View the video of this post here.
This week’s post is sponsored by YCharts.
Advisors have a lot on their plate: client meetings, portfolio construction, investment research, and keeping up with an endless stream of market developments.
All of that takes time away from the part of the job that matters most: working with clients and building relationships. YCharts’ new AI agent, Y is built to help give some of that time back.
From analyzing portfolios and comparing investments to preparing client materials and generating market commentary, Y can help turn hours of work into minutes.
Learn more and get 20% off your initial YCharts Professional subscription (new customers only).
Rate Hikes, Recessions, and the Biggest Risk
1) Rate Hikes
The message from the market is getting louder:
The Fed needs to hike rates to fight inflation, and that likely starts next week.
The odds of a rate hike at the September 16 FOMC meeting jumped to 85% after the CPI report, up from 60% a week ago.
What did that report show?
Something every American already knows: inflation has been too high for too long, averaging over 4% per year in the last 5 years.
The 3.4% inflation reading in August was the 66th consecutive month above the Fed’s 2% target.
And with gas prices rising to $4.30 per gallon, 35% higher than a year ago, September will mark the 67th consecutive month.
The 2-Year Treasury Rate of 4.56% is now 93 bps higher than the Fed Funds Rate (3.63%). That’s the widest spread since November 2022. The Fed was behind the curve back then (“inflation is transitory”) and is behind the curve again today. Which means that we’ll likely see more than one rate hike in the coming months, and perhaps even before year end.
2) Recessions
The U.S. economic expansion that began in 2020 is now over six years old. And if we exclude the covid recession which was atypical in that workers who lost their jobs did not experience the usual hardships of unemployment (as many received greater compensation than when they were employed), this is by far the longest period of prosperity in U.S. history (17+ years). There hasn’t been a real downturn and credit default cycle since the global financial crisis and recession that ended in the middle of 2009.
The fears in 2025 over a recession and weakening labor market have completely receded, with the Unemployment Rate moving down to 4.1% from a high of 4.5% last November.
The job losses of late 2025 and early 2026 have reversed course and over the last six months 107,000 jobs per month were created. That’s the strongest job growth on a rolling 6-month basis since the middle of 2024.
While the monthly payroll numbers should always be taken with a grain of salt due to their tendency for massive revisions, this much is undeniable: rarely in history have we seen unemployment this low for this long. With 60 months of unemployment below 5%, this is now the 2nd longest streak in history, trailing only the 64-month streak that began in the mid-1960s.
While higher interest rates and higher inflation could certainly impede growth, a recession is not guaranteed. We saw this most recently in 2022. While the stock market did suffer a bear market that year (peak-to-trough decline of -27.5% in the S&P 500), 525 bps of Fed rate hikes and 9% inflation (highest in 40 years) were not enough to end the expansion.
3) The Biggest Risk?
The last decade has been a great one for U.S. equity investors, with the S&P 500 advancing 315%. That’s over 15% per year, well above the long-term historical average of 10%.
When times are good, it’s important for investors to consider what risks may lie ahead.
Here are three I’m thinking about:
a) Elevated Valuations
The S&P 500 ended August with a CAPE Ratio of 41. That’s in the 99th percentile of historical readings and the highest we’ve seen since 2000.
While valuations haven’t mattered very much in recent years, that doesn’t mean they will never matter.
b) A Prolonged War in Iran
When the Iran War first began, it was not expected to last more than a few weeks. We are now more than six months into the war with some warning that it could last through the remainder of Trump’s presidency.
While we have zero clarity on when it will end, this much is known:
Food and energy prices are exploding higher.
And the longer the Iran War drags on, the more these price increases will ripple through the economy and the harder inflation will be to contain.
c) An AI Capex Slowdown or Bust
The AI investment boom won’t last forever. We know this to be true but when you’re in the midst of a mania, it’s hard to imagine anything but continued growth.
With equity and credit markets increasingly dependent on this cycle continuing, any signs of a potential slowdown will be a problem.
And that’s it for this week. Thanks for reading!
Every week I do a video breaking down the most important charts and themes in markets and investing. Subscribe to our YouTube channel HERE for the latest content.
Disclaimer: All information provided is for educational purposes only and does not constitute investment, legal or tax advice, or an offer to buy or sell any security. Read our full disclosures here.
