Market Update: September 2026

 Economic & Policy Highlights 

Interest Rates & Fed Outlook 

·         Canadian and Mexican Central Bank kept rates unchanged  

·         The Bank of Japan raised rates by 0.25% to 1.25% and indicated an openness to further hikes

·         The Bank of England kept rates unchanged but said it will hike if the war persists

·         The European Central Bank raised rates 0.25% and raised their inflation outlook

·         The US Federal Reserve raised rates 0.25%, the first hike since 2023, despite 5 ½ years of inflation above their 2% target

Employment & Growth 

·         AI capital spending to hit 2.5% of US GDP

·         The price of new single-family homes fell 9.1% (month over month) as builders purged unsold inventory

·         US employment remained stable

·         More states and counties placed moratoriums on data center construction

·         China introduced mortgage subsidies for low priced homes as they try to arrest a 5-year contraction in real estate

·         All of China’s economic growth came from exports, as the domestic economy stagnated

Consumer spending & sentiment 

·        30-year mortgage rates hit 7.3%, near a 3-year high

·        Consumer sentiment fell again but high-income consumers continued to spend

·        Delinquency rates on commercial office debt and sub-prime auto debt hit highs, worse than 2008

Trade

·        The EU asked Canada to become its first associate member

Geopolitical Volatility & Energy 

·         Concerns about a renewed Eurozone debt crisis emerged as French fiscal worries grew

·         The price of oil rose 5.4% as the Houthis disabled a Saudi pipeline to Yanbu and took greater control of territory near the Bab El-Mandeb Strait

·         The US announced another draw of 40 million barrels from the Strategic Petroleum Reserves

·         Iran resumed producing ballistic missiles according to US intel

·         Gasoline and diesel prices reached $4.40 and $6.40 per gallon, respectively, as inventories plumbed record lows

·         Gold fell 6.3% as interest rates surged globally.  Central banks continued their purchases, with China completing its 23^rd consecutive month of buying (a new record)

Summary Impact 

·         The US Federal Reserve unanimously raised the Fed Funds rate by 25 basis points.

·         The US Treasury’s plan to buy back long bonds to cap interest rates short term, failed.

·         The CEOs of America’s largest AI companies all agreed that development of AI needs to be regulated and slowed down, the White House disagreed

·         Iran and the Houthis continued to slowly escalate their attacks on shipping and energy infrastructure. 

Commentary: 

Global equities were weak across the board as the powerful combination of rising rates and rising energy prices conspired to lower stock prices.  Globally, shares lost ground across all regions (US, Int’l and Emerging Markets).  The outlier appeared to be the S&P 500 as it only showed a small decline of 0.3%.  While on the surface this result seemed to indicate US stocks were largely immune to volatile bond and energy markets, the facts tell a different story.  In September, 78% of all S&P 500 stocks declined with only a handful of large technology companies holding up the index.  In fact, only 2 sectors delivered a positive return (Technology & Communications), the other 9 sectors were all down.  On average large cap stocks fared better than small caps as the Russell 2000 fell 5.3% (we have avoided small caps all year due to rising oil prices and our expectation that interest rates would rise during the year).

“I am the house now”

-         Sept 8, 2026. Scott Bessent, US Treasury Secretary

This quote was part of the administration’s attempt to stop the rise in interest rates by jawboning the market, much like the playbook used to try and suppress oil prices. Essentially, Bessent was trying to scare traders into believing he had asymmetric information regarding currency and bond market interventions.  Unfortunately for Mr. Bessent, his threat was tested by the bond market, and he failed to stem the rise in rates.

September action in the bond market was decidedly negative on a global scale as yields rose around the world and across the interest rate curve.  These moves helped to drive the bond market volatility index to levels only witnessed during market dislocations.  US 2-year yields rose 54 basis points while 10-year yields rose 56 basis points, and 30-year yields rose 42 basis points.  On the credit side spreads widened about 50 basis points for higher quality debt but widened significantly more for junk bonds (CCC rated).  All this activity resulted in a decline of 2.6% for the US bond index.  We continue to witness an almost insatiable demand for credit led by multiple facets of AI (data centers, GPU chips, etc.), regular companies and sovereign governments.  This demand coupled with elevated inflation will keep rates high and likely pressured higher until the cost of capital becomes so high that the marginal borrower can no longer justify the interest rate.

The S&P 500 is the only market that is still choosing to believe that higher rates, dwindling energy supplies and the threat of increased AI regulation, will not impact the earnings and multiple paid for the AI trade.  We recognize that investors can and seem willing to fight the gravitational pull of these risks in the short term.  However, elevated earnings growth expectations coupled with crowded investor positioning makes for a higher risk trade that we are unwilling to chase.  Our approach has been to invest in second and third order derivatives of the AI trade where valuations permit.  Our discipline has been to harvest profits methodically and not try to time the “top”.  We believe that analysts’ earnings growth forecasts are approaching unrealistic levels putting us somewhere between greed and delusion in the AI cycle.

We would like to highlight two recent announcements by the SEC (securities and Exchange Commission).  First is the decision to allow 401K investors to access private credit and private equity type investments.  This invitation for retail investors to finally have access to these funds is like being invited to a party after midnight.  You aren’t being invited for the festivities, you are being invited to help clean up.

The second announcement came from the SEC’s Office of the Chief Accountant regarding guidance on the fair value determination of private market investments (Net Asset Value (NAV) calculation).  The last time this “critical reminder” was issued was September 30, 2008, just before the collapse of a mountain of collateralized debt that was being improperly valued led to the Global Financial Crisis (GFC).

September Returns (including dividends):

S&P 500:  -0.3%

S&P 500 Equal-Weight: -4.8% 

Dow Jones:  -4.1% 

Nasdaq: 1.9%

MSCI EAFE:  -3.1% 

MSCI Emerging Markets: -0.6% 

Bonds (US Aggregate):  -2.6%