“Headlines, in a way, are what mislead you. Because bad news is always a headline and gradual improvement is not.” – Bill Gates
August was a strong month for investment returns. All of the major stock market indexes we track had what we believe is exceptional performance. The two major positive surprises were the Small Cap S&P 600, along with the Global MSCI EAFE index. At the same time, commodities boasted the best monthly gain for 2025 while the bond index continued to creep higher. The U.S. Dollar Index continued its weakening trend.
All data as of 09/02/2025, Source: Wells Fargo Investment Institute. An index is not managed and not available for direct investment. Past performance is not a guarantee of future results. [Wells Fargo Investment Institute, Inc. is a registered investment advisor and wholly-owned subsidiary of Wells Fargo Bank, N.A., a bank affiliate of Wells Fargo & Company.]
At Magellan Financial, we’re in the business of advice—and that means our conversations with clients go far beyond simple stock market commentary. From estate planning to cash flow strategy, the questions we receive encompass a wide spectrum. Questions related to the markets, however, tend to follow seasonal or cyclical patterns. But this past month stood out. We saw an unusual surge in inquiries specifically about the stock market—its volatility, valuation levels, and what it means for long-term positioning. We always welcome these discussions. We write this letter each month to share how we’re thinking about the markets—so our clients and prospective clients can stay informed, aligned, and confident in the guidance we provide.
The recent surge in questions is a reminder that even seasoned investors can feel unsettled when headlines shift quickly. Our role is to bring clarity, context, and confidence—especially when the noise gets loud. Here, we will start with a look at the current investment climate before taking a dive into our intermediate and longer-term outlook.
Momentum Feels Good, But Questions Remain
Every year we are quick to mention that August and September are the seasonally weakest months for the stock market. We also are quick to add that seasonal weakness does not mean negative returns every year. Seasonality is just one of the factors that need to be considered when analyzing the market. The robust returns last month are a prime example of why the mantra of “sell in May and go away” is more about being cautious than selling out of the equity markets for half the year.(1)
We entered August with positive momentum for the S&P 500, a bond market that continued a slow trend higher, and weakness in commodities and the U.S. Dollar. At the same time, questions continued to mount about what the Federal Reserve Bank (the Fed) would do with interest rates. Two key factors surrounding this issue – inflation remains above the Fed’s 2% target rate and weakness in the jobs data – suggest different policy paths by policymakers. Seemingly, the perfect setup for a typical August struggle for markets.
Well, surprise, surprise, surprise. August turned out to be quite the positive experience for investors. Participation occurred in most areas of the markets, including a big month from the small-cap sector.
Chart #1: www.stockcharts.com Data 01/02/2025 – 08/29/2025 as of 09/02/2025. An index is not managed and not available for direct investment. MA 13 = 13-week moving average MA 40= 40-week
Looking into September, we are positive but cautious for a number of reasons. We remain positive on the markets in the face of seasonal trends, in part, because August was so robust. In our experience, when the S&P 500 posts a positive August return and is above its 50-day and 200-day moving averages (see Chart #1), September has a better than average chance of posting gains. Maybe more importantly, we believe there is a high probability of the Fed announcing the lowering of short-term interest rates at its September 16-17 meeting. In this case, rates would be reduced to “normalize” interest rates, not as a way to deal with recession fears or financial instability. A rate cut this month would be similar to Fed action in 1995 and 2019, both of which led to further stock market gains.(2)
Our caution is focused on what is happening with tariffs and the Federal Budget. The concern around tariffs is the consistently changing narrative. As we write this on September 2, an appeals court has ruled most of the recently imposed tariffs as unconstitutional. In response, the Trump Administration has claimed the Supreme Court will reverse the ruling. If, however, the Supreme Court rules them unconstitutional, the Administration is prepared to pivot to other ways of implementing the tariffs that are currently in place. We believe this is the definition of uncertainty – and the stock market hates uncertainty.
The budget is a completely different beast. To start, there needs to be Congressional action before the start of the new fiscal year on October 1, 2025. Unlike tariffs, POTUS cannot dictate what the budget will be, but needs to sign legislation passed by Congress. Republicans have control of both the Senate and the House of Representatives, but Democratic votes will be needed to pass spending bills. Given the heightened tensions between the two political parties, we see a high probability of either a short-term spending package that kicks the can down the road, or a Government shutdown. More uncertainty.
Mega Trends Remain Strong – But How We Invest Must Adapt
Over the past five years, the stock market has moved higher on the back of a few mega trends. Digital and artificial intelligence (AI) is likely the most well-known trend positively affecting the market, but three other trends have been important for investors. The rewiring of globalization into a fragmented world, the transition to a low-carbon economy and demographic shifts are currently important, and in our opinion, will continue to be a source of positive market movement.
At the same time, the way markets work together has changed, mainly due to the ever presence to inflation.(3) According to BlackRock, a 60% stocks /40% bond portfolio (60/40) has returned approximately 8% per year for the past 10 years. At the same time, the volatility of this portfolio has increased, and the correlation of stocks to bonds has increased.(4) Put in plain terms, we believe the 60/40 asset allocation is likely to be bumpier ride moving forward for investors than it has been in the past. In our opinion, diversification is more important today than it has been for many years.
In the equity markets, the mega trends and mega-cap stocks should continue to do well – we do not believe we are not living in the reincarnation of the stock market bubble of 1999. Twenty-six years ago, the companies that led the markets to a top in March 2000 and then a three-year decline were young companies with little to no earnings. The leading companies today, on the other hand, is where you get earnings growth. We believe we are at a point where international diversification makes sense. Small-cap stocks continue to lag, but aggressive rate cuts from the Fed could lead to outperformance by this sector.
The bond market isn’t a single, unified entity—it’s a collection of distinct sectors, each with its own sensitivities to interest rate changes and should be treated as such. Treasury bonds, corporate debt, municipal bonds, and mortgage-backed securities all respond differently when the Fed adjusts rates. For example, short-term Treasuries tend to react quickly and directly to Fed policy, while long-term bonds may reflect broader economic expectations. It is not uncommon for long-term rates to move higher while the Fed is cutting short-term rates. Because of this dynamic, we believe a proper bond allocation should be focused away from the Aggregate Bond Index and invested with more diversity, focused on shorter duration holdings.
Finally, we believe adding in alternative asset classed (Alts) for part of the stock and bond can be beneficial. For many years we have held a position in Gold in our actively managed asset allocation portfolios. Earlier this year we increased the diversification of our Alts and are likely to continue to do so for the foreseeable future.
Final Thoughts
Over the past five years, markets have been driven by powerful mega trends—most notably digital transformation and artificial intelligence. But other forces like the rewiring of globalization, the shift to a low-carbon economy, and demographic changes are equally important and, in our view, will continue to support long-term growth. At the same time, inflation has reshaped how markets interact, making traditional models like the 60/40 portfolio more volatile and less predictable. We believe diversification is no longer optional—it’s essential.
If you would like to discuss your current strategy, or how to build such a strategy, Contact Our Team Of Financial Advisors Today!
Sources:
(1) For more on the meaning of this phrase, see “Sell in May and Go Away”: Definition, Statistics, and Analysis (Investopedia)
(2) How The Stock Market Performs After Federal Reserve Rate Cuts (Forbes.com)
(3) The post-Covid period changed the world in many ways. Prior to 2020 deflation was a topic that periodically came up in the investment world. Since then, however, the conversation has changed to worries about inflation. In our opinion, how you invest in an inflationary period is different than one with benign inflation rates.
On behalf of Magellan Financial, we would like to thank you for taking the time out of your busy day to take in our thoughts and opinions. If you found this helpful, please forward it to others. If you have any questions on the materials presented, would like to be added to our email list, or would like our help with your investments, we can be contacted at 610-437-5650 or via email.
Wells Fargo Advisors Financial Network did not assist in the preparation of this report, and its accuracy and completeness are not guaranteed. The opinions expressed in this report are those of the author(s) and are not necessarily those of Wells Fargo Advisors Financial Network or its affiliates. The material has been prepared or is distributed solely for information purposes and is not a solicitation or an offer to buy any security or instrument or to participate in any trading strategy. Additional information is available upon request.
Asset allocation and diversification are investment methods used to help manage risk. They do not guarantee investment returns or eliminate risk of loss including in a declining market.All investing involves risks including the possible loss of principal invested. Past performance is not a guarantee of future results.
Index returns are not fund returns. An index is unmanaged and not available for investment.
Dow Jones Industrial Average: The Dow Jones Industrial Average is a price-weighted index of 30 “blue-chip” industrial U.S. stocks.
S&P 500 Index: The S&P 500 Index consists of 500 stocks chosen for market size, liquidity, and industry group representation. It is a market value weighted index with each stock’s weight in the Index proportionate to its market value.
S&P Midcap 400 Index: The S&P Midcap 400 Index is a capitalization-weighted index measuring the performance of the mid-range sector of the U.S. stock market, and represents approximately 7% of the total market value of U.S. equities. Companies in the Index fall between the S&P 500 Index and the S&P SmallCap 600 Index in size: between $1-4 billion.
S&P Small-Cap 600 Index: The S&P SmallCap 600 Index consists of 600 domestic stocks chosen for market size, liquidity (bid-asked spread, ownership, share turnover and number of no trade days) and industry group representation. It is a market value-weighted index (stock price times the number of shares outstanding), with each stock’s weight in the index proportionate to its market value.
MSCI makes no express or implied warranties or representations and shall have no liability whatsoever with respect to any MSCI data contained herein. The MSCI data may not be further redistributed or used as a basis for other indices or any securities or financial products. This report is not approved, reviewed, or produced by MSCI.
MSCI World Index: The MSCI World Index is a free float-adjusted market capitalization index that is designed to measure global developed market equity performance.
MSCI EAFE® Index: The MSCI EAFE Index is designed to represent the performance of large and mid-cap securities across 21 developed markets, including countries in Europe, Australasia and the Far East, excluding the U.S. and Canada.
MSCI Emerging Markets Index is a free float-adjusted market capitalization index that is designed to measure equity market performance of emerging markets.
The CRB (Commodity Research Bureau) Index measures the overall direction of commodity sectors. The CRB was designed to isolate and reveal the directional movement of prices in overall commodities trades.
Bloomberg Barclays U.S. Aggregate Bond Index: Bloomberg Barclays U.S. Aggregate Bond Index is a broad-based measure of the investment grade, US dollar-denominated, fixed-rate taxable bond market.
NASDAQ Composite Index: The NASDAQ Composite Index measures the market value of all domestic and foreign common stocks, representing a wide array of more than 5,000 companies, listed on the NASDAQ Stock Market.
Russell 2000® Index: The Russell 2000® Index measures the performance of the 2,000 smallest companies in the Russell 3000® Index, which represents.
U.S. Dollar Index (USDX) measures the value of the U.S. dollar relative to majority of its most significant trading partners. The index is similar to other trade-weighted indexes, which also use the exchange rates from the same major currencies.
Technical analysis is only one form of analysis. Investors should also consider the merits of Fundamental and Quantitative analysis when making investment decision. Technical analysis is based on the study of historical price movements and past trend patterns. There is no assurance that these movements or trends can or will be duplicated in the future.
Stocks offer long-term growth potential, but may fluctuate more and provide less current income than other investments. An investment in the stock market should be made with an understanding of the risks associated with common stocks, including market fluctuations.
Investing in foreign securities presents certain risks not associated with domestic investments, such as currency fluctuation, political and economic instability, and different accounting standards. This may result in greater share price volatility.
Investments in fixed-income securities are subject to market, interest rate, credit and other risks. Bond prices fluctuate inversely to changes in interest rates. Therefore, a general rise in interest rates can result in the decline of the bond’s price. Credit risk is the risk that the issuer will default on payments of interest and/or principal. The risk is heightened in lower rate bonds. If sold prior to maturity, fixed income securities are subject to market risk. All fixed income investments may be worth less than their original cost upon redemption or maturity.
Investing in commodities is not suitable for all investors. The commodities markets are considered speculative, carry substantial risks, and have experienced periods of extreme volatility. Investments in commodities may be affected by changes in overall market movements, commodity index volatility, changes in interest rates or factors affecting a particular industry or commodity. Exposure to the commodities markets may subject an investment to greater share price volatility than an investment in traditional equity or debt securities. The prices of various commodities may fluctuate based on numerous factors including changes in supply and demand relationships, weather and acts of nature, agricultural conditions, international trade conditions, fiscal monetary and exchange control programs, domestic and foreign political and economic events and policies, and changes in interest rates or sectors affecting a particular industry or commodity. Products that invest in commodities may employ more complex strategies which may expose investors to additional risks, including futures roll yield risk.
Robert I. Cahill, Partner Rob.Cahill@wfafinet.
Jonathan D. Soden, Managing Partner Jon.Soden@wfafinet.com
Cassandra Queen, CFP®,ChFC®, Senior Wealth Planner Cassandra.Queen@wfafinet.com
Susan C Schupp, MBA, Senior Wealth Planner Susan.Shupp@wfafinet.com
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