August Market Recap
Stocks began August on a strong footing, supported by a solid earnings season, an orderly resolution to a high-profile, AI-focused hedge fund failure, and a series of Goldilocks economic reports that pointed to moderating inflation and a healthy labor market. Strong employment data and steady economic growth reinforced hopes that the economy could continue expanding without reigniting inflation pressures.
Meanwhile, the bond market continued to command investors' attention as yields across the curve and globe climbed to multi-decade highs. Rising rates reflected concerns over persistent inflation pressures, unsustainable fiscal deficits, and uncertainty surrounding the Federal Reserve's path forward. As a result, inflation-sensitive assets such as commodities, energy, and precious metals posted strong gains.
August highlighted the ongoing tug-of-war between resilient economic growth and mounting concerns about inflation, government borrowing, and higher-for-longer interest rates. While equity markets demonstrated remarkable strength, the sharp rise in bond yields could pause the growth momentum. As investors look ahead, markets will continue to balance corporate earnings, economic data, and central bank policy expectations. In this environment, maintaining a diversified portfolio and focusing on long-term objectives remains one of the most effective ways to navigate uncertainty and capitalize on emerging opportunities.
Why Should We Care About Rising Bond Yields?
One of the recurring themes in the past few years has been rising bond yields. In fact, prices of long-dated Treasury bonds have fallen as much as 10% and have lost half of their value since 2020.
Bond yields can sound like one of those financial topics that only economists care about. The truth, though, is that rising bond yields affect mortgage rates, car loans, credit cards and, for many of us, the stock market.
For instance:
- Mortgage rates are mostly based on the yield on the 10-year U.S. Treasury note and the market’s inflation expectation.
- Shorter-term debts such as auto loans and credit card rates are much more dependent on the Fed’s interest-rate policy, which affects the short-end of the yield curve.
Bond yields and stock market returns have a more “complicated” relationship.
Rising bond yields are not necessarily bad for stocks. In fact, if yields are rising because the economy is growing, jobs are plentiful, and businesses are earning more money, stocks can perform quite well, as we have experienced in the past few years.
The challenge comes when bond yields rise faster than corporate earnings. Higher yields give investors an opportunity to earn more from relatively safe investments like Treasury bonds. As bonds become more attractive, stocks must offer the potential for higher returns to justify their additional risk.
Rising yields can also increase borrowing costs for consumers and businesses, which may dampen spending, investment, and profit growth over time.
The key question isn't whether bond yields are rising. It's why they are rising.
If yields are moving higher because of healthy economic growth, stocks often have a supportive backdrop. If yields are rising because investors are worried about inflation, government borrowing, or other economic risks, stock valuations can come under pressure.
In short, bond yields matter because they are one of the important barometers of the market's expectations for growth, inflation, and future returns.
An Early Look At 2027 Tax Planning
With the tail end of summer still lingering, it may feel early—but now is a good time to start planning for 2027. Here is a shortlist of what taxpayers can expect next year.
While 2027 is still a full quarter away, a little planning now can make year-end decisions much easier. Many tax strategies take time to review and coordinate, especially when they involve retirement contributions, charitable giving, Roth conversion opportunity, or changes in income. If you would like to discuss how these updates may apply to your unique situation, please reach out to schedule a meeting.
