Stock Market & Economic Commentary — August 2026

The decisions that shape a financial plan are usually made slowly, over years. The damage is almost always done quickly, and by people who were certain.

“When Genius Failed”: A book by Roger Lowenstein, American financial journalist about the collapse of Long Term Capital Management (LTCM) in 1998.

The book describes the rise and collapse of the largest hedge fund of its day. “The Gambler”, a famous song written by Don Schlitz and performed by Kenny Rogers, might have been written for markets as much as for cards.

The lesson is simple. “The Gambler” is a quiet lesson in judgement: risk is not wrong in itself but taking it without discipline is. The wisdom lies in knowing when conviction should be held, when loss should be accepted, and when the sensible course is simply to walk away. It suggests that risk should be measured so that judgement survives misfortune. LTCM forgot that and in doing so, turned genius into dependence and leverage into vulnerability.

Most of the large investment banks were so impressed by the reputations and Nobel Prizes of the LTCM partners that they relaxed normal lending disciplines, including the requirement for initial margin on derivatives exposure and full visibility of the underlying trading strategies. At its peak, the fund had gross positions of more than $100 billion and leverage of around 25 times, even before taking account of its significant derivatives exposures.

LTCM’s partners had calculated that the fund was unlikely to lose more than $35 million in any one day, but on 21 August 1998 it lost $553 million in only a few hours.

LTCM had to be rescued by a syndicate of banks, orchestrated by the US Federal Reserve, in order to prevent a potentially catastrophic systemic shock.

The LTCM episode is relevant today because each extended market cycle produces its own celebrated figures and self-reinforcing strategies. Strong short-term performance, particularly when amplified by leverage and concentration, can be mistaken for enduring skill. The failure earlier this month of Leopold Aschenbrenner’s AI-focused hedge fund is a contemporary reminder of the same pattern.

Aschenbrenner made his name on his ability to predict the future. But the trader, dubbed the “Nostradamus of AI”, would have been hard pressed to foresee how quickly his high-flying hedge fund would run into trouble.

The OpenAI alumnus, with no trading experience, had become a Wall Street sensation, racking up gains of more than 400% for his $20 billion hedge fund, Situational Awareness, in less than two years. But his debt-fuelled bets on a dazzling future for AI put Aschenbrenner on the wrong side of a brutal market sell-off in recent weeks.

A drumbeat of pressure from the fund’s bankers and efforts to sell off chunks of its portfolio rapidly culminated when Aschenbrenner was forced to accept a deal to sell much of the portfolio to a rival hedge fund. The banks had first charge on the proceeds, and the unfortunate investors ended up losing all their money.

The firm’s rapid downward spiral is a familiar tale, as Silicon Valley and Wall Street once again threw their weight behind a bright-eyed but untested investor who promised that this time would be different.

The names and circumstances differ; LTCM, Neil Woodford, Bill Hwang of Archegos Capital Management and Nick Leeson of Barings Bank among them, but the underlying lesson is consistent.

When markets rise, leverage, concentration and momentum can lend an appearance of genius. The weakness is usually hidden until liquidity tightens; correlations shift or confidence breaks. There is an old City saying, “Gear today, gone tomorrow.” It is a blunt reminder that borrowing can magnify success for a time, but it can just as readily accelerate failure when conditions turn.

Warren Buffett’s observation remains apposite: “Only when the tide goes out do you discover who’s been swimming naked.” That is why disciplined portfolio construction matters more than identifying the latest market celebrity. Investment management is not about finding the smartest person in the room. It is about building portfolios that can endure adverse conditions while still participating in long-term growth. The portfolio exists to support the plan, not the other way round.

These episodes are about more than leverage, celebrated investors, or financial accidents. They highlight a recurring truth of investment history: periods of confidence often encourage investors to underestimate risk, overestimate certainty, and place too much faith in recent success. The details change from one cycle to the next, but the underlying pattern is remarkably consistent.

Prudence, diversification, and respect for valuation rarely attract attention during speculative phases, yet they tend to prove their worth when conditions become less forgiving.

Against that backdrop, it is useful to step back from the immediate market narrative and consider some of the broader economic forces that have shaped returns over the past quarter century. Certain patterns stand out more clearly with distance than they did in real time. In thinking about that period, and about what may lie ahead, six themes seem particularly important.

1. Low growth explains more than is commonly acknowledged.

Most major economies are growing more slowly than they did 20 years ago. That matters because slower growth tends to aggravate many of the problems that dominate public debate: weak real income growth, strained public services, rising debt burdens, and a harsher political climate. Europe illustrates the point most clearly, but the underlying pattern is wider than Europe alone. Even the United States and China, for different reasons, have experienced a meaningful slowing in trend growth.

The causes are debated. Demographics plainly matter. So do weaker productivity growth, higher debt levels, policy error and a succession of shocks, including the financial crisis, the pandemic and the energy shock that followed Russia’s invasion of Ukraine. The precise mix differs by country, but the implication is broadly the same. If Western economies are to regain confidence and fiscal room for manoeuvre, they will need to rediscover a more serious commitment to growth-enhancing reform. The policy mix will not look like that of the 1980s or 1990s, but the need for a more pro-growth bias is difficult to dispute.

2. GDP per capita is usually more revealing than headline GDP.

Headline GDP can flatter. In a number of Western economies, immigration has supported aggregate growth by enlarging the labour force and the consumer base. That can be economically helpful and, in some cases, essential, but it does not automatically translate into stronger living standards. For that, GDP per capita matters more.

The distinction is important. An economy can produce a respectable headline growth rate while delivering only modest gains in output per person. Equally, countries with weaker population growth may look sluggish in aggregate terms while performing more credibly on a per-capita basis. The effect depends heavily on the composition of migration, labour-market participation, and productivity. Skilled, high-wage migration is generally more supportive of GDP per capita than migration into lower-paid or less productive sectors. When assessing economic performance, investors should therefore pay at least as much attention to GDP per capita as to headline GDP.

3. Financial risk has shifted from banks towards governments.

The post-2008 regulatory response forced banks to hold more capital, improve liquidity, and reduce leverage. The banking system is not risk-free, nor could it ever be, but large banks are materially better capitalised than they were before the global financial crisis. The more obvious balance sheet vulnerability now sits with the state.

The financial crisis, the pandemic, and the energy shock all prompted heavy public borrowing. In many advanced economies, public debt as a share of GDP is now very high by post-war standards. For a period, ultra-low interest rates disguised the problem. That phase has ended. With bond yields back at levels that would once have been regarded as normal, debt service has become more constraining; fiscal flexibility has narrowed, and sovereign bond markets matter more.

That leaves governments with less room to absorb the next shock. It also raises the possibility that future instability may come less from undercapitalised banks than from sovereign balance sheets, fiscal credibility or stress in government bond markets. Britain’s gilt episode in October 2022 offered a brief but instructive reminder.

4. Geopolitics is re-wiring the global economy.

Patterns of trade are shifting; supply chains are being redesigned, and governments are intervening more directly in areas once left largely to the market. The definition of a strategic industry has widened considerably. Semiconductors, critical minerals, energy systems, communications infrastructure and advanced manufacturing now sit close to the centre of national policy.

Technology has become a principal theatre of international rivalry. Export controls, investment screening, subsidy races, and industrial policy are no longer exceptional measures. They are becoming part of the normal operating environment. At the same time, many non-Western economies are seeking to reduce vulnerability to the dollar-based financial system and Western sanctions.

Globalisation is not ending. It is changing form. The world economy is becoming more fragmented, more politically conditioned, and, in some respects, less efficient. Investors should assume a future with more friction, more duplication, and more emphasis on resilience than on pure cost minimisation.

5. Three industrial upheavals are unfolding at once: technology, energy and defence.

It is unusual to see three large capital cycles advancing in parallel. Yet that appears to be where we are. Investment in AI infrastructure, software, and related technologies has accelerated sharply. In the United States, AI-related investment categories made a striking contribution to growth in 2025. Energy systems are also being rebuilt on a large scale, driven by security, electrification, and decarbonisation. Meanwhile, defence spending is rising again across much of the developed world.

The sums involved are substantial. The International Energy Agency estimates global energy investment at roughly $3.3 trillion in 2025, with around $2.2 trillion directed towards renewables, grids, storage, nuclear, efficiency, and electrification. In parallel, the strategic importance of defence capacity has returned with force after years of underinvestment. Taken together, these investment waves are likely to shape industrial priorities, capital allocation, and policy for years to come.

6. Low growth is not destiny.

Periods of weak growth are not unusual in economic history. Britain experienced them in the late nineteenth century and again in the 1970s. Both episodes were followed by stronger expansion, aided by new technologies and, in the latter case, by policy reform.

The pessimistic case today is familiar: that the West has exhausted the big productivity gains, and that innovation now falls short of what is needed to move the wider economy. Versions of that argument have appeared before. In the 1930s, the American economist and Harvard professor Alvin Hansen suggested that the great growth-enhancing technologies had largely run their course. The decades that followed proved otherwise.

AI may or may not fulfil the most ambitious expectations now attached to it. That remains uncertain. But it does appear to have the characteristics of a general-purpose technology: broad applicability, strong complementarity with other forms of investment and the potential to affect productivity far beyond the sector in which it originated. Many commentators believe AI offers the most credible prospect for a meaningful revival in productivity growth since the computing and communications advances of the 1980s and 1990s. That would not solve every structural problem. It would, however, materially improve the backdrop.

The View from Here.

The six themes outlined above do not offer a forecast. Rather, they provide a framework for thinking about the environment in which investors are likely to operate over the coming years.

Some developments are encouraging. Banking systems appear more resilient; technological innovation remains strong, and artificial intelligence may ultimately support a meaningful improvement in productivity. Other challenges are substantial: elevated public debt, slower trend growth, geopolitical fragmentation, and increasing fiscal pressures.

The lesson for investors is not to become either unduly optimistic or excessively pessimistic. Economic history suggests that progress is rarely linear. Periods of uncertainty and disruption often accompany periods of innovation and renewal.

What matters most is maintaining discipline. The examples discussed at the outset of this commentary, from LTCM to more recent failures, and lessons from “The Gambler”, serve as a reminder that successful investing depends less on predicting the future than on managing risk, preserving resilience and remaining focused on long-term objectives. Markets will continue to experience periods of enthusiasm and disappointment. A well-constructed portfolio should be capable of living through both. So should the plan it belongs to. That is the more useful subject for your next review: not what markets will do next, but what has changed in your own life that the plan should now reflect.

The Beatles, The Rolling Stones, and the Case for Endurance.

Continuing the musical themes of recent months, there is a deceptively simple question posed by the Canadian Indie band Metric in Gimme Sympathy: “who would you rather be, the Beatles or the Rolling Stones?”. On the surface it is a throwaway pop lyric, but it contains a serious point. The Beatles were perhaps the greater creative phenomenon, compressed into a remarkably short period of brilliance before reaching their natural end. The Stones, by contrast, have been more uneven, more weathered and less pure as a cultural force, but they have endured. In investment terms, that is not a trivial distinction. Markets tend to celebrate bursts of brilliance, yet long-term capital is usually built by resilience, adaptability and the avoidance of fatal mistakes. To shine briefly is one achievement. To remain standing after several cycles is another. Perhaps that is why the song’s final glance towards George Harrison’s Here Comes the Sun feels so apt. After the excess, the noise and the argument, the more useful lesson may be the simplest one: survive the difficult seasons, and the light has a habit of returning.

As always, we thank you for your continued support and look forward to updating you regularly throughout the rest of 2026.

Please click here to access The Clarion Investment Diary for August with full details of the Clarion Portfolio Funds including performance statistics.

Keith W Thompson

Clarion Group Chairman

August 2026

Clarion, At the heart of what matters in life.

Risk Warnings

Any investment performance figures referred to relate to past performance which is not a reliable indicator of future results and should not be the sole factor of consideration when selecting a product or strategy. The value of investments, and the income arising from them, can go down as well as up and is not guaranteed, which means that you may not get back what you invested. Unless indicated otherwise, performance figures are stated in British Pounds. Where performance figures are stated in other currencies, changes in exchange rates may also cause an investment to fluctuate in value.

The content of this article does not constitute financial advice, and you may wish to seek professional advice based on your individual circumstances before making any financial decisions.