September Market Recap
September has historically been one of the weakest months for stocks, and at times it appeared poised to follow that script as conflict in the Middle East continued to create uncertainty. Technology stocks, however, stood out as a notable exception, helping support broader market performance. Despite ongoing geopolitical concerns, equity markets have remained resilient, suggesting investors are growing more comfortable with the current backdrop in the absence of new shocks.
The bond selloff deepened in September as global yields climbed to new multi-decade highs. Investors continued to shun long-dated bonds amid persistent inflation pressures, while the Federal Reserve delivered its first unanimous interest rate hike in three years. Higher yields reflected growing expectations that interest rates may remain elevated for longer than previously anticipated.
Commodities also posted gains during the month, led by a surge in crude oil prices that pushed diesel prices to record highs. The impact of higher energy costs could become more apparent during the holiday season, as increased spending on travel and transportation places additional pressure on consumers.
The resilience of the U.S. economy continues to underpin the market rally. Healthy consumer spending, a labor market characterized by low layoffs and moderated hiring, and generally strong corporate earnings have helped sustain investor confidence. Absent a significant new threat or source of uncertainty, markets appear capable of adapting to a higher interest rate environment, supported by continued economic strength.
The Fed At A Crossroad: Balancing Economic Strength And Price Stability
One of Wall Street's oldest sayings is, "The Fed kills a rally." While the phrase may be simplistic, it reflects a fundamental reality: the Federal Reserve is often forced to balance economic strength with price stability.
When the economy is growing, unemployment is low, and consumers are spending strongly, businesses generally prosper. Earnings improve, investor confidence rises, and stock prices often follow. But strong growth can also fuel inflation, creating pressure on the Fed to keep interest rates higher for longer, which is what we are experiencing now and is where the tension begins.
The Fed's job is not to support the stock market. Its mandate is to promote maximum employment and stable prices. If economic activity becomes too strong and inflation risks increase, policymakers may need to tighten financial conditions, even if markets would prefer lower rates.
Higher interest rates can slow borrowing, moderate spending, and put pressure on stock valuations. As a result, investors often view the Fed as a headwind to market rallies, particularly those fueled by easy money rather than strong fundamentals.
For investors, the key distinction is whether a rally is driven by improving earnings and economic productivity or by abundant liquidity and speculation. Historically, markets built on solid fundamentals have proven more resilient, while those dependent on easy financial conditions have been more vulnerable when the Fed shifts toward fighting inflation.
The Fed does not intentionally "kill" market rallies. Rather, in pursuing its mission of price stability, it can remove the conditions that helped fuel them. As the Fed stands at this crossroads, investors should remain focused on long-term fundamentals while recognizing the important role monetary policy plays in shaping market outcomes.
Midterms 2026: What A Split Congress Could Mean For Markets
Democrats are now expected to regain control of the House while Republicans could hang onto their razor-thin margin of the Senate.
Should a split Congress become a reality, we can expect to experience more gridlock and fewer sweeping legislative changes in coming years.
Potential positives:
- Lower probability of major tax increases and tax cuts
- Reduced likelihood of large new spending programs
- Greater policy stability and predictability
Potential negatives:
- More debt-ceiling and budget disputes
- Increased risk of government shutdown threats
- Slower fiscal response during an economic slowdown
If the election produces a divided Congress, investors may get a familiar mix of policy stability and political gridlock. While markets have historically been comfortable with divided government, the bigger determinant of returns is likely to remain the path of inflation, economic growth, and Federal Reserve policy rather than which party controls Congress.
