August 2026
Market Update
The Power of Diversification
(3 min read)
13th August 2026
In the US, the Federal Reserve is undergoing regime change with the appointment of Kevin Warsh as the new Chair. At his first news conference following the July 2026 monetary policy meeting his remarks were somewhat ambiguous as to how he intends to manage the process of implementing interest rate decisions.
There has been much criticism about how the Fed has operated over the last 30 years. Critics have objected to so called ‘forward guidance’ where the central bank articulates its view on the direction of interest rates. In addition, the same commentators have been strongly opposed to the abolition of ‘moral hazard’ where market participants believe the Fed will underwrite losing positions by easing market turmoil during dramatic downturns.
Conservative economists believe that monetary policy has been far too loose in recent decades culminating in a private sector bail out following the 2008 Great Financial Crisis and now the mountain of government debt that central banks have allowed to build because of turning on the money printing presses through quantitative easing (QE) programmes. In effect the sharp critics of monetary policy actions of the last 30 years believe that capitalism through natural economic cycles has not been allowed to function.
Meddling Fed
Current conventional thinking about Warsh’s style is concerned that the Fed will lose credibility over inflation causing the long end of the bond market to spiral out of control. Warsh wants to reduce the Fed’s balance sheet caused by excessive QE, reversing the money printing process, which will significantly tighten monetary conditions, and allow the market to establish the interest rate equilibrium and keep the markets guessing about future interest rate moves. Capitalism will decide success and failure, not an intervening Federal Reserve.
Whatever one’s opinion on the nature and implications of the changing of the guard at the US central bank, we can be sure that it increases the level of uncertainty at a macroeconomic policy level. The probable outcome is more volatility of returns between and within different asset classes.
Client portfolios: two funds compared
The charts below illustrate the possible shape of things to come. Two global equity funds, one investing in large cap technology companies and the other in medium sized value companies. In the left-hand chart, the technology companies power ahead but during the technology sell off in June and July we were very grateful to have decent exposure to ‘value’, allowing positive portfolio returns for our clients in both periods and under different scenarios.
If Warsh’s plan is to take a less ‘hand holding’ approach to running interest rate policy, more scenario analysis and consequently broad market exposure will be imperative.
Peter Geikie-Cobb | Head of Investment Research
Montgomery Associates
Chart 1
Comparison of two funds’ returns in client portfolios demonstrating the power of diversification.
Source: Montgomery Associates
Further Reading
Read our article ‘Diversification Delivers’ from November 2025 which looks at the surge in value of Magnificent Seven companies, and AI spending.
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Risk warning
This article and other articles on www.MontgomeryAssociates.co.uk does not constitute an offer or invitation in respect of investments described, nor should it be interpreted as advice or a recommendation. You should contact your financial adviser or accountant for advice relating to your circumstances. The opinions and information in this article have been prepared from sources believed to be reliable at the time and are given in good faith. The information and opinions expressed in this document represent our views at the time of preparation and may be subject to change. The value of an investment and any income from it can fall as well as rise and you may not get back the amount you originally invested.
Past performance is not a guide to future performance.
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