IMG Q3 2026 Investor Letter

Happy Fall!

 

After recording the fifth warmest summer in Boston’s history, we transitioned right into fall with a powerful and rare Nor’easter that brought flooding and power outages to New England. Meanwhile, the Boston Red Sox turned its 2026 season around to make the playoffs, only to be eliminated after two games right out of the gate. Advances in artificial intelligence (AI), newly coined super intelligence (SI) by the administration, have powered historic market gains and are now sparking debate that AI may cause human extinction. These are just a few musings on how quickly things can change and give perspective on current market conditions. Markets will rise and fall, at times sharply, but history shows that markets will recover and persevere over time. Our disciplined approach to asset allocation is designed to participate in market upswings and mitigate downside risk. We invest in sound companies with earnings growth and solid long-term fundamentals. Our diversified portfolios are positioned to protect you throughout changing political, economic, and geopolitical landscapes.

 

U.S. Economy

The oil price shock and supply chain strains from the ongoing war with Iran continue to stoke inflation worries. The consumer price index (CPI), which measures costs of goods and services across the economy, increased 0.4% in August, up 3.4% from a year earlier. Excluding the volatile food and energy categories, core prices rose 2.4% from a year earlier. Meanwhile, the personal consumption expenditures (PCE) price index, which reflects changes in the prices of goods and services purchased by consumers in the U.S., and is the Fed’s preferred indicator of inflation, increased 0.3% in August and is up 3.4% from a year ago. Excluding food and energy, the core PCE price index rose 0.2% and is up 3.0% from a year ago. For comparison, the Federal Reserve (Fed) targets 2%. Alternately, the producer price index (PPI), which tracks the price changes companies see before it hits consumers, ticked up 0.4% in August, showing an upward trend from a 0.1% decline in June and 0.1% increase in July. Compared with a year earlier, producer prices rose 5.4%.

 

The labor market remains at or near full employment, albeit “low-fire, low-hire” mode, and pay growth remains solid. ADP data showed private employers added 90,000 jobs in September, the first acceleration since May. Education and health care, as well as leisure and hospitality, showed solid hiring. Financial activities and professional and business services showed weakness. According to ADP Pay Insights data, the increase in wages for workers who changed jobs rose to 4.8% in September from 4.7% in August whereas wages for those who stayed in the same job remained steady at 3%, a level likely below the current rate of inflation. The Labor Department reported that the U.S. added 29,000 jobs in September and the unemployment rate ticked up to 4.2.% from 4.1% in August. The unemployment rate has remained in a narrow range of 4.1% to

4.3% since March.

 

The Conference Board’s confidence index, which measures consumer attitudes on prevailing business conditions and likely developments for the months ahead, fell to 81.9 in September, down from 88.6 in August, and was the lowest reading since 2015. Similarly, the University of Michigan’s consumer sentiment index, which is used to estimate future spending and saving, fell 7% in September, reaching the lowest reading in four months and down 15% from the start of the year.

 

Still, there is a disconnect between what consumers say and how they actually behave. Notably, so long as consumers have jobs and steady incomes, they generally continue to spend. U.S. retail sales rebounded sharply in August, surging 1.2%, the largest increase since March, after a revised 0.5% drop in July. Households have continued to spend even as consumers grow more anxious about high inflation. Notably, consumers have become more selective and are seeking lower-priced goods.

 

Real gross domestic product (GDP), the broadest measure of economic output, increased at an annual rate of 2.2% in the second quarter, well above the 1.5% that had previously been reported. For comparison, the economy grew at a 2.5% pace in the first quarter, revised up from previously reported 2.1%. Consumer spending and investment were key contributors to the increase in real GDP in the second quarter.

 

With a broadly stable economy and employment under control, the focus is on the inflation side of the Federal Reserve's mandate. Basically, inflation is too high and has been too high for too long. The Fed raised its benchmark interest rate by 0.25% to a range of 3.75%-4% at its September meeting. It was the first increase since July 2023 and marked a relatively swift reversal from the end of 2025, when the Fed's rate-cut cycle appeared likely to continue into 2026.

 

Traditional Asset Class Returns Q3 2026

 

U.S. Stock Market

Despite a somewhat lackluster September, the S&P 500 rose 2.30% in the third quarter and is up 12.75% year to date. The technology heavy Nasdaq increased 2.61% in the quarter and is up 16.09% year to date. In contrast, the Dow Jones Industrial Average declined 2.34% in the third quarter but is up 7.19% for the year. The performance gap reflects investors' preference for growth and technology stocks over more rate-sensitive sectors.

 

Technology (+4.47%) and Communication Services (+4.33%) were the only positive sectors in September, benefiting from optimism about artificial intelligence. Breadth remains poor. Despite the S&P 500 being within 1% of a record high, only 45% of stocks are above their 200-day moving averages, and 26% are above their 50-day. In other words, U.S. equity market gains in 2026 have been driven primarily by a narrow group of mega-cap growth stocks, i.e., those benefiting from enthusiasm surrounding artificial intelligence, data-center investment, and semiconductor demand. The Philadelphia Semiconductor Index (SOX), which comprises 30 major semiconductor-related stocks listed in the United States, continues to be one of the best performing areas of the U.S. equity market in 2026, advancing approximately 86% year to date. NVIDIA aside, the remaining four of top five semiconductor companies do not pass our quality screens primarily due to the boom/bust cyclical nature of that industry. Whereas low quality and momentum have driven recent performance, we continue to believe that high quality companies with deep competitive moats and recurring revenues are best positioned to adapt to a changing landscape and navigate future surprises.

 

Year to date, Energy has been the leader, surging 40.28% due to higher oil prices. Technology and Healthcare have also rallied in 2026, up 28.38% and 10.15%, respectively. Consumer Discretionary(-5.82%) lagged on concerns about consumer spending and Utilities (-5.65%) and Financials (-1.30) struggled as higher interest rates weighed on rate-sensitive sectors.

 

From a style perspective, growth surpassed value in September by 530 basis points. However, value continues to outperform growth in 2026. The Russell 1000 Value index finished the third quarter  up 2.61% while the Russell 1000 Growth index was up 0.92%. Year to date, the Russell 1000 Value is up 19.27%, and the Russell 1000 Growth index is up 6.30%.

 

Fixed Income

Escalating tensions in Iran during the third quarter reignited inflation fears which drove interest rates dramatically higher across the yield curve. The U.S. 10-year Treasury rate hit a 24-year high during trading sessions, surpassing 5.30% which was last seen May 2002. The 10-year ultimately closed the quarter at 5.29%, rising 0.82%, or 82 basis points, from the start of the quarter. With the 10-year Treasury rate seen as the baseline for long-term borrowing costs, U.S. markets experienced immediate impacts in the form of higher mortgage and loan rates.

 

As a result of rising oil prices and the CPI report published in August showing prices rising month over month, the Federal Reserve (FED) unanimously voted to raise the discount rate by 25 basis points at their September meeting. Chairman Kevin Warsh stated the Fed removed a dose of accommodation, leading many investors to interpret there could be additional hikes as the Fed works to stabilize prices and move closer to their 2% inflation target.

 

With a substantial increase in rates and an inverse relationship of bond yields and prices, investors witnessed prices fall sharply during the quarter. Nearly all the fixed income sectors for the quarter produced negative returns with the U.S. Government intermediate index at -1.68% and Corporate High Yield at -1.82%. The sectors with shorter duration or less interest rate sensitivity were slightly positive, 1–3 month U.S. Treasury bills returned 0.93%.

 

The Fed implemented other changes by removing forward guidance earlier this year so while we may not know the official stance on future rates without seeing their dot plot, we do know they have committed to taming inflation. Each month’s CPI report will be closely examined and will likely be the driving factor for any additional rate hikes to end the year. Bonds continue to play an important role in diversified portfolios. In this type of rate environment, these elevated interest rates provide an opportunity for investors to reinvest and improve purchasing power by using today’s higher yields to compound interest.

 

Diversifying Asset Classes

It was a challenging quarter for diversifying equity asset classes. Managed Futures (+7.05%) and Gold (+2.94%) were the only asset classes to add relative value, outperforming the S&P 500. Year to date, equity diversification has been beneficial, with Emerging Markets, MLPs and Managed Futures significantly outperforming the S&P 500.

 

Performance across diversifying fixed income asset classes was negative for the quarter, save for floating rate loans, which were up 1.95%. Year to date, floating rate loans (+3.29%) and high yield credit (+0.10%) added significant relative value.

 

 

Conclusion

Despite higher prices, the labor market and consumer spending remain resilient. Markets are teetering near record highs on AI exuberance. The Magnificent 7 gained more than 3% during the month, while the remainder of the index declined more than 2%. This type of narrow market leadership can create one of the most challenging environments for investors, as headline index performance can mask significant weakness beneath the surface. Therefore, we  could see continued volatility in the market. Long term performance is driven by solid fundamentals, and we construct portfolios to meet your long-term financial goals in all environments. As always, if you have any questions, please reach out to your Relationship Manager.