Spotting the window of optimism, risk, and failure

Yet financial markets remain, for the most part, unfazed. Asian equities are up year-to-date, corporate earnings are still very good, and the bond market, for all the pressures, remains relatively sober. Are the markets sleepwalking into a risk-off cliff-edge? Are they over-reliant on central banks to bail them out? Or are they being sanguine about how risks might actually manifest?

We think the story of Garry Hoy might be of interest.

Garry Hoy was a 39-year-old Toronto lawyer in the early 90s with a unique party trick. When welcoming students to the firm, he would run towards the 24th floor window, throw himself on it and bounce back. The gag was intended to demonstrate the sturdiness of the window. Garry was fascinated with modern architecture. It was quirky, to be sure, but it was “Garry’s Thing”, and Garry was an otherwise brilliant lawyer. He had performed the stunt often and without incident.

Then, on the 9th of July 1993, he performed his last stunt. As he launched himself at the window, expecting it to bounce back, the frame – not the glass – gave way, and Garry plunged to his death from the 24th floor.

There are several lessons to be drawn here. We might sum these up by saying that things can often appear to fine, right up until they don’t.

The most important lesson is the effect of compounding on risk (not just return). Each time Garry crashed into the window, the frame was weakening, little by little, bit by bit.  No one would have noticed. But each time he performed his act, he was one step closer to disaster.

Risk, often in economics and financial markets, is not linear but parabolic.

Things don’t look gradually more risky. They appear benign, and then suddenly they become distressed. It is only with benefit of hindsight that underlying risks become apparent.

In the first weeks of 2026 alone we saw several incidents. None of these, on the face of it, held much significance:

• Geopolitical fractures and turbulence in the NATO alliance, which throw the military cohesiveness of the Western Hemisphere into question
• Further trade threats between G7 countries. As military bonds fracture, so do trade ones.
• Calls for swifter bank deregulation (good over the shorter term, worse over the longer term).
• Renewed pressures on the Fed and its independence.
• Questions over the accuracy of the US inflation data and data integrity in general, especially after the government shutdown.
• Renewed turbulence in the bond markets, especially after Japan’s decision to head towards a snap election.

Neither financial markets, however, nor economies are immune to persistent, escalating uncertainty. Especially not when deregulation (a short-term spur to growth but one which removes safety nets), is taking place.

Indeed, responses to our C-suite barometer suggest that economic uncertainty is the top factor holding back growth. Respondents identified this as the key risk for 2026, with AI being the biggest opportunity.

As global financial markets have been behaving relatively benignly, we assume that uncertainty and the associated risks remains manageable. Which they do, at the present time.

All is calm. No need to worry.

However, when we construct portfolios for clients, or consult with our clients, we are obliged to think of how things might play out. Statisticians (and our Chief Investment Officer Ben Seager-Scott) would say that markets now have “fatter tails”, meaning that while the base case is for manageable risk, the danger of fringe risks manifesting is increasing.

Should investors and businesses sharply reduce risk exposure, then?

Running for the hills, divesting or maintaining large amounts of cash may cost businesses significant growth opportunities, more so during a once-in-many-generations industrial revolution such as looks to be the case with AI. Similarly, investors who are too cautious risk simply losing money to inflation. If both businesses and investors are overcautious, then fear could become a self-fulfilling prophecy of lower growth, higher unemployment and sharp market downturns. As Franklin D Roosevelt famously said: “We have nothing to fear but fear itself.”

Should they ignore risks then, and hope for a better future?

“Hope is not a strategy”, our CIO Ben is fond of saying. We can’t run portfolios, and businesses can’t make decisions, based on the hope that all will be well.

Which brings us back to the tragedy of Garry Hoy. Think, for example, what would happen if the unfortunate lawyer had heard a tell-tale cracking sound as he threw himself at the window. Surely, he would have stopped doing his party trick, and in all likelihood would have never attempted such a thing again.

Mercifully, financial market risk might escalate quickly, but it is not vertical. We don’t go from calm to full crisis in a couple of days. There are some warning signs. Investors often maintain a matrix of areas in the market where stresses might have a more systemic nature. For example, we are focusing on the private credit markets, delinquencies, inflation expectations and a few key other “known unknowns”. Businesses can easily maintain such markers, including those even more relevant to their own industry.

The most important monitor, we believe, is the ability and willingness of central banks to intervene in times of stress. If central banks remain calm during risk spikes, that could be a warning sign that they might be complacent about systemic risks. If, in difficult times, they show their willingness to intervene, then investors and businesses should be more assured of their ability to absorb financial and economic shocks.

Then, markets and investors need to make generous assumptions about their “risk buckets”.  This is the amount of risk they can quantify. For investors, this means their risk boundaries. For businesses, active management of risk will identify and define the red line of risk beyond which the company will not step. There are also algorithms which can provide a more quantitative measure of how a business is likely to respond to risks.

Ultimately, how we respond to systemic risks is a matter of resilience and execution. Resilience is a state of mind, where the manager or executive refuses to let urgency, or even emergency, become haste. Decisions should be made quickly, to be sure, but with a well-considered plan and diligent execution.

Keeping the organisation’s senses tuned to the sounds and signs of impending danger, however, is the first step. Prevention is better than cure, after all.