Good morning,
Hopefully you had a nice Labor Day weekend as we said goodbye to summer ’26.
Equity markets had a solid run this summer, driven by booming corporate profits and continued strength in technology. Perhaps just as important, the march higher in stock prices seemed largely impervious to rising yields and the extended conflict with Iran.
As pleasant as summer was for investors, autumn may prove much choppier. September is historically the worst month of the year for stocks, but seasonality isn’t the only concern. Following last week’s labor report, which came in roughly 3x stronger than expectations, and another jump in fuel prices, the looming threat of an interest-rate increase from the Fed has become the market’s chief concern.
Autumn’s unofficial start this morning isn’t particularly inspiring, with futures down about .20% as yields move higher and energy prices remain relatively flat. The main events on investors’ minds this week are PPI Thursday and CPI Friday – key inflation reports that may cement the case for, or against, a Fed rate hike eight days from now at the September 16 FOMC meeting. Futures markets currently put the odds of a hike at roughly 60%.
A surprise in either direction at the end of the week could provide a flash of volatility, although I suspect the more dramatic reaction would occur in yields rather than stock prices.
The major market indices remain only about 1% below the fresh highs established in August. The prevailing narrative seems to be that investors are bracing for a pullback, primarily because of inflation concerns. That makes sense. Yields are rising, raising the question of when higher rates finally begin to bite into equity valuations. Meanwhile, there appears to be no end to the unrest in the Middle East or the pressure it is putting on energy prices.
However, that is not the message coming from the market itself.
The tape has barely wavered and has remained remarkably resilient throughout the summer. At the same time, investor sentiment has backed well off its optimistic summer levels and is now borderline pessimistic as fall arrives. Markets that refuse to decline despite a growing list of reasons why they should deserve our attention.
Color us cautious. If the Fed does tighten next week, it adds a powerful signal to the market calculus: “Don’t Fight the Fed.” Until then, however, the market itself continues to suggest more resilience than the headlines might imply.
Be well,
Mike