Weekly Newsletter: August 31, 2026
The annual Kansas City Fed confab in Jackson Hole, WY, at the foot of the Tetons elicited plenty of discussion of hikes, some interest rates, and some wandering around just outside of Yellowstone. The focus was on what Fed Chair Warsh would say about interest rates, inflation, and the likelihood of a rate increase. To this point, he has been consistently pointing out that inflation is still too high and needs to be a focus of the Fed. The financial markets have not taken those comments very seriously. He is a Trump appointee, and the expectations are that rate cuts would be coming soon. The economic conditions just do not warrant easier monetary policy. While the rain poured down, eliminating the possibility of an outdoor hike, the rhetoric inside led market participants to believe a rate increase would be coming in September. The CME Fed watch tool went from roughly a 30% chance of a rate increase to over 50% by Friday’s market close. Chair Warsh was the end of a long, slow hike through the weekly data. The peak was the earnings release from Nvidia. It reported sales growth of over 70%, on top of 50% last quarter, and figured it could be higher if not for a chip shortage. For one day, the technology sector led the averages higher, but failed to bring along the rest of the market as more stocks fell than rose the day following the earnings release. One last chance to rest up before the sprint to year-end that begins following the Labor Day holiday.
There was little economic data to grab onto last week, so the void was filled with earnings from Nvidia and Chair Warsh’s speech. The revised GDP figures were released this past week, without much fanfare. The revisions were slightly better, but in line with estimates. However, the big piece within the report was corporate profits, which rose over 9%. What makes the past year’s profit growth of over 20% remarkable is that it is happening during a period of growth, not coming out of a recession, when profit growth would normally jump. The increases were due in large part to the rapid growth in the technology sector and better profits from energy on the back of higher prices. International trade, tariffs and refunds of (some) of those tariffs can swing GDP around. Net exports were down in the past quarter by 1%, but were higher last summer by over 1.5%. Those can make GDP look better/worse depending on the sign in front of the export figure. Also buried in the data are personal incomes and spending. Both were above expectations, indicating the consumer is still willing and has the capacity to keep spending. This week, ahead of Labor Day, will be the Labor (employment) report, which should provide little angst going into a long weekend.
For the first time in decades, the focus of investors is becoming increasingly focused on US debt. Highlighted by the attempt to push down long-term rates by the Treasury, culminating with the Warsh talk that fueled expectations for a rate increase in September. The turbulence in the Treasury market saw investors run into corporate and high-yield bonds, pushing their yields ever closer to those available on a government bond. Those very narrow spreads provide little cushion in the case of “disaster” when spreads widen dramatically. Commodity prices in general remain elevated and may not provide much relief to the inflation picture when consumer and producer prices are released mid-month.
There are plenty of stories about statisticians, but the one that seems most pertinent to the markets is a man drowning while crossing a stream with an average depth of six inches. Focusing on “the averages” in the market can lead investors astray. The past three months have seen over 50 days where more stocks rose/fell while the “averages” fell/rose. Since the SP500 is dominated by a few very large companies, their movement can mask what the rest of the markets look like. The market “averages” rose on Thursday, following the earnings report from Nvidia. The tech sector was the only one of 10 sectors to rise on the day, but it was enough to have the SP500 rise. Again, more stocks were down than up, but the evening news said the market “had a good day”. It can be argued that the SP500 no longer represents “the” financial markets but is a better proxy for the tech sector. That may be true, but plenty of money continues to pour into funds that replicate the SP500, creating a virtuous investment circle. The averages are anything but.
The focus for the week will be the employment report on Friday. Once released, Wall Street will be a ghost town as everyone will be looking to get in the last bit of summer sun.
The opinions expressed in the Investment Newsletter are those of the author and are based upon information that is believed to be accurate and reliable but are opinions and do not constitute a guarantee of present or future financial market conditions.