By Logan Gilland, CFP®
“The battle is won in the trenches” is something you’ll hear from just about every old-school football coach this fall. While the touchdowns and highlight plays get all the attention, games are often decided by the blocking and tackling happening behind the scenes. Markets can work the same way. Over the last several weeks, earnings season has been the star of the show, with many companies delivering strong results. But now that earnings are largely behind us, investor attention has shifted back to the trenches, and in this case, that means interest rates. So if you looked at your portfolio early in the week and felt a little uneasy, you’re not imagining things. If you looked at it on Friday, you might think it was a snooze fest of a week. Let’s walk through what’s been causing the market’s back-and-forth swings.
We’re in a bit of a news vacuum right now. Earnings season has largely wrapped up, so we’re not getting that steady drumbeat of company results, and we’re about two weeks out from the next Fed meeting, which leaves investors with fewer fresh data points and more time to sit and worry. Into that quiet stepped Fed Chair Kevin Warsh, whose hawkish tone at Jackson Hole last Friday made clear the Fed intends to keep fighting inflation even if it means holding rates higher for longer. Right on top of that, the conflict with Iran escalated again.
U.S. forces struck Iranian targets near the Strait of Hormuz, and oil jumped above $90 a barrel. What followed says a lot about where investor concern actually sits right now. The ten year Treasury yield climbed to its highest level in about a year and a half, driven not just by inflation fears but by a growing unease about the sheer amount of government spending and debt the U.S. needs to finance.
Here’s the chain reaction, and it’s the same mechanism I walked through a few weeks ago in “Understanding Interest Rates.” Higher oil prices raise the cost of nearly everything, from shipping to manufacturing to your gas tank. That raises inflation expectations. At the same time, investors are increasingly wary of how much debt the government is issuing to fund its spending, and a jumpier, less certain world makes them demand more compensation to hold that debt. So yields rise on two fronts at once. Layer Warsh’s hawkish comments on top, and the market’s now pricing in close to a sixty percent chance the Fed raises rates again in September, up sharply from just a week ago. That pushes yields higher still.
Rising yields don’t stay contained to the Treasury market. When the government has to pay more to borrow, corporations do too, since Treasury yields are the baseline every other borrowing cost is built on. That means higher costs for companies carrying debt, tighter margins, and more caution about expansion. It also makes future earnings worth less in today’s dollars, which is one of the simplest explanations for why stocks often wobble when yields climb quickly. Geopolitics raised oil, oil raised inflation fear and debt concerns, and higher yields raised the cost of doing business everywhere else. With little else in the headlines to compete for attention, that story has had the market’s full focus this week.
So why the sudden flip in the later half of the week? After what seemed like a small relief rally on Wednesday. The market rallied strongly on Thursday on the backs of a Federal Reserve Governor Christopher Waller saying he would be inclined to support keeping rates where they are at the next Fed meeting in a couple of weeks. Waller did mention he will be watching the August data closely before making a decision on interest rates which will keep the market focused on upcoming data points, but after nothing but “rates are going higher” news over the last several days the market welcomed these comments and interest rates retreated while stocks rallied.
There are several crosscurrents in this economy right now, and we’re watching them closely. Earnings from companies like Nvidia last week and several software companies this week have been strong, but the market’s primary focus remains on interest rates. That means developments in Iran, inflation reports, and jobs data will all be under the microscope in the weeks ahead. While volatility can be uncomfortable, it’s important not to lose sight of what’s happening beneath the headlines. Many companies continue to execute at a high level, and Nvidia last week remains one of the clearest examples. At the same time, uncertainty surrounding inflation, interest rates, and the Middle East is likely to keep markets on edge for a while.
For now, we believe the prudent approach is to stay disciplined and avoid getting caught up in every market swing. If volatility creates opportunities, we’ll be ready to take advantage of them. In the meantime we will keep an eye on the star players but watch the trenches closely.
As always, if any of this has you wanting to talk through your specific plan, my door is always open.
Talk again soon,
Logan
Logan Gilland, CFP®, is Director of Wealth Management at Bluespring Wealth’s Lexington office, where he helps clients turn financial goals into practical plans. He also shares straightforward financial guidance through the DIY Money podcast, Savings & Sense radio show, and his weekly newsletter, Logan’s Lens. Outside the office, Logan and his wife, Hannah, enjoy hosting friends and planning their next national park trip.
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