Letter to CREF Participants
3
Colbert Narcisse
Geopolitical unrest and market volatility take center
stage
Financial markets generated solid returns in the first half of 2026. Yet,
the ongoing
turmoil in the Middle East added a layer of volatility to the
market environment,
creating a tug-of-war between investor optimism and
caution. The year began with
the Trump administration locked in a dispute with
the Supreme Court over U.S.
trade tariff policy. In February, resolution came
in the form of new tariff levels
that took effect for all countries, though
limited to a 150-day window. By March,
surprise military strikes against Iran
escalated regional tensions and disrupted
shipping through the Strait of
Hormuz, causing energy prices to rise and equity
markets to fall. In April,
however, a ceasefire in the Iran conflict, combined
with strong corporate
earnings reports, bolstered investor sentiment and drew
confidence
back into the markets through the end of June.
No one can say with
certainty where markets are headed for the remainder of
2026. However, history
provides a compelling case for staying invested through
turbulent times, as
the market impacts of geopolitical unrest can often be
short-lived. We
believe a long-term investment approach — one that includes a
professionally managed portfolio diversified among stocks, bonds, and other
asset
classes — is a wise course of action across all market
environments. As always,
investors should keep in mind that past performance
does not guarantee future
results, and diversification does not guarantee
against market losses.
Overview of the markets and
economy
U.S. and international stock markets advanced during the first half of
2026,
supported by global economic growth and stable interest rates, even as
geopolitical turmoil persisted. The U.S. economy expanded at an annual rate
of
2.1% in the first quarter of 2026, driven primarily by accelerating
private domestic
investment and continued strength in consumer spending.
Economies of the
20-nation euro area and China also recorded expansion during this period. Against
this backdrop of global growth, major central banks largely held their
benchmark
rates steady for most of the six-month period. The Federal Reserve
left the federal
funds target rate unchanged at 3.50%–3.75%, and the
Bank of England kept its
benchmark rate at 3.75%. The European Central Bank,
however, raised its key
benchmark rates in June, stating that the war in the
Middle East was generating
inflationary
pressures.
Stocks and bonds posted
gains
For the six-month period, U.S. stocks, as represented by the S&P
500® Index,
gained 10.21%. International equities, as measured by the
MSCI EAFE® Index,
advanced 9.44%. The U.S. investment-grade fixed-rate
bond market, as measured
by the Bloomberg U.S. Aggregate Bond Index, returned
a modest 0.62%, as
yields rose across nearly all maturities — consistent
with the inverse relationship
between bond yields and
prices.
CREF performance
review
All CREF Accounts* posted gains for the first six months of 2026, and
most
accounts outperformed their respective benchmarks during the period. The Global
Equities Account rose 12.82%, surpassing the 11.25% return of the MSCI All
Country World Index. The Total Global Stock Account gained 12.26%, exceeding
the
11.77% return of the MSCI All Country World (ACWI) Investable Market
Index (IMI).
The passively managed S&P 500 Index Account advanced 10.11% but lagged the
10.21% return of the S&P 500 Index. The Responsible Balanced Account,
which
is a balanced portfolio with equity and fixed income components that incorporates
environmental, social and governance (ESG) and impact criteria, returned
7.74%
and outpaced the 6.36% return of its Composite benchmark but trailed the 8.32%
return of the Morningstar Moderate Target Risk Index. The Growth Account
rose
6.54% and outperformed the 5.33% return of the Russell 1000®
Growth Index.