, which threatens to keep energy prices elevated. It’s understood that the Fed focuses on core inflation indicators, which strip out food and energy, which provides a cleaner, more reliable measure of the trend. But core inflation has been rising too.

The softer data in June via the Consumer Price Index (CPI), which will presumably be confirmed in today’s PCE price report, is encouraging. Per his previous comments, Warsh may also be relying on alternative inflation indicators to support a wait‑and‑see approach to a policy pivot. The Dallas Fed’s Trimmed Mean PCE inflation rate, for example, is running in the low‑2% range through May.

Yet the resumption of hostilities in the Middle East, and the ongoing near‑complete blockage of exports through the Strait of Hormuz, suggests that inflationary pressure will remain a threat for the foreseeable future. Pointing to alternative inflation metrics to argue that the Fed’s job is more or less complete won’t fly with the bond market.

The key risk is that headline inflation starts spilling over into mainstream core measures. There are hints that this transmission is developing. Even if the Fed’s decision to stand pat is justified — a reasonable view, according to some economists — Warsh’s suggestion that the bond market would do the Fed’s job for now in reacting to inflation pressures is not a good look for a central bank trying to establish its monetary bona fides this early in his tenure.

He insisted that “this Fed will not waver” in its obligation to lower inflation to the target. “Our credibility rests on performing our duties and delivering on our responsibilities.”

Those words will ring hollow if the Fed doesn’t persuade the bond market. The central bank lost some of its influence capital yesterday. Softer‑than‑expected inflation reports could come to the rescue, of course. But the opposite scenario is plausible too.

Make no mistake: the bond market is testing the Fed chairman. The good news is that he still has time to make a course correction. But if yesterday’s discussion is a guide for his guidance strategy, the months ahead could be a rocky road for the Fed’s influence and the bond market.

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The rout in semiconductor stocks is rattling nerves on Wall Street, but it’s premature to label this as something more than a correction after a white-hot rally that arguably lifted chip stocks too high too fast.

The decline in semis is taking a toll on tech sentiment generally, but there are some notable pockets of strength, including the recent rally in formerly battered software shares. Reviewing the tech sector’s performance since the start of the Iran war, however, suggests that the still-hefty performance gap favoring these stocks leaves them vulnerable to a bit of mean reversion until risk sentiment stabilizes.

For some perspective, here’s how sector results compare since the bombs started dropping on Iran on Feb. 28, which one might argue marks the beginning of a new era of geopolitical and macro risks. Using a set of ETFs through yesterday’s close (July 28) shows that for all of the recent woes hanging over tech, the sector’s still posting a wide return premium over the rest of the field and the stock market overall.

The SPDR Tech Sector ETF (XLK), despite its recent slide, is still up nearly 24% since Feb. 28. The next-best sector performer: financials (XLF), which is ahead by a distant 13.0%. The broad market’s gain is even softer at 8.6%, based on the SPDR S&P 500 ETF (SPY).

Note, too, that five sectors are underwater in the period profiled in the chart above. The biggest setback is a 6.6% loss for communication services (XLC).

The source of the angst in tech at the moment is linked to a number of concerns that have animated sentiment lately. A key issue is rising doubts over Big Tech’s AI spending and free cash flow. Recent second-quarter earnings reports, such as Alphabet’s, highlighted significant cash consumption directed toward AI infrastructure and data center buildouts, for example.

Concerns have also mounted over the financial structure of the broader AI ecosystem, specifically instances where hardware suppliers, cloud providers, and startups fund one another’s compute purchases. An additional worry that’s received attention lately: aggressive multi-billion-dollar manufacturing expansion plans announced by major memory and chip manufacturers (such as Samsung and SK Hynix), which have sparked fears of potential future supply gluts.

Lofty valuations for several high flyers in the tech space haven’t helped. Semiconductor and AI-linked stocks experienced strong gains in the first half of the year. With valuations stretched to near-perfect execution expectations, even modest shifts in sentiment or guidance have triggered profit-taking and leverage unwinding.

Investor anxiety has also been heightened by news of advances in China’s domestic technology supply chain. Reports of Chinese progress in domestic chip-making equipment, alongside competitive, lower-cost large language models from Chinese AI startups, have raised questions about Silicon Valley’s long-term dominance and pricing power. [added comma after “equipment” for proper clause separation]

And then there’s the macro backdrop: Rising Treasury yields, paired with ongoing inflation concerns fueled by energy price volatility, have raised expectations that central banks may maintain higher interest rates for longer, increasing borrowing costs and reducing the relative appeal of equities.

For all the anxiety about tech, it’s important to note that the sector is quite varied, as the chart below reminds. As semi stocks have cratered lately, other industries in the tech space have rallied in recent days.

Tech writ large may be wobbling, but a closer look at the underlying industries suggests that a rotation within the sector — and across sectors — is taking shape. The market, in short, is doing its job and resetting expectations for industries that recently succumbed to a bout of irrational exuberance.

The Iran conflict continues to unsettle the outlook for the US economy, but the effects of the Middle East crisis may be hard to spot in this week’s second‑quarter GDP report. The government’s initial estimate is expected to roughly match Q1’s moderate 2.1% real annualized gain, based on the median of nowcasts compiled by The Capital Spectator, with the Bureau of Economic Analysis set to publish the official data on July 30.

Today’s median estimate has ticked up to 2.1% from 1.8% on July 18, while the Econoday consensus is slightly higher at 2.3%. Overall, Q2 is poised to reaffirm the economy’s resilience despite a series of macro shocks. The Iran conflict remains a key risk by keeping energy prices elevated, which ripples through supply chains, raises costs, and adds pressure on the Federal Reserve to tighten policy. The threat of further escalation continues to hang over markets, sustaining geopolitical uncertainty that acts as a tax on growth by lifting energy costs, complicating trade flows, and keeping inflation risks skewed to the upside.

Even so, consumer spending has held up, supported by income growth and a labor market that continues to add jobs at a modest pace. Layoffs remain low, and new filings for unemployment benefits fell to 187,000 last week—the lowest since 1969. Jobless claims at a half‑century low alongside $100 oil suggest a labor market with virtually no slack, a combination that could become problematic if the conflict persists. A brief lull in hostilities this morning hints at improvement, but after five months of stop‑and‑start warfare, visibility remains poor.

As a result, the Federal Reserve will find it increasingly difficult to ignore elevated inflation signals. And with so much riding on the path of energy prices, geopolitical stability, and labor‑market tightness, the first half of the year may prove a poor guide to what the second half ultimately delivers.

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The CAPE that Cried Wolf
Dino Palazzo (Board of Governors of the Federal Reserve System)
May 2026

The Capital Spectator’s Takeaway
The paper reports that traditional CAPE ratio’s false warnings of market overvaluation since the 1990s are an accounting illusion caused by mandatory R&D expensing and volatile special-item write-downs. By stripping out these regulatory distortions, CAPE-H eliminates the apparent structural break and restores CAPE’s ability to accurately predict long-term price appreciation and excess stock market returns.

Abstract
The “dog that did not bark”-the absence of dividend-growth predictability (Cochrane, 2008)-implies time-varying expected returns, yet the cyclically adjusted price-earnings (CAPE) ratio has “cried wolf” in the post-Global Financial Crisis period, persistently signaling mean reversion that failed to materialize. Since the early 1990s, CAPE has exhibited a persistent structural break and weak out-of-sample performance (Goyal and Welch, 2008; Lettau and Van Nieuwerburgh, 2008). This apparent breakdown can be largely attributed to systematic earnings distortions arising from accounting changes interacting with intangible capital growth. Mandatory R&D expensing increasingly understates reported earnings, while expanded special items recognition introduces transitory volatility that contaminates long-horizon averages. We construct CAPE-H (Historically-comparable CAPE), restoring intertemporal comparability by correcting both distortions. Decomposing returns, we show that the failure of traditional CAPE arises from a breakdown in predicting price appreciation, while dividend growth remains essentially unpredictable under both measures. CAPE-H reestablishes predictability in excess returns, consistent with valuation-based mean reversion, by restoring the link between valuations and subsequent price appreciation.

Persistence and innovation in the momentum signal
Doojin Ryu (Sungkyunkwan University)
May 2026

The Capital Spectator’s Takeaway
The momentum premium is primarily driven by predictable stock risk rather than temporary mispricing, though unexpected price shocks offer distinct high-alpha opportunities in smaller stocks. By decomposing past stock returns into a predictable trend and a forecast-error “innovation,” the research reveals that predictable persistence accounts for most momentum profits but is largely absorbed by standard risk factors. In contrast, unexpected innovations generate true risk-adjusted alpha—particularly among smaller and mid-tier momentum stocks—while extreme winner and loser stocks eventually see these unexpected price shocks reverse.

Abstract
By separating the momentum indicator into a predictable persistent component and a forecast-error innovation, we examine how each component contributes to the momentum premium. The persistent component absorbs most of the momentum profit, challenging a pure transitory-mispricing interpretation of momentum. The innovation component earns a smaller positive premium, concentrated among non-extreme momentum stocks but reversed at the extremes.​

Crowded Anomalies over the Business Cycle
Dennis Jung (Technical University of Darmstadt)
May 2026

The Capital Spectator’s Takeaway
The research advises that different stock market strategies carry different levels of economy-driven risk, allowing you to time your investments based on the business cycle. Instead of generating higher profits all the time, strategies tied closely to the broader economy behave like a coiled spring: they bear brunt during market recessions, but deliver strong, outsized returns during economic recoveries and expansions. By identifying which strategies align best with economic momentum, investors can rotate into the right assets at the right point in the cycle.

Abstract
Anomaly returns vary systematically over the business cycle, yet the literature on factor timing has studied this variation in the time series and remains silent on its cross-sectional allocation. We propose excess centrality, a measure constructed from the difference between an anomaly’s centrality in a macro-targeted principal-component decomposition and its centrality in standard PCA. The measure isolates the component of systematic exposure that loads on macroeconomic fundamentals and assigns it at the level of individual anomalies. A longonly portfolio formed on the signal matches the equal-weighted benchmark unconditionally but earns its premium cyclically: realised in recovery, contributed in expansion, and absent in recession where the priced risk is borne. The unconditional flatness is the arithmetic signature of a state-dependent premium paid through the cycle rather than the absence of a signal. The findings identify a priced macroeconomic risk premium that conventional factor models do not capture, locate it in identifiable corners of the anomaly cross-section, and extend factor timing from the question of when to scale a given factor to the cross-sectional question of which strategies carry the macroeconomic risk.

Pricing the Federal Reserve’s Inflation Response in Treasury Markets
Keiichi Morimoto (Meiji University)
June 2026

The Capital Spectator’s Takeaway
The post-pandemic market repricing of Federal Reserve rate hikes occurred in two distinct phases: in 2022, markets priced in higher future real interest rates alongside rising inflation expectations, but in 2023, the market underwent a fundamental shift toward higher real rates paired with falling inflation compensation. This structural transition made 2023 the strongest year on record for perceived Fed policy responsiveness, demonstrating to investors that nominal yield spikes alone do not reflect monetary tightening unless real rate hikes successfully bring down long-term market inflation expectations.

Abstract
Using public nominal Treasury and Treasury Inflation-Protected Securities curves, I decompose post-pandemic Treasury repricing into real-rate and inflation-compensation projections measured along the same six-maturity direction. The distinction changes the reading of the tightening cycle. In 2022, real-rate pricing strengthened, but inflation compensation rose even more, leaving the combined response-pricing index weak. In 2023, firmer real-rate pricing was accompanied by lower inflation compensation; that annual configuration ranks above every other analysis year for every positive weighting. Existing research documents a broad post-liftoff increase in perceived Federal Reserve responsiveness. I show that the Treasury repricing behind that shift changed composition between 2022 and 2023. Household three-year inflation expectations and disagreement move inversely with the index, while Federal Open Market Committee path surprises move it upward. The chronology survives presample statistical and term-structure alternatives. Treasury prices determine finite-grid projection coordinates conditional on the representation, not a daily Taylor-rule coefficient separately from other macroeconomic forces, so the measure is a price contrast rather than a structural policy estimate.

Learn To Use R For Portfolio Analysis
Quantitative Investment Portfolio Analytics In R:
An Introduction To R For Modeling Portfolio Risk and Return
By James Picerno

The war with Iran is bad news for the global economy, but it’s lifting the fortunes of most energy stocks, led by oil refiners, according to a set of ETFs. The world has had a painful reminder that fossil fuels from the Middle East can’t be ignored. At the same time, some corners of energy have taken a hit — the nuclear power industry is the major downside outlier since the conflict began on Feb. 28.

The benchmark for energy stocks is the Big Oil sector, proxied by the State Street Energy Select Sector SPDR ETF (XLE), dominated by ExxonMobil, Chevron, and ConocoPhillips, which together make up more than 40% of the portfolio. Since the conflict began, XLE is up more than 7% through Wednesday’s close. It’s a solid gain, though it trails the broader stock market: the SPDR S&P 500 ETF (SPY) has risen about 9.5% over the same period. Competing with AI and tech — SPY’s largest weights — is difficult these days, even with a Middle East war providing a tailwind for energy.

Looking beyond Big Oil reveals an even wider spread of outcomes. Oil refiners have dramatically outperformed XLE. The VanEck Oil Refiners ETF (CRAK) has surged nearly 24% during the war, marking the strongest rally in the group. The Iran conflict has created a perfect storm for refiners: years of lagging refinery-capacity growth, geopolitical disruption, and strong consumer and industrial fuel demand have combined to boost profitability.

The big energy loser during the war has been uranium and nuclear stocks. The VanEck Uranium and Nuclear ETF (NLR) has fallen nearly 25% since Feb. 28. Some of this weakness reflects the unwinding of a large 2024–2025 rally. Recent news — including the Trump administration’s approval of a U.S.–Saudi civilian nuclear pact and a White House-backed AI-driven nuclear acceleration initiative — has helped revive sentiment this week. There are early signs that fortunes in the industry may be stabilizing.

In the near term, however, if the Iran conflict continues to simmer, traditional oil and gas stocks are likely to remain the primary beneficiaries. Geopolitical risk tends to support crude prices, bolster refining margins, and strengthen cash flows for fossil‑fuel producers — giving them a clearer upside path than more volatile, sentiment‑driven segments like nuclear.

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In late February, the US 10-year Treasury yield was trending lower, dipping below 4.0% on the final trading day of the month. The macro outlook at the time suggested the benchmark yield would dip even lower in the coming weeks, a view supported by the downside trending behavior that month. But on Feb. 28, the bombs started falling on Iran, an event that reversed the 10-year yield’s slide—a turnaround that has strengthened in July.

The collapse of the US-Iran peace agreement and renewed military strikes in the Gulf region have revived the bond market’s focus on inflation risk. The US military on Tuesday conducted an 11th straight day of attacks on Iran. Secretary of State Marco Rubio on Wednesday said the US was open to diplomacy, but that the attacks would continue if Iran continued its efforts to control shipping through the Strait of Hormuz, the critical chokepoint for Middle East energy exports. Meanwhile, President Trump this week said he is willing to escalate US military action by again bombing Iran’s nuclear facilities, or what’s left of them after previous attacks.

Earlier this week, the risk of a wider war that further restricts oil shipments came into focus after the Houthis in Yemen threatened to blockade ships moving from Saudi Arabia through the Bab al-Mandab Strait at the southern end of the Red Sea. At stake is roughly 4% of the world’s oil shipments, according to Kpler, a consultancy.

The oil market is taking the hint and repricing crude higher again. The US benchmark rose above $87 a barrel in trading yesterday, the highest in more than a month.

The bond market is processing the news and testing the upper level of the trading range for yields since the war started. The 10-year yield rose to 4.63% yesterday, just below the war’s peak set in May.

The revival of energy costs is again pointing to higher inflation risks at the headline level. Although the Federal Reserve may be inclined to look through a new spike in a general increase in pricing pressure to the extent it’s driven by energy costs, there’s a growing concern that core inflation, which ignores food and energy costs, will stay elevated or rise further. Core inflation tends to be more influential for monetary policy decisions because this measure generally offers a steadier read on the underlying price pressures that matter most for setting interest rates.

Expectations for higher core prices cooled after the June update on prices reported softer inflation pressure, but the optimism has faded as the latest phase of the war has continued. The Fed funds futures market is still expecting no change to rates at next week’s policy meeting (July 29), but at least one rate hike is now priced in for the rest of the year.

The policy-sensitive 2-year yield’s hawkish pivot is especially pronounced these days. In yesterday’s trading, this yield rose to 4.28%, just a few basis points below the peak since the war began—set a few days earlier at roughly 4.30%. Notably, this yield is well above the Fed funds 3.50%-3.75% target range—a clear sign that the market expects rate hikes.

Inflation and Treasury yields remain closely tied to Middle East instability. Finding an off-ramp presents a strategic dilemma for the US. A de-escalation is vital to ease energy-driven inflation and calm nervous financial markets, yet accepting anything less than explicit capitulation from Iran risks looking weak on the international stage. With missile exchanges continuing alongside mixed diplomatic signals, any proposed “deal” risks being framed as a retreat—leaving the administration trapped between market-damaging inflation and political face-saving.

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The momentum risk factor has been leading the field in recent history, but there are signs that a rotation may be underway, based on a set of ETFs through yesterday’s close (July 20).

As a new phase of the Iran conflict heats up—reigniting concerns about macro effects—there are hints that the leadership profile in the factor space is shifting. The analysis is speculative at this point, but the differences in how various segments of the current stock‑market pullback are performing suggest that capital flows in equity allocations may be shifting.

Let’s start with an update of factor performances since the conflict with Iran began on Feb. 28. Results highlight the momentum factor’s ongoing leadership via the iShares MTUM Momentum ETF (MTUM), which is up nearly 20% over that span—a clear outlier that’s well ahead of the rest of the field, including the stock market benchmark (SPY).

Month‑to‑date results, however, highlight a reversal of fortunes for several of the leading factor funds. Notably, the leading factors in the chart above—momentum (MTUM) and high beta (SPHB), the second‑best performer since Feb. 28—have fallen the hardest this month. Meanwhile, small‑cap (IJR) and micro‑cap (IWC) shares have posted relatively modest losses.

Reviewing the price charts also highlights a divergence in the recent correction and the trend profiles. Consider the recent price action for small‑cap stocks (IJR), which have posted only mild downturns.

Compare that with the considerably deeper slide for momentum stocks (MTUM).

These differences could be noise, of course, and so it remains unclear whether the long dominance of momentum via large caps, as reflected in the MTUM portfolio, has run out of road or is simply on the back foot temporarily. But after a long run of relatively weak small‑cap results, the recent strength for these shares raises the possibility that a leadership rotation may be developing.

For some analysts, the writing is already on the wall. Vanguard is currently forecasting that small caps will outperform large caps over the decade ahead.

Royce Investments’ co‑CIO, Francis Gannon, told CNBC on Monday that an earnings rebound for small caps is a key factor shaping expectations. The negative earnings run for small caps “just turned positive at the end of last year. The [earnings] outlook [for small caps] is pretty positive, and we think it’s actually going to continue to be in line—perhaps even potentially better than large‑cap earnings—by the end of this year into 2027. If earnings lead the market, as I believe they do, I think you’re going to be in a sweet spot here for small caps for a period of time.”

Forecasts should be viewed cautiously, especially in the small‑cap space, which has suffered numerous false dawns in recent years. But monitoring price trends is a way to trust but verify. If the relative‑strength profile holds up, the bullish earnings outlook will continue to resonate—a combination that could keep the small‑cap engine humming.

With the Iran war escalating, the conflict is again getting harder to ignore, which strengthens the case for maintaining a globally diversified portfolio. The reasoning isn’t based on assuming that a broad approach to asset allocation will outperform other strategies or deliver superior risk management. Although one or both outcomes are possible, the stronger case for leaning into global diversification is that it rests on the idea that markets can, and often will, deliver surprising results.

Consider asset-class performances since the bombing of Iran began on Feb. 28. My initial assumptions after learning of the attack turned out to be quite different from how markets reacted through Friday’s close (July 17), based on a set of ETFs. U.S. stocks (VTI) and real estate investment trusts (VNQ) have rallied, outperforming the rest of the field. Bonds — including the U.S. investment‑grade benchmark (BND) — have lost ground. Foreign real estate shares (VNQI) have been hammered, posting the steepest losses among the major asset classes.

To say that I didn’t expect these results is an understatement. Perhaps I’m in a minority of clueless market observers, but I suspect there are many more card‑carrying members of this club than it appears.

The question is how to read the latest headlines in terms of adjusting asset allocation. Is the case for hedging with a particular tilt timely? The news flow certainly inspires acting to some degree.

The U.S. and Iran traded fresh strikes on Monday — American attacks on Iranian sites followed by Iranian hits on Bahrain and Kuwait — underscoring how the collapse of last month’s interim deal has pushed both sides step by step toward a wider war and stalled shipping through the Strait of Hormuz.

Energy prices are rising again, and the specter of elevated inflation and potential Federal Reserve rate hikes is once more a risk factor on the march. Although there are reports that the U.S. and Iran are willing to restart peace talks, there’s also growing concern that the conflict will intensify before a new phase of relative calm returns.

“This is the wake‑up moment for both sides,” said Ellie Geranmayeh, an authority on Iran at the European Council on Foreign Relations. “They either take the diplomatic off‑ramp now or risk allowing the war to spiral beyond managed escalation.”

Attempting to predict how the war evolves at this point — and how asset classes will react over the coming weeks and months — is difficult bordering on impossible. That, at least, is my main takeaway as I review performances to date since the start of the conflict.

Consider, for instance, the chart below, which shows that small‑cap stocks (IJR) have outperformed during the war. Meanwhile, cash (SHV) is ahead of bonds (BND), while a relatively middling but respectable rally has been logged by a 60% stocks/40% bonds portfolio strategy (AOR).

For investors who, on Feb. 28, expected these results, congratulations — you’re a member of what is probably an elite club of seers. But even if you anticipated how the past five months have unfolded, you still have your work cut out for you for the remainder of the year.

Granted, for analysts with sophisticated models that have proven to be resilient during various macro shocks and periods of elevated geopolitical risk, there could be a case for relatively aggressive portfolio tilts via focused hedging actions. But there’s also a case for considering forecast‑free asset allocation that limits tilting and takes a broader perspective.

The market isn’t perfectly efficient, nor is passive asset allocation a shortcut to investment success. But it’s a good place to start when refining a portfolio to match the specifics of investors’ assumptions and financial objectives.

Predicting how markets will fare in the short term remains as challenging as ever, but history provides valuable lessons. Perhaps the most important is that a passive asset‑allocation strategy will likely continue to deliver average to above‑average results through time, especially after adjusting for trading costs, taxes, and other frictions. That’s one of the few forecasts likely to stand tall once we review the results after the Iran conflict truly ends at some unknown point in the future.

● Speed: How It Explains the World
Vaclav Smil
Review via The Wall Street Journal
We are often told that the speed of innovation today is faster than ever before and accelerating exponentially. But as we prod and marvel at our smartphones or develop parasocial relationships with our chatbots, it’s useful to remember that a few decades spanning the turn of the 20th century saw the invention of lightbulbs, the electric automobile, home refrigeration and powered flight. How fast are we really going now by comparison? And is faster necessarily better?
That is the question posed in “Speed,” a marvelously encyclopedic book by Vaclav Smil, an environmental scientist and professor emeritus at the University of Manitoba.

● Cheating: The Human Project and its Betrayal
Fred Harrison
Summary via publiher (Shepheard-Walwyn)
Five thousand years ago, humanity made a huge mistake. The income generated from shared land, known as economic rent, was taken by chiefs and priests instead of being used for everyone’s benefit. Every unfair tax, every preventable death from poverty, and every financial crash since can be traced back to this original betrayal. Drawing on evolutionary science and years of accurate economic predictions, including the 2008 financial crisis, Fred Harrison reveals the “culture of cheating” built into the foundations of modern society. He explains how mainstream economics deliberately removed the idea of rent and how governments choose to tax wages instead of land, harming prosperity and shortening lives. With five major crises: political gridlock, environmental collapse, mass migration, authoritarianism, and uncontrolled artificial intelligence, set to clash around 2028, Harrison makes an evidence-based case for tax reform: replacing taxes on labour with Annual Ground Rents and sharing rents between nations to resolve conflicts from Gaza to the global climate crisis.

● Stop Making Stupid Investments: 7 Rules to Avoid the Hype and Build Real Wealth
David Leiter
Summary via publisher (Wiley)
In Stop Making Stupid Investments: 7 Rules to Avoid the Hype and Build Real Wealth, experienced real estate and finance leader David Leiter delivers a practical, common-sense strategy guide for building wealth through intelligent investing. Leiter explains the 7 rules that helped guide him as he built a large and resilient portfolio over 30 years. He demystifies complicated financial concepts and explores powerful investing techniques in a straightforward way without the usual jargon.

● No Experience Necessary: Why Betting on Yourself in Your Twenties Is the Best Decision You’ll Ever Make
Ronnen Harary
Q&A with author via Brands Untapped
Q: What prompted you to write it?
A: The book was a bit of a give-back for me. I’m an entrepreneur at heart, I’ve put a lot of toys out into the world, and this is kind of like my solo record. I was thinking back to my 20s, remembering how special that decade was and all the things that are accrued to you in your 20s that you don’t necessarily have in your 30s and 40s… I felt that this was my opportunity to contribute something to the dialogue and discussion around the power of youth and the power of your 20s. It was really a thesis that I wanted to get out, and I used my story as the mechanism to do that.

Please note that the links to books above are affiliate links with Amazon.com and James Picerno (a.k.a. The Capital Spectator) earns money if you buy one of the titles listed. Also note that you will not pay extra for a book even though it generates revenue for The Capital Spectator. By purchasing books through this site, you provide support for The Capital Spectator’s free content. Thank you!

Economic activity is on track to expand close to the pace reported in the first quarter, based on the latest Q2 nowcasts compiled by The Capital Spectator. The median estimate suggests growth will ease slightly from Q1.

Output is pegged to increase at a 1.8% real annualized rate for the April‑through‑June quarter. This median nowcast marks a modest downshift from the 2.1% increase in Q1. The Bureau of Economic Analysis is scheduled to release Q2 data on July 30.

Recent nowcast updates show Q2 growth running slightly below Q1’s pace, although today’s estimate improved a bit from the previous report’s 1.5% advance. on July 7.

Yesterday’s release of the Federal Reserve’s Beige Book aligns with today’s modest nowcast estimate for the second quarter. “Economic activity increased at a slight to moderate pace in eleven of twelve Federal Reserve Districts in late May and June, while one District reported no change,” the report noted. “The pace of growth was quite close to that of last period, when activity expanded in ten Districts, was flat in one, and down in one.”

The Beige Book also reported that “Employment rose on balance, with five Districts showing modest, moderate, or solid gains in employment, and with seven Districts experiencing little to no change.”

A separate government release yesterday indicates labor‑market stability persisted last week as jobless claims edged lower. Initial unemployment filings fell 8,000 to 208,000 for the week ending July 11, the lowest since April and near recent cyclical lows.

Retail sales rose again in June, though at a slower pace than expected. The 0.2% monthly gain is the softest increase since January’s essentially flat reading.

“Despite challenges, consumers are still spending and the labor market shows no signs of cracking,” Ellen Zentner, chief economic strategist at Morgan Stanley Wealth Management, wrote in a research note yesterday. “This type of data won’t move the Fed’s needle either way, but it underscores the ongoing resilience of the US economy.”

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Federal Reserve officials are talking tough on inflation, but the outlook for monetary policy is still cloudy amid murky geopolitical and economic conditions.

The possibility of a hawkish pivot came into focus this week after comments from three of the central bank’s policymakers. Governor Christopher Waller set the tone on Monday, noting that raising interest rates may be necessary in the “near term” if inflation continues running well above the 2% target. “Sternly staring at inflation until it melts before our withering gaze is not an option,” he told the New York Association for Business Economics.

On Wednesday, the government published data that highlighted cooler inflation figures for June, which ease the pressure for rate hikes, at least on the margin for the immediate future. The year-on-year change in the headline measure of the consumer price index (CPI) moderated for the first time since January. Core CPI, which strips out food and energy and is said to be a more robust measure of the pricing trend, also fell back.

Shortly after the CPI report was released yesterday, Fed Chair Warsh told the House Financial Services Committee that he and his colleagues “have no tolerance for persistently elevated inflation.”

Later on Wednesday, Fed Governor Lisa Cook said, “I see it as prudent to give a bit more time to observe how inflation unfolds from here.” Speaking at the Exchequer Club of Washington, D.C., she added: “Going forward, though, I believe the risks continue to be strongly weighted toward higher inflation for at least two reasons.”

One reason is related to the rapid rise in the AI-driven building of data centers, she noted. The second is “the recent big supply shocks—tariffs and the Middle East conflict—that risk leading to persistently higher inflation.”

Despite the hawkish comments this week, yesterday’s CPI data strengthened the market’s view that the Fed would leave its target rate unchanged at the next FOMC meeting on July 29. The Fed funds futures market is currently estimating a 90% probability of standing pat later this month. The outlook for a rate change at the September meeting, by contrast, is roughly a coin toss estimate.

The return of military strikes by the U.S. and Iran in the Gulf region in recent days raises uncertainty about the disinflationary pulse that emerged in the June CPI report. Absent the war, core inflation’s trend would likely ease in the months ahead, based on a model updated each month in The US Inflation Trend Chartbook, which is part of the research service for subscribers to The U.S. Business Cycle Risk Report, an affiliate publication of The Capital Spectator. In line with recent updates, the model’s current estimate shows the one-year change for core CPI easing in the near term, based on the point forecasts. Keep in mind, however, that the model is purely econometric and doesn’t factor in geopolitical risk.

The question is whether the softer inflation in June is outdated now that military actions in the Middle East have resumed, curtailing energy exports through the Strait of Hormuz again and driving up oil prices. Because of the renewed fighting, tanker traffic through Hormuz fell late last week, abruptly halting a brief recovery that followed the fragile ceasefire between the U.S. and Iran — an agreement that has collapsed this week.

The U.S. benchmark for crude oil (WTI) has rebounded in recent days to just under $80 a barrel, but remains far below the levels reached earlier in the war. For the moment, the inflation impulse from energy remains relatively moderate.

The clock is ticking, warns Fatih Birol, executive director of the International Energy Agency (IEA). He predicts the global economy faces economic impacts within weeks as Middle East tensions re-escalate and tanker traffic through the Strait of Hormuz halts.

“If the Strait of Hormuz remains closed, we may again have some difficulty for global economies, including those in the region, developing nations, and Asia,” Birol explained in an interview with Bloomberg yesterday. “It is not months, it is weeks,” before major economic challenges return, he advised.

A new round of an energy shock could slow economic activity, and in turn translate into a disinflatinonary pulse, eventually. In the near term, however, pricing pressure would probably rebound if the Middle East crisis continues to deepen.

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The market premium for the U.S. 10‑year Treasury yield dipped in June after rising for three months, based on a fair‑value estimate calculated by The Capital Spectator. The decline coincided with last month’s expectations that the war‑driven rise in inflation expectations had peaked. But the resumption of hostilities in the Gulf in recent days has raised questions about whether recent optimism on the inflation outlook is premature.

Military strikes by the U.S. and Iran in the Gulf region have intensified in recent days. The U.S. hit Iran early Wednesday, launching heavier airstrikes and reimposing a naval blockade after Tehran attacked ships in the Strait of Hormuz, a key chokepoint for oil exports. As the two sides traded overnight strikes for a fourth straight night—amid President Trump’s threat of a ground invasion and infrastructure attacks—fears of a full‑scale war escalated on Wednesday.

The threat of renewed fighting may keep oil prices rising, which could slow or reverse the easing inflation trend reported for June, based on the Consumer Price Index (CPI). After running hotter for months, the 1‑year change in headline and core CPI cooled last month for the first time since January. But the revival of a disinflationary impulse may fade or even reverse if the Middle East crisis intensifies.

The 10‑year yield continues to trend higher, albeit in fits and starts. In yesterday’s trading, the benchmark rate closed slightly lower, at 4.59%, close to its recent peak near 4.70%.

The market premium for the 10‑year yield slipped to 38 basis points in June, marking the first month‑to‑month decline since February, according to The Capital Spectator’s average estimate for three models. Note that the softer spread was due to a drop in the monthly 10-year yield, in contrast to the model’s fair-value estimate, which continued to rise.

The current premium remains modest by historical standards and implies that the 10‑year note is offering a relatively attractive yield.

One caveat to consider: the model doesn’t factor in geopolitical risk. The renewed hostilities in the Gulf underscore why the recent easing in the market premium may prove fleeting. With the U.S.–Iran conflict again disrupting energy markets and reviving fears of a broader regional war, the inflation outlook is suddenly more fragile than it appeared just weeks ago. Oil remains the key transmission channel, and any sustained rise in crude prices threatens to re‑accelerate inflation expectations, push Treasury yields higher, and widen the market premium anew.

In short, the geopolitical shock has reintroduced a level of uncertainty that markets had begun to discount, leaving investors to reassess whether June’s disinflationary signals were a pause rather than a pivot.

The US expansion just marked its six‑year anniversary, and the odds still lean toward growth holding up in the near term. Yet the backdrop is anything but serene. Geopolitical flashpoints, economic crosscurrents, and a thicket of slow‑burn risks continue to accumulate beneath the surface.

So how is the economy actually performing?

One useful lens is the “big four” indicators of the business cycle—payrolls, consumer spending, personal income, and industrial production—and how their current trajectories stack up against the historical record since 1970. Together, they offer an insightful read on whether the expansion’s momentum is fading, firming, or simply treading water.

Let’s start with the labor market: the recovery in payrolls since the brief but dramatically sharp pandemic recession ended in April 2020 has been an upside outlier by historical standards. A key driver for the rebound is the snapback from unprecedented speed and depth of the loss when the economy effectively shut down during the early phase of the Covid‑19 shock. But as the chart highlights, the growth rate has slowed as the expansion ages. That’s unsurprising at this late stage of the recovery. After 75 months of expansion, the pace is naturally settling into a more mature phase of the cycle, which suggests that the labor market’s contribution to economic growth will continue to ease.

Consumer spending’s trend is stronger, which is somewhat surprising for several reasons. The macro shocks over the past couple of years—tariffs and Middle East conflict—looked like textbook threats to personal consumption expenditures. But supported by a resilient labor market, the appetite to consume has remained robust, despite one measure of consumer sentiment reflecting some of the weakest polling on record in recent months.

The solid growth trend in consumer spending is all the more striking when viewed alongside the relatively weak recovery in personal income since the pandemic ended. Income surged early in the pandemic thanks to the government’s Covid‑related stimulus, but the path since then has been one of the weakest—and at times the weakest—runs during economic expansions in half a century.

Finally, industrial output has been strikingly lackluster over the past several years. There are hints that activity in this sector is strengthening lately, but the flatlining that has prevailed for much of the time since the recovery began in early 2020 suggests a cautious outlook for industrial activity is still warranted.

The takeaway: the expansion is heavily reliant on consumer spending. That’s hardly surprising. The modern US economy has long run on the capacity of households to open their wallets. But hints that labor‑market growth has slowed while support from personal income and industrial activity remains weak suggest a degree of vulnerability for the economic outlook.

To be clear, a deeper analysis of current conditions points to low recession risk in the near term, based on this week’s edition of The US Business Cycle Risk Report. But with the Middle East crisis flaring again and oil prices rebounding, the economy’s heavy dependence on household demand makes the expansion look more fragile than the headline data suggests.

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The Middle East conflict is a fire that seems to die down, only to flare up from embers that continue to burn. Those embers burned brighter over the weekend as the ongoing cycle of attacks between the US and Iran continued. The military strikes of the past week have had little effect on markets to date, but it’s an open question how a low‑grade war will affect investor sentiment if the fighting drags on for weeks or months.

Reviewing the major asset classes since the first US strikes on Iran on Feb. 28 reminds us that the risk appetite was dented but not broken, based on a set of ETFs through Friday’s close. US equities have led the winners by a wide margin: the Vanguard Total Stock Market ETF (VTI) is up nearly 11% since the start of hostilities.

Note, too, that a globally diversified portfolio has also rallied during this period, advancing more than 6%, based on the Global Market Index (GMI), an unmanaged benchmark (maintained by The Capital Spectator) that holds all the major asset classes (except cash) in market‑value weights via ETFs.

Yet a fundamental question is coming into focus as the conflict drags on and the US confronts the possibility that military force, at least in its current form, may not achieve the administration’s aim of reopening the Strait of Hormuz and restoring pre‑war flow of energy exports.

Senior Iranian officials escalated their threats in recent hours as the latest U.S.–Iran exchange of strikes continued into Monday. Neither side appears to be backing away from a cycle of attacks that is unraveling the cease-fire signed last month.

The main question for markets is bound up with the outlook for inflation. Although oil prices have dropped sharply over the past month — briefly returning to pre‑war levels in early July — crude has rebounded in recent days, albeit moderately relative to the spike in March and April. Even if energy prices remain relatively stable in the near term, it’s unclear whether the recent surge of energy‑driven inflation is bleeding into the wider economy, which would likely require a response from the Federal Reserve. In that scenario, a series of rate hikes may be near, creating stronger headwinds for financial markets.

The prevailing narrative to date is that the Iran conflict lifted headline inflation via energy prices, but that this shift was temporary. This account is under renewed threat as it becomes clear that the US has few options for restraining Iran from attacking shipping in the Gulf. Short of a full‑scale invasion — an unlikely scenario — it’s possible, if not likely, that gray‑zone conditions in the Gulf, somewhere between war and peace, will persist. In turn, these conditions could support an ongoing inflationary pulse that triggers a reaction from the Fed.

The week ahead will be an important test of how markets price in the risk that hotter inflation may linger longer than recently expected. The US 2‑year Treasury yield is on the front line of digesting investor sentiment around inflation risk. An upside breakout above the recent peak of roughly 4.25% would be a worrisome sign for markets generally.

The United States has backed itself into a corner with Iran, trapped in a retaliatory cycle that leaves little leverage to defuse the crisis or accelerate a quick reopening of the Strait of Hormuz. If the waterway stays constrained for longer than expected, the resulting pressure on energy markets could keep inflation elevated well past policymakers’ comfort zone — and it’s increasingly unclear how markets will react to this emerging risk.

● The Asset Class: How Private Equity Turned Capitalism Against Itself
Hettie O’Brien
Review via The Guardian
Private equity partnerships are groups of individual and institutional investors with deep pockets. O’Brien traces their rise following the era of deregulation inaugurated by Reagan and Thatcher, and details how Blackstone, the Qatar Investment Authority, Macquarie, KKR and others have bought undervalued assets using borrowed money to minimise their exposure to risk. What happens next is that costs, wages and investment in the future are frequently cut to the bone in the cause of exceptionally high returns.

● Investing in America: The Rise Of A 250-Year Bull Market
Meb Faber
Review & interview with author via ETF Trends
The book was born out of frustration with a generation that learned investing through meme stocks and zero-day options rather than structural ownership. Faber’s remedy is long-term compounding, illustrated by the idea that $1 invested in 1800 would be worth $200 million today. He cited Charlie Munger’s principle: “The first rule of compounding is don’t interrupt it unnecessarily.”
Faber also frames America’s origins as a venture capital story, noting that the Virginia Company and the Plymouth Colony’s Mayflower voyage were financed as joint-stock ventures by profit-seeking investors. Today, roughly 55% of American households own stock, and despite representing only 5% of the world’s population, the U.S. commands two-thirds of global stock market capitalization.

● The Next China Is Still China: An Insider’s Playbook for Winning in the New Era
Joe Ngai and Nick Leung
Review via Fortune
When Joe Ngai, McKinsey’s Greater China chair, first began to test-drive his point that “the next China is still China” on social media, the world’s second-largest economy was in a post-COVID slump. Sluggish consumption and a property market crash were still dragging down the country’s economy, while foreign companies were rethinking their investment in China as both a consumer market and a manufacturing hub—and asking where the “next China” might be.
“You heard all these things. We’re trying to diversify away from China. We’re trying to de-risk from China,” Ngai tells Fortune in McKinsey’s Hong Kong office. “You can’t find another China. There’s no other China out there now.”
Ngai’s observation is now a book, The Next China is Still China: An Insider’s Playbook for Winning in the New Era, coauthored with Nick Leung, director of the McKinsey Global Institute and Ngai’s predecessor as Greater China chair.

Please note that the links to books above are affiliate links with Amazon.com and James Picerno (a.k.a. The Capital Spectator) earns money if you buy one of the titles listed. Also note that you will not pay extra for a book even though it generates revenue for The Capital Spectator. By purchasing books through this site, you provide support for The Capital Spectator’s free content. Thank you!

War‑related inflation risk appeared to be easing when the US and Iran signed a ceasefire three weeks ago, but new military strikes in the Gulf region this week from both sides highlights and strengthens the uncertainty around the outlook. Markets aren’t yet fully persuaded that inflation will continue to rise, but events over the last several days have increased doubt about when pricing pressure will ease.

Oil prices rose earlier in the week on news that military action had resumed in the Gulf region, and Treasury yields moved higher as well. Markets were calmer on Thursday, however, with both oil and yields pulling back. Even so, it’s clear that expectations for the Iran crisis to keep fading as a geopolitical risk factor for markets and the global economy were premature.

There’s still a case for expecting inflation to ease in the months ahead, but the path may take longer than markets were anticipating before this week’s resumption of military strikes. The Cleveland Fed’s inflation nowcasts, published just before the latest round of hostilities, anticipated that pricing pressure would start easing in the upcoming June Consumer Price Index report and continue dipping in July. But the prospect of a long, uneven path to peace in the Middle East has dented the optimistic view.

One of the proprietary models The Capital Spectator monitors for tracking inflation has been showing a transition into a high‑inflation regime lately, based on data through May. The shift was notable since it wasn’t accompanied by a slowdown in economic pulse.

The task for the immediate future is monitoring if the recent move of the pricing trend, albeit modestly so, into the high inflation/high growth endures. It’s possible that the latest military strikes in the Gulf region will be one-off events that don’t derail efforts to normalize Middle East energy exports, in which case inflationary pressure will ease.

Yet this week’s events also remind that the pre-war calm is still nowhere on the near-term horizon. The potential for a long, protracted period of conditions that remain in a gray area between war and peace prevail.

The question is how markets price in a brittle equilibrium for the US-Iran conflict. Similarly, the Federal Reserve will struggle to make reasoned, timely decisions for monetary policy.

The latest release of Fed minutes, for the June 16-17 policy meeting, highlight that the central bank’s interest-rate setting committee remains split on the inflation outlook. This week’s events in the Middle East will likely strengthen the policy debate well into the future.

The minutes outlined two key scenarios: if inflation stays high and broadens, most Fed officials are ready to raise rates; if inflation steadily falls, most prefer to hold rates steady or eventually cut them.

“I do think [the minutes] showed that richness of these scenarios,” New York Fed President John Williams said on Thursday. “There are certain parts of the inflation outlook that are probably maybe a little bit more benign, say on the tariffs, maybe on the energy prices, depending how that plays out. But there are other scenarios where inflation is more persistent and stays higher, which would … call for tighter monetary policy. I think that’s the right way to think about it.”

Fed funds futures continue to price in moderately high odds for keeping the target rate unchanged at the next FOMC meeting on July 29, followed by modest shift in favor of a rate hike in September.

The wild card, of course, is still Iran, and will likely remain so for weeks if not months, or even longer. With no obvious path out of this box in the near term, markets will struggle to find a degree of comfort with elevated Middle East uncertainty that persists.

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The Iran war has scrambled the old map of safety, leaving bond investors rethinking which havens still deserve the name. It’s debatable whether the period since the attacks began on Feb. 28 has forged a new normal, but a review of performance across major fixed‑income sectors certainly raises questions about how to manage expectations.

Perhaps the most surprising trend since the conflict began: bank loans have outperformed the rest of the field by a wide margin, based on a set of ETFs through yesterday’s close (July 8). The Invesco Senior Loan ETF (BKLN) continues to lead, rallying more than 3% since Feb. 28 — roughly double the gain of the next‑best performers.

Meanwhile, most Treasuries and the investment‑grade benchmark — Vanguard Total Bond Market (BND) — remain underwater since the war began. The biggest loss: long Treasuries (TLT), down more than 5%.

One explanation is that the war has lifted inflation and fueled expectations that the Federal Reserve will soon be forced to react by raising interest rates. Add in growing concerns about the still‑unaddressed rise in federal debt, and incentives are in place to think differently about safe havens.

Bank‑loan securities surged because the war in Iran flipped the usual risk playbook. Investors rushed to floating‑rate, senior‑secured credit, which suddenly looked safer than the long‑duration assets that typically anchor defensive portfolios.

BKLN holds floating‑rate, senior‑secured junk loans. The ETF’s strength in recent months suggests investors are eager to chase higher yields while sidestepping interest‑rate risk. They’re willing to take on a bit more credit risk to lock in coupon income and seek protection from future rate hikes.

On that basis, it’s no surprise that the second‑best performance during the war is essentially a tie between a dedicated floating‑rate note ETF (FLRN) and a short‑maturity junk‑bond fund (SJNK).

This isn’t a free lunch, however. Investors should be aware of three pressure points for BKLN and other funds favoring floating‑rate loans issued by relatively highly leveraged borrowers: shrinking income if the Fed cuts rates, leveraged borrowers vulnerable to tightening credit, and an underlying loan market prone to sudden liquidity freezes.

The crowd’s preferences remain clear, and BKLN’s strength is conspicuous relative to the investment‑grade benchmark (BND) since the war started.

To the extent that the Middle East conflict has persuaded investors to favor BKLN and similar portfolios, this week’s news flow suggests geopolitical risk will remain elevated. Renewed military strikes in the Middle East have jolted markets by reviving fears that the region’s fragile calm is slipping back into open conflict.

If war and geopolitical uncertainty have been bullish factors for BKLN and its counterparts in recent months, the near‑term outlook still looks supportive for this slice of the fixed-income market.

Learn To Use R For Portfolio Analysis
Quantitative Investment Portfolio Analytics In R:
An Introduction To R For Modeling Portfolio Risk and Return
By James Picerno