The markets marched higher to begin the month of August, with the indices moving in concert. By the second week of trading, the indices diverged into different trading paths. Into month-end, we witnessed the S&P 500, DOW and Russell 2000 hit new highs then retreat…the Russell 2000 did a round-trip. The NASDAQ didn’t reach the high made in June but retreated less from the August move then the other indices.
S&P 500: Aug +2.62% YTD (thru 9/4) +12.28%
DOW: Aug +1.33% YTD (thru 9/4) +10.66%
NASDAQ: Aug +3.93% YTD (thru 9/4) +13.46%
Russell 2000: Aug +0.76% YTD (thru 9/4) +19.19%
Sector Performance YTD thru September 4th:
Communication Services +0.87%
Consumer Discretionary -1.81%
Consumer Staples +7.32%
Energy +41.59%
Financials +5.83%
Healthcare +10.53%
Industrials +12.76%
Technology +23.41%
Materials +14.70%
Real Estate +9.59%
Utilities +0.31%
Current U.S. Treasury Yields:
6 Month Bill 3.95%
2 Year Note 4.38%
5 Year Note 4.54%
10 Year Note 4.77%
30 Year Note 5.24%
The Economy and the Fed:
Fed Chair Kevin Warsh delivered a hawkish speech last week at Jackson Hole. Warsh opined that inflation expectations are stable but that the Fed will not assume it will persist. Warsh doesn’t believe that policy is restrictive with a fed funds rate at 3.6%. He noted that bank credit is growing at a 7%-8% annual rate. Warsh is adding more metrics/economic data to gage the economy, knowing full well it is still looking backwards to move forwards. Reviewing commodity prices, credit spreads and money supply matters. Powell’s Fed didn’t do this.
The 10-Year Treasury is the main benchmark for credit card debt, auto loans and mortgages. It hit a multiyear high last week at 4.78%. The 30-year Treasury hit it’s highest yield at 5.34% in mid-August. It has remained above 5% for the longest stretch since 2006…60 days this year. Despite Treasury Secretary Bessent’s announced buybacks, coupled with other policy changes, there is a reluctance to own long duration bonds. We may have seen the top in yields, but volatility will remain with a cloudy picture.
If inflation remains elevated and the labor market continues to be steady, the Fed will lean to raising interest rates. We will get PPI data on Thursday this week and CPI on Friday. This will help the Fed directionally. At the G20 event in Ashville, North Carolina, Bessent remarked that “the economy is strong, and importantly, we are creating private sector jobs here. Interest rates will come down when we get on the other side of this. The economy will accelerate.” We believe the Fed will leave rates unchanged at the upcoming meeting, with a continued hawkish tone.
Looking Ahead:
The Magnificent Seven, not including Tesla, have lagged the S&P 500 92% of the calendar year in 2026…and have put in their worst year since 2022. A rise in yields tends to be detrimental for equity prices. Multiple compression has been the biggest culprit. The street sees capital expenditures over the next five years to outpace what we’ve seen over the previous twenty years. It is believed that AI correlated financing may help to alleviate some capital expenditure fears.
We view that we are in a less generous stage of a bull market. The market has spent 2026 broadening out from just the Technology sector. The street believes that investors have pulled forward several years of returns during this cycle. However, there is still plenty of room for corporate profits to increase and share prices to rise without multiples expanding. Clearly, company earnings have grown into elevated P/E’s as we have seen those multiples pull in.
September, historically, is a choppy trading month. The Iran war is an overhang. The Strait of Hormuz is still problematic, contributing to heightened energy prices. Nonetheless, we remain constructive on the market into year-end. It has demonstrated a continued resilience with outstanding earnings and growth in Q2. Q3 guidance has been excellent. Some deceleration is only natural. We continue to have cash on hand to buffer volatility and to add, when appropriate, to portfolio holdings. We are staying long U.S. equities and short-term fixed income.