Market Update Q2 2026: What’s Driving Markets Now

Welcome to the Polestar Podcast. This is another episode on our quarterly market update. I'm here with Portfolio Manager Keith Allen. How are you doing today, Keith?

Hey, good, Kevin. Thanks for having me. It's always good to have you back and always good to chat about what's going on in the markets. We've got a few things as always to cover because there's never a dull moment.

So I'm just going to start with a little bit of a preamble and then we'll jump right into some questions, some Q&A with you. So coming into this year, I think a lot of people expected calmer markets, maybe some lower rates and a little more certainty. But instead of that, the headlines have felt heavier than ever with oil, inflation, war, interest rates, volatility. And for most people, it's hard to tell what actually matters versus what's just noise.

Some of that's new to this year, some of it is just sort of constant noise. But today I want to chat with you about what's really happening underneath the surface and how that impacts investors in real life and how we think about navigating environments like this. So I'd like to start, as always, with a little bit of a big picture. And if you zoom out, what do you think has actually changed in the markets in the economy over the first few months of the year and recognizing that we're now sort of halfway into Q2.

So I don't know what's changed to the end of March versus now. But yeah, let's zoom out. What's happened so far year to date? Yeah, well, I think it seems to be a common theme every time we speak, right?

Like it just seems like there's a lot of noise, a lot of clutter, and it's really kind of trying to sift through that and identify like what's real, what's not real, what's happening, what's not happening. And yeah, we're almost halfway through Q2, but I guess bigger picture, we're actually almost halfway through the year, which is hard to believe. And, you know, we're approaching June here and, you know, 2026 is almost halfway done. And, you know, the one, I guess, thematically, if we're talking about themes, I think the biggest thing is that like equity markets continue to reach all time highs.

And this is primarily led by AI, tech, semiconductors, just that real sort of strong sector that we've seen over the last, well, over many, many months now that's kind of really driven equity markets. And I'm just actually bringing up my screen now as we talk. And, you know, the TSX is almost, well, it's almost $34,500. The S&P 500 is almost $7,500.

The Dow is at close to $50,000 now. So all the sort of the major indices are, like I said, at all time highs. And I think that's really what's driven risky assets in capital markets. And it's allowed folks that have kind of stayed the course and not wanting, you know, that instinct to sell out of their portfolio.

They've benefited from that. So, yeah, I think that's, I would say that's kind of the theme of 2026. But there's also like a lot of underlying themes there, right? And I know we're going to get into it, but what's going on in the conflict in Iran, the price of oil, inflation, interest rates, the same sort of nagging questions that consistently investors want to know more about and how is this ultimately going to impact their portfolios?

Yeah, well, I think that's a question I would think to ask is what has happened that was expected versus unexpected this year. And that could be a good segue into that. But I think what I found really interesting is even just in the planning around recording this podcast, the market has moved quite substantially. You know, the end of Q1, then the war in Iran started, markets declined and have recovered.

And this is now the second year in a row, last year being the big tariff announcements, where in April there is a pretty significant decline and then almost as quickly a rebound. So it's sort of made for a lot of discussion around what's going on, but to your point ultimately is staying the course or at least having a good philosophy around your portfolio continues to matter more than almost anything else. But people are and rightfully curious about what's going on. So when people do hear about oil, supply chain, inflation the war tariffs and rates every day but most people don't really understand how those things connect so how do those macro events actually flow through into everyday life and the investor experience really good question and i think for the everyday investor and and folks that we work with on a day-in day-out basis that has kind of been the main question that we've seen in our meetings that we've had with with clients over the last well over the first five and a half months of the year, but over the last quarter for sure.

So I think the biggest thing is whenever there's geopolitical tension and these conflicts that we're seeing, and whether it's the ongoing conflict in Ukraine or what we're seeing in the Middle East, or even what happened with Venezuela earlier in the year, this will impact directly and indirectly global commerce and real assets. And we'll use what's going on in Iran, for example. So automatically, they close the Strait of Hamas and the supply of oil, which is it's a major artery to to get oil out of the Middle East and to the global economy is stopped.

So automatically the supply of oil is limited. So whenever there's this is like economics 101, limited supply price is going to go up. And the thing about the price of oil going up, because it affects so many other aspects of human life, all those prices now go up. So right.

All of a sudden, airlines are going to have to charge more because there's lack of fuel and there's not going to be as many flights that they're going to be on a day-to-day basis, right? So less flights means less revenue So they going to have to charge more because now their access to oil and jet fuel is limited Consumers driving on a day basis groceries transportation of goods anything from industrial goods to groceries to I mean you name it clothing consumer discretionary items All that transportation, getting those goods from place A to place B, that is going to take more time, more energy, more effort.

It's going to cost more because, again, there's such a heavy reliance on oil. And even though there's this push to a greener economy and really clean energy sources, oil is still a driving force of the world we live in. And I think people do realize that. So it just has that cascading effect when there is a limited supply of it and it's not reaching the destinations it's intended to reach.

in order to fuel that growth and that economy, it's not there. So naturally, everything's going to be priced higher, and that's what inflation is. All of a sudden, we see the price of a cup of coffee, the price of a pair of jeans, the price of groceries. It's just skyrocketing, and we're seeing it at the pumps too, like for your car.

If you don't drive an electric car and you're still driving a car that requires gasoline, Well, it's, I don't know, it's well over $2 a liter now. Maybe $2.12 I saw for just your regular fill-up at the gas station here right by my house. I mean, it's astronomical.

I remember not too long ago, I remember in high school actually, like when it got over a dollar a liter, it was like, oh my gosh, oils, it's over a dollar a liter now. And now we're like two and a quarter. It's mind-boggling. You're just aging yourself now.

I am aging myself. No, and those are all super important things. And it's interesting, and we'll see where this sort of unfolds. But obviously, the countermeasure to raising inflation is raising rates.

And so that raises more issues, is what happens in the rate conversation as inflation goes up. And I guess the follow-up question to a lot of this stuff is occurring very recently because of a geopolitical event. What happens if tensions in the Middle East ease tomorrow? if there was a peace treaty and all of a sudden now the Strait of Hormuz opens up and oil starts flowing, how fast can things shift back and what does that do in all the other areas?

Is there an equal trickle down occurrence, just like there was sort of a trickle up? Yeah. So anything like what we're experiencing is never instantaneous. Like I think we've actually seen it over the last kind of call it three, four weeks where like every single day there's something new, right?

Now they've got a peace treaty. Now there's a ceasefire. Now this is stopping. Now they've reopened the Strait of Hormuz.

Now it's closed again. Now there's been a missile launched at this ship, or this ship's under attack. Every single day when that sort of news is put forward to the general population, we're seeing the markets react accordingly. But that would suggest that it is instantaneous.

I don't feel it is instantaneous. I think that the cascading effect or sort of the longevity that we'll see will continue to persist here through the summer. it's really hard to say from you know it's really hard to say like okay this means that you know x is happening so this means y is going to happen in in you know capital markets and and risky assets you know i think obviously the the closer we get to an agreement or when i say we like the world gets to an agreement to what's going on the better everyone's going to be you know circling back to your point about interest rates like yeah in order to combat inflation you have to raise interest rate.

So people don't have access to easy money, right? Because then they want to get money to spend money to buy more expensive things. And it's just that sort of like rinse, wash, dry, repeat cycle where it just gets out of hand and it spirals out of hand. And we've seen it firsthand really when it gets out of hand, what happens.

So interest rates have to go up to curb the consumer's appetite to have more money and buy more expensive things. But then all of a sudden, like now you've got people defaulting on their mortgages and not being able to pay car loans off and all these other unintended effects when you raise interest rates too fast, too high, too quickly. So it's a very delicate balancing act. Should a resolution be reached here in the short term, I think we'll sort of avoid that risk of having increased interest rates.

But should this persist over six, eight weeks? Yeah, there's a real risk that interest rates will go up, whether it's 25 basis points, 50 basis points. I think they've priced in probably a small interest rate hike at some point this year. but to see something significant, yeah, it could have lasting effects that could be really detrimental to the general population for sure.

Yeah, fair. And I mean, time will tell. I think what's really interesting about this particular occurrence, what's happening is in the past, maybe let's look at COVID as an example, almost all asset classes went up universally. And so whatever you owned seemed to go up in value as long as you were an owner of something.

Right now, it feels like we're seeing sort of disparity in assets. There are certain assets, like look at the stock market it's hitting all-time all-time highs in the face of geopolitical uncertainty but there are other asset classes that are declining in value so it's not a universal truth that things are going up and i want to bring that back to the point that we're always telling people with a well-managed portfolio don't time the market it's time in the market with that said who's managing the portfolio and how do you know it's being done well and that's something i want to touch on.

So when uncertainty rises and markets become volatile as they have, what actually changes inside a portfolio and what stays consistent? So what are you looking at as the portfolio manager as I am talking to clients about staying the course? Yeah, so really good question. So I think the biggest thing that like, especially in times like this, in the times of uncertainty, in times of higher inflation it really what it ultimately comes down to is the portfolio manager or the team of portfolio managers whoever is managing the assets to ensure that the asset mix is not only aligned with the investor expectations and their desire and appetite for risk but also with fundamentally how we see the market and like what is unfolding So it's important that, I mean, every client, every investor is going to be a little different, right?

Some clients will have more risk in their portfolio, some will have less. And that depends on numerous factors, including age, income, goals, objectives. There's a plethora of factors that determine how we build the asset mix. But fundamentally, as an organization, as a firm, we will have our structure and what we're seeing, where we see value, where we don't see value, and how we're going to sort of fundamentally structure the portfolio.

And for us right now, that sort of 60-40, 70-30 traditional portfolio that people think of when they talk about building a portfolio where it's like 70% equities, 30% bonds, or 30% bonds and cash in one sort of lump there, that's very antiquated, right? That's very archaic. And for us, and we've spoken about this before, we want to look at other areas where we can find value. So particularly assets that are positively correlated to inflation.

In other words, assets that will rise in times of higher inflation and a higher inflationary environment, we want to look at assets to hold in the portfolio that will also rise. So for us, one thing we've really touched upon, and there's actually one particular asset I want to bring to light in our conversation today, is real assets. And Harness, Purpose, we have an asset, it's the Purpose Diversified Real Asset Fund, which a lot of our clients hold. And this asset has performed extraordinarily well over the last, call it 18 months for our clients.

Because it is a fund in the sense that it trades as an ETF, but it is a fund that invests in different types of real assets that we've basically amalgamated and put into a unitized product for our clients. So they have exposure to all these real assets. So that's 70-30. No, that's not what we're looking at.

We're looking at, yeah, we're going to have some equities and we're going to tilt our equities to sectors that are performing well in a higher inflationary environment. Fixed income, with the expectation that interest rates are going to rise, fixed income is not going to perform as well, right? Because fixed income assets move inversely to interest rate expectations or interest rates. So if the expectation or the feeling is that interest rates are going to rise in the future or interest rates are rising, we will ultimately see fixed income assets fall.

So we want to look at, okay, where are other areas we can add value? So the purpose, I'll talk a little bit about the diversified real asset fund. So actually year to date, it's up 24% for our clients. That fund itself is up 24%.

And it basically maintains a real value over time or an after inflation value over time by investing in base metals, precious metals, land, infrastructure, energy, projects, highways, hospitals, things of that nature. And again, we don't actually hold those assets. It's an investment into projects with those particular assets that we've then unitized into a single product for clients. but for us, we feel like this is where we can really add value for our clients and investors alike by having exposure to those types of assets.

Yeah, I think that's a question I was going to ask or even just anecdotally, I was going to say I come across a lot of people every year who are looking for analyses of their portfolio in the context of their plan and just objectively and I notice more often than not that what you're doing, what we're doing in our portfolios is superior to what they're getting. And so some of the questions I would be inclined to ask are what is happening that's different? And that explains it right there.

There are things that you are doing within the portfolio to create value that may not be happening, again, at least anecdotally, across the board. So further to that, in sort of a conversation around opportunity and risk, and we talked about sort of the different categories and maybe this is just extrapolating, but where are you seeing the best balance between opportunity and risk across equities, fixed income, and alternatives? Yeah, so I'll get, well, okay, that's, again, another really good question.

So I'll touch on equities first. So we want to be opportunistic when we manage a portfolio. We're not day traders, right? Like, we are very much in it for the long game.

To your point earlier, it's not timing the market, but timing the market. We are very much buy and hold investors. You know, typically our turnover rate is about 20% per year. So we'll typically turn over one out of every five positions we hold.

But one area we did look to trim recently, and again, this speaks to opportunity, is when the energy market, when the price of oil got to, I think it got to over $110 a barrel or right around $110 a barrel. So we trimmed our energy exposure, our energy sector, the names we held to trim those, and we added to cash. So again, we took opportunity there to say, hey, look, the energy names are performing really well. Obviously, they do well when the price of oil goes up, especially in a very finite period of time like that.

So we trimmed that sector. We reduced our exposure to energy. We added to our cash and we're actually holding a higher than a higher cash weight than normal right now. You know, typically we're always going to hold some cash for clients, but I think right now we're a lot of clients are seeing sort of that four ish, four and a half percent waiting in cash.

We're typically will be around two, two and a half, you know, maybe even up on five on some folks. So for us, it's like, now it's like, where are we going to deploy that cash? So it's again, finding opportunity. Now, that doesn't mean we have to go out and spend it right away.

Like we can sit on the sidelines and have some dry powder available if opportunities find themselves. So that's kind of one area where we saw opportunity to take some profit for clients and take some money off the board. Fixed income, like I said, it's a little trickier environment that we're in, in a high inflation environment, potentially increasing interest rates. Fixed income, it's a fickle asset class.

I mean, you use it to hedge your portfolio. You use it as an asset class to hedge against equities and sort of be negatively correlated to traditional equities But again it really hard to find value right now in fixed income We do use some private debt and other assets to sort of round out the portfolio and give us exposure in the fixed income environment. And then on the alts, we've, like I said, we had the diversified real asset fund for clients. We've held gold and, you know, gold's still at $4,800 an ounce.

So people that have held gold have done really well. I've spoken about gold in the past. I think it's important that everyone has a little gold in their portfolio. I caution folks that want to overweight their portfolio in gold because, again, it's a non-yielding asset class.

So while it holds its value and its store of value in a high inflation environment or a higher inflationary environment, it doesn't yield anything typically. It doesn't pay cash flow. It doesn't pay a dividend. So for us, it's like, yeah, it's great to have some exposure there, but you want to be careful.

You want to be mindful of how much. And then, you know, using other, like using option writing strategies, calls and puts, and, you know, using derivative securities like that to sort of round out the portfolio to really make sure we're properly diversified. And again, where we see value or where we don't see value and making certain bets in certain areas where we think we can, you know, outperform the market for our clients on a regular basis. Amazing.

And every time we have this conversation, it just sort of continues to come to mind that there is so much information out there about what you could be invested in and how and indexes versus do-it-yourself and funds of funds. But when we really get into the weeds of portfolio management, there is conversation of what makes up pools, but also asset allocation, hedging strategies, and everything then tied to the individual. So it's oftentimes more complex than just put something into an index and see what happens.

And it makes a difference to have somebody working for you. Last question, and I think this is sort of more of a, get a feel for how people are reacting to what's going on in the world today in news. And this is sort of anecdotal as well. And I've got my own answer.

What do you think investors are most likely to get wrong in environments like this? And more of, I guess what I mean is, what is kind of like a commonly held, in all the people you're talking to, a commonly held belief about what's going on that is actually inaccurate? what I would say to that is I think investors in general I think that the old adage or the old sort of feeling is is like hey wait for the bottom to buy wait for the biggest dip when the market bottoms then it's time to get all back in and invest and it's so difficult to predict when the bottom is going to hit and everybody I talk to says oh well it's going to sell off it's going to go to hell in a handbasket, the world's coming to an end and so many people are waiting for that bottom before they get into the market or even get back into the market.

I've had clients that have sold out that now they want to get back in and they're going to wait for the bottom. Well, you can't predict the bottom. I think it's important that investors, and especially over the last few years, they've been somewhat conditioned to buy on weakness rather than the bottom. And there hasn't been that double dip that we've seen where it's like, hey, we might get a sell-off like we did in early April here.

And then there's going to be another sell-off where maybe in the past, pre-COVID, that was the case. When I look back, think back to almost 20 years ago, the financial crisis, there was like sort of multiple bottoms. But now it's almost when there's any sort of weakness or any hint of weakness in the economy or in capital markets, it's like then we'll see a rebound right away. So I would say the biggest takeaway is, again, going back to time in the market versus time timing the market, but also trying to predict that when that bottom is going to hit and when that top is.

because no one has ever, even if they've gone it right once, I always say no one's ever, no one in the history of investing has ever gone it right twice. And so I think if you see that sort of first sign of weakness, the last few years have shown us is typically we're going to see a pretty strong rebound. And that's what we've seen right here in early April, sell off. And now kind of the last four weeks, we've seen a pretty steady market where returns and indices have, you know, returns have been very impactful.

And the indices, like I said at the beginning of the podcast, the indices are at their all-time highs. So I would say that's the biggest sort of misconception or where investors maybe get it wrong. Yeah, that sounds fair. I think something that comes up often when I'm talking to people is there's a general sentiment, and not a wrong sentiment, but that there's struggle in the economy, right?

I mean, inflation is creeping up. Interest rates aren't helpful. There are probably many sectors where people are getting laid off. And so there's this general sentiment that economically the world is doing bad.

And so there's sort of shock and surprise when we look at their portfolios and they're seeing pretty incredible returns. So that's kind of something that I've found is people come into these meetings expecting to see portfolio returns as abysmal as it seems the world's doing. And that's not the case, which is great. But that's why sometimes it's really important to separate the two is how do I feel about what's going on and what's actually happening.

So we'll wrap it up there. always appreciate your time Keith it was great getting into what's going on in the world how oil or oil limitations really impacts the market and where that shows up how fast things might turn around if a geopolitical event of the war stops if oil starts flowing how that makes up the portfolio design and as always investor behavior is going to have a bigger impact over your rate of return than anything else having a good portfolio is important but making sure that you're having conversations and you're not letting emotions drive those decisions.

So that's it for this quarter. Thanks again, Keith. Look forward to chatting with you again in a few months and we'll see what the rest of 2026 has in store. Yeah.

Thank you, Kevin. Thanks for having me.