September has arrived and August gave us plenty to think about.
Stocks had another strong month, even though the economic picture underneath the market wasn’t nearly as straightforward. Inflation remains higher than the Federal Reserve would like, interest rates and bond yields remain elevated, and geopolitical tensions pushed oil prices sharply higher. At the same time, consumers appear to be getting more cautious, the housing market continues to feel the effects of higher rates, and hiring has slowed considerably.
In other words, the market has remained strong, but there are enough mixed signals underneath the surface that I think it’s important to stay attentive rather than complacent.
Where the Markets Finished
U.S. stocks hovered near record highs in August. Technology and AI-related companies continued to provide much of the momentum. Nvidia’s strong earnings late in the month also helped reassure investors that spending on artificial intelligence and the infrastructure needed to support it isn’t slowing down yet.
- The S&P 500 rose 2.62%.
- The Nasdaq 100 surged 4.18%.
- The Dow Jones Industrial Average edged up 1.34%.
What I’m Watching
The job market is clearly cooling. July hiring fell well short of expectations, and prior months were revised lower still, a further sign of the labor market’s weakness. Yet the unemployment rate actually ticked down to 4.1%, partly because fewer people were out looking for work, while layoffs stayed rare. I think the easiest way to describe the labor market right now is”low hire, low fire.” Companies aren’t hiring aggressively, but they aren’t laying people off aggressively either.
Consumers are becoming more selective. Retail sales data released in August showed a 0.6% dip in July, the sharpest monthly drop in over a year. Major retailers including Walmart and Home Depot described shoppers as increasingly cautious. For investors, employment trends, real wage growth, and holiday-season sales guidance are now the key gauges of consumer health to watch.
Housing continues to feel the effects of higher interest rates. Elevated mortgage rates kept weighing on the housing market through August, with new construction and sales sliding to some of their softest levels in years and prices continuing to drift lower. A modest uptick in building permits offered a rare bright spot, but rates stayed high enough to restrain broader activity. Of all the major sectors, housing most clearly shows how today’s rate environment is affecting everyday financial decisions—not just Wall Street.
Inflation is still the Fed’s biggest challenge. The Fed’s preferred inflation gauge showed little improvement, keeping a rate hike on the table even as the labor market slows and the war with Iran continues to factor heavily into the inflation conversation. Several officials already favored raising rates, and Fed Chair Kevin Warsh’s late-month remarks made clear that inflation, not growth, remains the priority. Markets took the hint, nudging up the odds of a September move.
So, What Does This Mean for Us?
This is the part I think matters most.
I’m also paying close attention to what’s happening underneath the headline numbers and still following the trends. We have a market near record highs at the same time that hiring is slowing, consumers are becoming more cautious, borrowing costs remain high and inflation is still creating challenges for the Fed. That doesn’t mean a long term downturn is inevitable, but it does mean I don’t think this is a time to become complacent.
Looking Ahead
September’s jobs and inflation data should show how the economy has continued to develop as the third quarter starts to wrap up. The bigger risk of contraction may be borrowing costs, which could squeeze housing and pressure growth-stock valuations.
AI bellwether Nvidia confirmed that infrastructure spending remains robust, but I’m also continuing to watch whether the strength we’ve seen from AI expands beyond a handful of large technology companies. If spending begins benefiting software, industrial companies, utilities, networking and power infrastructure more broadly, that could create opportunities in other areas of the market.
You’ll notice that I continue to talk about diversification and risk management quite a bit. There are times when being more aggressive makes sense, and there are times when adding protection or stability to a portfolio makes sense. Higher bond yields give us more options on the defensive side, while strategies designed to provide some downside protection can also play a role. My job is to continually evaluate that balance as conditions change rather than simply reacting after the market has already moved.
Cindy Foy Hunter, President, Foy Financial Services, Inc.