Market commentary: Aug 2026

Client portfolio performance

The rise of artificial intelligence continues to dominate market news – and mainstream media. Enormous amounts of capital are being poured into the development of AI. Real concerns are emerging about the impact of unbridled AI on humanity and a possible AI bubble. Elevated share prices in the US share market, at this stage, are supported by strong corporate earnings.

International equities and infrastructure investments continue to be the main driver of returns in client portfolios. Fixed interest (bond investments) are having a tough time. Investors demanding higher risk premiums, and expectation that central banks will raise rates, are pushing yields up (and therefore bond valuations down).

Managing asset allocation

We adjust asset allocation (the mix of investments) based on market data indicating where we are in the market cycle. Our current setting is that the market is approaching a peak. Market fundamentals are poor, and market psychology is optimistic. This is a dangerous combination. We have reduced exposure to shares by 2% in client portfolios, and increased exposure to fixed interest. Optimism is driving the market higher. We are closely watching for signs of pessimism (no sign of this yet) at which point we will reduce exposure to shares by a further 2%.

US debt crisis?

Concerns about a potential US financial crisis are intensifying as high government debt, growing refinancing requirements, and increasing dependence on short term funding, expose vulnerabilities in the US financial system. Adding to this is the increasing amount of borrowing by AI companies.

The main concern is the scale and expansion of US government borrowing. New Federal Reserve Chair, Kevin Warsh, faces pressure to balance the need to raise interest rates (to reduce inflation), against increasing the financing costs of US government debt. Persistent US government deficits (tax revenue not covering spending), and increased defence spending are adding to this pressure.

While this is the prevailing market view, there are always contrarian opinions. Here’s one that I came across from an American wealth manager. He said:

“I’m not worried about a US government debt crisis!”
- We have the world’s largest, most dynamic economy.
- We have the biggest, most innovative companies.
- We have the most liquid financial markets.
- We have the global reserve currency.
- We have the most rich people.
- There is no substitute for U.S. Treasury bonds at this time.

Classic Wall Street! You can see where the optimism in the US share market comes from! We disagree, as there is plenty to be concerned about that warrants heightened caution.

Richard Grimes, CERTIFIED FINANCIAL PLANNER (CFP^CM), Director and Financial Adviser