Dorato News - October 2026

Portfolio Issues - The Next Crisis

The last several years have been pretty good for the US stock market. And if you ignore the brief Covid sell-off and a few minor crises, US stocks have had a good run since mid-2009. The longer we go without a sell-off, the more forgetful investors are of what that feels like (it doesn't feel great).

Part of our job is to remind you that sell-offs happen from time to time. We can't predict them, and we think others can't either. Our main message to everyone is simply this - don't put yourself in a position where a sell-off is going to cause you a lot of pain.

So are we hinting that a big drop in stock prices is just around the corner? No, not at all. Good things are happening in the US economy. The artificial intelligence capital spending boom is acting like a massive stimulus program to the economy, and that's reflected in higher company profits. Unemployment continues to hover around all-time lows.

Of course, there are things to worry about, too: just what the impact of artificial intelligence will be on jobs, on security, and on our culture; the changing international world order; the enormous US debt and it's impact on inflation. Well, we better stop there. There's no shortage of things to be worried about.

But sell-offs happen, and it's the price of investing in stocks. The cardinal sin is to sell after stocks have dropped. So try not to put yourself in the position where you have to do that.

"For Halloween, I was going to go as a financial crisis, but my dad said that was too scary.”

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Market View - Interest Rates

We've been saying for a while that the massive US debt, and the continued deficit spending by the federal government, should eventually cause long-term interest rates to rise, as investors worry about the inflationary consequences of a spendthrift government. And finally, that seems to be happening. The 10-year US Treasury rate is now over 5%. Historically, the 5% rate is not all that high. But it hasn't been consistently this high since about 2007.

So why is this a big deal? Because you can think of interest rates as the cost of money, and money is getting more expensive. That's a problem for companies that need to borrow. It's a problem for those who took out low-rate loans and now need to re-finance. And it's a problem for new projects and investments that might have made sense in a lower-interest rate environment, but don't make sense now.

With all things economic, there's a good side and a bad side. The bad side is for borrowers, as we've described. The good side is for savers and lenders. They can now make a better return on their money than they've been able to for the last two decades. With this background, the Federal Reserve is raising the short-term interest rate in an attempt to force inflation lower. That job is hard when the US is running 6% budget deficits.

What everyone might like to know, because it affects predictions about the future, is whether interest rates will continue to rise. The answer depends on whether the federal government decides to rein in spending, how aggressively the Federal Reserve raises short-term rates, and on whether technology such as artificial intelligence improves productivity, so that the economy can grow faster without causing inflation. We think it's unlikely that the federal government, and the electorate, will pay much attention to debt and the deficits until they're forced to, until there's some sort of crisis, and that inflation will continue to hover above the Federal Reserve's target of 2%. So we expect long-term interest rates to drift upward.

In that environment, stocks can do OK. Not great, but OK. Companies that borrow a lot will be worse off. Companies with low borrowing needs, and companies that lend will do a bit better.

The US stock market has provided a 15% annual return to investors since 2009. Admittedly, 2009 was a low point for stock values. But the long-term average return for US stocks is about 10%, and it's probably wishful thinking to hope that stocks will continue to return 15% per year.

With rising rates, the typical bond does not do well - it's value falls. But inflation-protected bonds, which get an inflation adjustment, will hold their value.

You will never hear us advocate for gold or Bitcoin in your portfolio. The price of Bitcoin may be uncorrelated with the prices of other asset classes but so what? So is the price of used sofas, and we don't want to own those either. Gold may have more of a theoretical basis for investment, but we'd rather own well-run companies that sell products people want to buy.

We do expect prices to fluctuate more than normal, due to the ease of trading, a gambling mentality that pervades the markets, and a wide range of possible outcomes over the next several years. Investors who are able to ride out this volatility will be the ones who maintain and build their wealth.

Sources: Economist, Wall Street Journal, Value Line, Vanguard, Applied Finance Group, Schwab