September 20, 2026 | Building Lasting Wealth Through Principled Investing
Dear Valued Reader,
Something remarkable happened this week. After months of "higher for longer" rhetoric, the Fed did what it said it would—raised rates for the first time in three years. Meanwhile, in New York, President Trump is meeting with President Xi, and has signaled he's "probably" open to meeting Iran's President Pezeshkian.
Markets barely flinched. The S&P 500 ended Friday at 7,668, up 0.22% on the day. The Nasdaq gained 0.72% for the week. The feared volatility around the Fed's decision? It didn't materialize. The diplomatic overtures that could reshape the energy situation? Markets are watching, but not yet repricing.
This week's newsletter explores what I'm calling the "diplomacy discount"—the gap between what markets are pricing (extended conflict, persistent inflation) and what might unfold (negotiated resolutions, faster normalization). It's not a prediction that peace will break out. It's an observation that markets have become very good at pricing disaster, and perhaps less adept at pricing its opposite.
When everyone is positioned for the worst case, the best case becomes the opportunity.
The week brought the Fed's first rate hike since 2023, diplomatic developments that could reshape the global energy picture, and a market that absorbed it all with surprising calm.
The Fed's 25 basis point hike was the first increase in three years—a symbolic moment marking the end of the easing cycle that began in late 2023. Chair Warsh emphasized data-dependence, leaving the door open for future moves while acknowledging the "uncertainty inherent in supply-side factors."
President Trump is meeting with President Xi this week at the UN General Assembly. Discussions are expected to cover trade, AI cooperation, and Middle East disruptions. Separately, Trump indicated he would "probably" be open to meeting Iranian President Pezeshkian on the sidelines. If an Iran dialogue opens, it could reshape the energy picture faster than markets currently expect.
The contrast with last week is striking. Seven days ago, markets were pricing in extended energy disruption and a Fed determined to fight supply-driven inflation with demand-side tools. This week, the Fed acted—but with language that acknowledged its limitations. And diplomatic channels that seemed closed are showing signs of opening.
The question isn't whether conflict will resolve. It's whether markets are prepared for the possibility that it might.
Last week we explored supply-side inflation and why the Fed's toolkit is poorly suited to address it. This week, I want to examine something markets struggle with even more: pricing diplomatic uncertainty.
Geopolitical negotiations are inherently binary until they're not. Talks are either happening or they aren't. A deal is either reached or it isn't. Markets hate this kind of uncertainty because it defies the smooth probability distributions that underpin most pricing models.
Financial markets tend to process diplomatic developments in three distinct phases, each with different implications for positioning:
Phase 1: Conflict Pricing. When tensions emerge, markets rapidly discount worst-case scenarios. We saw this with Iran earlier this year—oil spiked, defense stocks rallied, and risk assets sold off. This phase is typically fast and dramatic.
Phase 2: Negotiation Premium. This is where we are now. Talks may or may not happen. Signals are mixed. Markets don't know how to weight competing possibilities, so they remain anchored to conflict pricing while hedging with optionality. Volatility tends to be elevated but directionless.
Phase 3: Resolution Repricing. When a deal is reached—or definitively fails—markets move rapidly to price the new reality. Positions that were hedging conflict unwind. Sectors that benefited from uncertainty give back gains. This phase can be even faster than Phase 1.
The asymmetry is in the transition from Phase 2 to Phase 3. Markets are very good at pricing conflict (Phase 1). They're reasonably good at maintaining uncertainty premiums (Phase 2). But they're often slow to anticipate resolution.
Why? Three reasons:
1. Recency bias. After months of conflict headlines, it's psychologically difficult to envision a different state. The brain defaults to extrapolating recent experience forward.
2. Asymmetric risk for professionals. Fund managers face career risk from being wrong about resolution. If you're positioned for peace and conflict escalates, you look foolish. If you're positioned for conflict and peace breaks out, you merely underperform—a more forgivable sin.
3. Headline-driven positioning. Most market participants react to news rather than anticipate it. By the time "talks are progressing" becomes a headline, the easy money has been made.
Consider how markets have handled past diplomatic resolutions:
Iran Nuclear Deal (2015): Oil dropped 10% in the weeks following the JCPOA announcement. Energy stocks that had rallied on conflict premiums gave back gains rapidly. The repricing was faster than most anticipated.
US-China Phase One (2020): Markets rallied into the signing, then continued higher as the "resolution premium" replaced the "trade war discount." The S&P gained 29% in 2019 partly on trade optimism.
Ukraine Grain Deal (2022): Agricultural commodities dropped sharply when the Black Sea grain corridor opened. The conflict continued, but the specific supply constraint was addressed.
The pattern: markets overshoot on conflict pricing, maintain elevated premiums during uncertainty, then rapidly reprice when resolution arrives—often faster than fundamentals would suggest.
Several signals would indicate we're moving from Phase 2 toward Phase 3:
Markets are excellent at pricing visible risks and poor at pricing invisible resolutions. The premium for conflict is always priced; the possibility of peace rarely is. When diplomatic channels open after extended closure, the repricing of resolution happens faster than most participants expect. Position sizing should reflect the asymmetry: the downside of missing a continued conflict rally is gradual underperformance; the downside of missing a resolution rally is rapid underperformance. In Phase 2 uncertainty, diversification beats conviction.
The consensus narrative goes like this: inflation remains above target at 3.4%, the Fed is committed to 2%, therefore rates must rise until demand is crushed sufficiently to close the gap.
But what if that narrative is already obsolete?
Last week we explored why supply-driven inflation differs from demand-driven inflation. The Fed's rate hikes can cool an overheating economy; they cannot produce oil or reopen shipping lanes. If the inflation we're experiencing is primarily supply-constrained, the Fed's tightening may be addressing a problem that doesn't exist while ignoring one it can't solve.
Here's the contrarian scenario:
1. Diplomacy progresses faster than expected. If Trump's overtures to Iran lead to even preliminary talks, energy markets will reprice rapidly. Oil below $90 would mechanically reduce headline inflation.
2. Core inflation continues moderating. Stripping out energy, underlying inflation trends have been improving. If energy normalizes, the Fed may find itself with rates too high for the actual inflationary environment.
3. The labor market cracks first. At 4.1%, unemployment remains low—but the Fed's models have historically lagged reality. By the time unemployment starts rising meaningfully, it's often too late to prevent a hard landing.
Five developments worth tracking this week:
We've been living in "conflict mode" for most of 2026. Iran tensions, Strait of Hormuz closures, energy spikes, Fed uncertainty—it's been a steady drumbeat of risks that demanded our attention.
In these environments, the temptation is to match your portfolio to the news cycle. Oil is spiking, so you buy energy. Yields are rising, so you sell duration. Each headline triggers a corresponding trade, and before long you're not investing—you're reacting.
The challenge with reactive investing is that it systematically buys what's already happened and sells what's already priced. By the time you've rotated into energy, the conflict premium is baked in. By the time you've sold your bonds, the yield move has occurred. You're always one step behind the information you think you're acting on.
What's the alternative?
It's not to ignore the news. It's not to pretend geopolitics doesn't matter. It's to recognize that markets are forward-looking, and the job of an investor is to think about what happens next—not what's happening now.
Right now, everyone is positioned for extended conflict. Energy is overweight. Duration is underweight. The Iran thesis is consensus. The Fed's hawkishness is priced in.
What's not priced in is resolution. What's not priced in is normalization. What's not priced in is the possibility that the world six months from now looks meaningfully different from the world today.
I'm not predicting peace. I'm not calling a top in energy. I'm observing that when positioning becomes uniform, the contrarian outcome becomes asymmetric. Not because it's more likely—but because it's less prepared for.
The best investors I know have a habit I find instructive: they always ask what would have to be true for the opposite of consensus to play out. Not because they're contrarians for contrarianism's sake, but because the exercise forces them to think about scenarios the market isn't pricing.
If Iran talks progress, what happens to your portfolio? If oil drops to $80, are you prepared? If the Fed pauses after this hike, how are you positioned?
The answers don't need to drive aggressive repositioning. But they should inform your sizing, your diversification, and your readiness to act when circumstances change.
Conflict is dramatic. Resolution is gradual, then sudden. The time to prepare for normalization is when everyone is still preparing for crisis.
Understanding how herding behavior drives markets is essential for thinking independently. Part 2 of our new series, "Herding — When Independence Dies," explores the three mechanisms that cause crowds to move together: informational herding, reputational herding, and payoff herding.
From the restaurant line paradox to the GameStop herd-vs-herd collision, we examine why rational individual behavior creates irrational collective outcomes—and how to protect yourself from being swept along.
The week ahead brings continued diplomatic developments at the UN General Assembly, follow-on reaction to the Fed's rate decision, and potentially market-moving headlines from the Trump-Xi summit. Stay focused on what could change rather than what has happened.
In markets, as in life, the future rarely looks exactly like the past. The investors who prosper are those who hold their convictions loosely while maintaining their principles firmly. Be prepared for the world to surprise you—in both directions.
Stay invested. Stay diversified. Stay thoughtful.
Warm regards,
Nick Travaglini
The Gilded Pilgrim
Disclaimer: This newsletter is for educational and informational purposes only. It does not constitute investment advice, and you should not rely on it to make investment decisions. Past performance does not guarantee future results. Always consult with a qualified financial professional before making investment decisions. Your individual circumstances may vary.
Securities offered through Osaic Wealth, Inc., member FINRA/SIPC. Investment advisory services offered through American Wealth Strategies Group, LLC, a registered investment advisor. The Gilded Pilgrim and American Wealth Strategies Group, LLC are not affiliated with Osaic Wealth, Inc.
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