This Mid-Year 2026 update provides a summary of portfolio positioning, market conditions, and key changes made in the moderate risk Strategic Asset Balanced Account over the first half of 2026. We focus on maintaining a diversified approach with disciplined risk management that balances capital appreciation and income total return potential with a defensive ballast of fixed income, coupled with moderate volatility and risk.

2026 Mid-Year Review

Financial markets demonstrated remarkable resilience during the second quarter, with performance broadening beyond a handful of large technology companies. Major U.S. indexes reached multiple all-time highs throughout the quarter as investors looked past geopolitical uncertainty and focused on resilient economic conditions and strong corporate earnings expectations.

The first quarter of 2026 was dominated by the beginning of the US-Iran war in early March, which escalated market volatility along with oil prices and inflation expectations. The second quarter of 2026, however, reinforced a familiar theme: resilience. Despite elevated inflation, higher energy prices, geopolitical uncertainty surrounding the U.S.-Iran war, and shifting expectations for Federal Reserve policy, financial markets continued to advance fueled by strong corporate earnings.

Fixed-income markets experienced a challenging environment as well. While the Bloomberg U.S. Aggregate Bond Index posted a modest 0.7% gain during the quarter to finish mid-year up 0.62%, interest rates moved higher as inflation remained stubborn and investors adjusted expectations for Federal Reserve policy. At his first Federal Open Market Committee meeting, which the Fed holding policy rates steady as expected, Federal Reserve Chair Kevin Warsh emphasized the Fed's commitment to restoring inflation to its 2% target, leading markets to price in the possibility of at least one rate increase before year-end.

The third quarter began with continued momentum in early July, but markets became more cautious as concerns surrounding the fragile U.S.-Iran ceasefire resurfaced and interest rates moved higher. US and international stocks finished July with mixed results, and bonds dipped 1.3% and slightly into negative territory YTD down 0.7%. However, August has brought cooler than expected inflation reports, as well as moderating labor and economic data, which reduced Fed rate hike expectations.  Coupled with strong corporate earnings, stocks surged to new all-time highs to start the month, while bonds yields have moderated around recent highs, as energy prices remain elevated amid tenuous progress surrounding the US-Iran war resolution.

Equity Positioning

We began 2026 with valuation concerns following a strong but tumultuous 2025, which saw a v-shaped recovery from the tariff turmoil in the spring setting multiple all-time highs along the way. In mid-January, we reintroduced an Alternatives position, Franklin Systematic Style Premia ETF – FLSP,  as a risk damper with low stock correlation, and trimming from both US and international stocks. This represents about 40% of our max Alternatives allocation. Additionally, we restructured our International allocation so our Active International pairs more closely with our Passive (Index) International position by trimming Dimensional International Core Equity Market ETF – DFAI 1% and bought 1% active Avantis Emerging Markets ETF – AVEM. Developed International is about 70% of the World Ex-US Market and 30% Emerging Markets, as represented by global benchmark MSCI ACWI index in our Passive Vanguard FTSE All-World ex-US Index ETF - VEU; this accomplished about 55% of our target and we have further adjustments to make going forward. While international stocks outperformed U.S. stocks in 2025, with a healthy tailwind from a weak US dollar, U.S. stocks have largely outperformed developed international in 2026 even amid volatility. However, emerging markets have remained among the top performing asset classes ending Mid-Year 6-30-26. We rebalanced in mid-May, along with the international bond allocation changes above following strong record setting gains from the March lows, and rebalanced again at the end of June.

Bond Positioning

We have maintained a modest interest rate and inflation expectation hedge in our bond allocations since May 2025, following the tariff announcements, with an emphases on credit quality. Our 15% short-term allocation is again running above our 10% short-term Neutral Bond allocation to dampen interest rate volatility. Despite expectations of as many as two Fed rate cuts at the beginning of 2026, those expectations have shifted markedly with elevated inflation expectations surrounding the US-Iran war and high energy prices. Markets are pricing in one or more rate hikes by year end. Following the normalization of global interest rates over the past few years, international bonds once again offer meaningful diversification benefits. Mid-May, we reintroduced international bonds to our Strategic Asset Balanced accounts adding actively managed Dimensional International Core Fixed Income ETF - DFGX (+2.5%), and trimmed our U.S. core and core-plus bond positions accordingly.  This addition expands our bond exposure beyond U.S. interest rate policy and provides access to global fixed-income markets while minimizing currency risk through U.S. dollar hedging. Long term, international bonds have historically helped improve portfolio diversification by delivering comparable returns with lower overall portfolio volatility. It had been 20-years since we last had an international bond allocation and the move we made in May, was an initial modification towards our relative 20% Neutral International Bond target allocation we'll seek over the next year-plus. We trimmed across our intermediate-term bond positions to add the international bond allocation, while maintaining our short-term allocation.  We will continue to monitor developments with inflation expectations and Fed monetary policy for portfolio positioning weighing credit and interest rate risk against total return opportunities and capital preservation.

Key Portfolio Adjustments – H1 2026

• Mid-January, we reintroduced an Alternatives position in Strategic Asset Balanced adding Franklin Systematic Style Premia ETF – FLSP  (+2.4%) to reduce risk with low stock correlation, and trimming from both US stocks and international; Vanguard Morningstar Total Stock Market Index ETF- VTI (-1.5%), Vanguard Morningstar Value ETF - VTV (-0.1), Dimensional US Small Cap ETF - DFAS (-0.3%)  and Vanguard FTSE All-World ex-US Index ETF - VEU (-1.0%), Rebalanced the whole account
• Also Mid-January, we restructured our International allocation so our Active International pairs more closely with our Passive (Index) International. We trimmed Active Developed Dimensional International Core Equity Market ETF – DFAI (-1%) and bought active Avantis Emerging Markets ETF – AVEM (+1%)  
• Mid-May, we reintroduced international bonds in Strategic Asset Balanced; bought actively managed Dimensional International Core Fixed Income ETF - DFGX (+2.5%), and trimmed Capital Group Core Plus Income ETF - CGCP (-1.0%), Fidelity Total Bond ETF - FNBD (-0.5%), SPDR® Portfolio Aggregate Bond ETF - SPAB (-0.5%), and Vanguard Intermediate-Term Bond ETF - BIV (-0.5%), Rebalanced the whole account
• At the end of June, we rebalanced Strategic Asset Balanced

The Outlook – H2 2026

We remain cautiously optimistic about the second half of 2026 while recognizing that uncertainty remains elevated, mid-term elections loom in early November, and the macroeconomic environment is becoming increasingly complex. Strong corporate earnings continue to support and drive the market, while resolution to the turmoil in the Middle East remains promising. Market leadership broadened significantly in Q2, and a well-diversified portfolio remains one of the most effective ways to navigate changing market conditions and manage risk across a variety of economic and investment environments. Periods of market volatility are a normal part of investing and, for disciplined long-term investors, often create attractive opportunities.

Portfolio diversification, risk management, and a long-term focus on a balance of capital appreciation and income total return from the bond ballast continue to drive our Strategic Asset Balanced accounts for the remainder of the year and into 2027. Staying invested and disciplined remains essential to capturing long-term returns. Inflation expectations, Federal Reserve monetary policy under new Fed Chair Kevin Warsh, market valuations, economic resilience, developments with the US-Iran war, and currency movements continue to captivate the markets. 

All WAM Managed Account Objectives are driven by risk-based models with specific diversified asset allocations. Investing in Exchange Traded Funds (ETFs) have historically required whole-share purchases; using Schwab's iRebal platform to manage our portfolios, we strive to be as precise as possible to hit our target allocations; however, each account varies in size and positions may vary slightly from our model portfolios. We are excited that effective August 4, 2026, Schwab's iRebal executes fractional share purchases, which will provide more precise model portfolio allocations, less cash drag, and keep portfolios more closely aligned to our model targets and further benefit our clients.   

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