“Markets can stay irrational longer than you can stay solvent.”
– attributed to John Maynard Keynes
Returns for the major indexes we follow were mostly positive for the month of August. International stock markets led the way, with both the Emerging Markets and Developed Market indexes posting solid returns. Large Cap indexes – the Dow Industrials and S&P 500 – were positive, as the Small Cap and Midcap Indexes lagged. Due to higher energy costs, the CRB Commodities index rose more than 8.5%. The US Dollar index was down modestly as the Aggregate Bond index was slightly positive.
All data as of 09/01/2026, 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.]
The first 8 months of 2026 have been full of news and events that, at other times, might have derailed stock markets across the globe. Yet, life in 2026 has been relatively good for stock market investors. We often get asked about the disparity between what clients and prospects think SHOULD be happening and stock market performance. Our simple answer is that earnings growth in 2026 has been so robust that the market has seemed to ignore all the perceived bad news. Some might refer to this as irrational behavior, with our explanation convenient but lacking in perspective.
This month we will take a look beyond corporate earnings. We will start with Inflation – a topic on many people’s minds – followed by a look at what has been happening in the bond markets.
Inflation – How We Got Here and Why It Matters
For the past 65 months, we have witnessed government officials from both major parties refer to the high level of inflation as “transitory.” In the post- pandemic period (2021 through 2022), we believed this argument was plausible. High consumer demand for goods over services, supply-chain disruptions, and high energy prices from a sudden surge in energy consumption as the world reopened resulted in an inflation peak of 9% in 2022. Aggressive rate hikes by the US Federal Reserve (the Fed) and the normalization of supply chains allowed inflation to fall toward the 2-3% range. This year, inflation has picked up again, reaching year-over-year numbers in the 3.0 – 4.2% range. Shelter, energy, and auto insurance have been major contributors to the re-acceleration.
The current inflation episode is one of four major inflation “regime breaks” since 1913.¹ These inflationary periods account for 72% of cumulative inflation despite representing just 29% of the time span.² Clearly, cost inflation is not linear.
We believe inflation is bad for both households and markets for four reasons:
- Erosion of Purchasing Power: Even moderate inflation steadily reduces what a dollar will buy. For retirees, many on a fixed income or reliant on pensions that do not increase over time, this can become a lifestyle issue.
- The Creation of Uncertainty: It becomes hard for both businesses and consumers to plan when prices are unstable. This can slow business investment and consumer spending.
- Distorted Financial Markets: Higher inflation has historically led to high interest rates, which affect mortgage rates, borrowing rates, and equity valuations.
- Essential Categories Disproportionately Affected: In the past, shelter, energy and food often rose faster than the overall Consumer Price Index (CPI). This can put pressure on households, even after headline inflation moderates.
Why the Bond Market Matters & What Are the Challenges
In our experience, inflation has an impact on the bond market. The Federal Reserve Bank (The Fed) has a dual mandate of price stability and maximum employment, as per a 1977 amendment to the Federal Reserve Act. In practice, the Federal Open Market Committee (FOMC) defines this as a long-run goal of an average inflation rate of 2% while sustaining the highest level of employment the economy can support without causing an inflation surge. While the employment piece is not a hard number and is open to interpretation, the “average inflation rate of 2%” doesn’t have a reference time frame embedded in it. We think this explains why the FOMC can get away with calling inflation “transitory” for long periods of time.
Historically, periods of elevated inflation have pushed bond yields higher. We saw this most clearly after more than a decade of near-zero interest rates: the inflation surge in 2021–2022 forced the Fed into one of its most aggressive hiking cycles in modern history, driving yields sharply higher across the curve.
On January 2, 2021, the 10-year US Treasury Bond had a yield of 0.92%.³ For almost 3 years, the rate trended higher before trending sideways, parallel to inflation stabilizing in the 2-3% range. Recently, yields have been rising toward the top of the recent range. It’s anybody’s guess if the November 2023 high yield of 5.00% holds, or if yields continue to trend higher.
Chart #1: www.stockcharts.com Data 02/13/2023 – 07/09/2026 as of 09/08/2026. An index is not managed and not available for direct investment. MA 50 = 50-day moving average MA 200= 200-day moving average
For investors, particularly those with an asset allocation that includes both stocks and bonds, the bond market matters for three reasons:
- Inflation historically has driven yields higher: Central banks fight elevated inflation by increasing short-term rates. Short-term rates affect long-term rates, and rates often increase in conjunction with short-term rates.
- Higher yields translate directly into lower bond prices: As rates surged in 2022, US bonds suffered their worst annual performance since the 1920s. The Aggregate Bond Index lost roughly 13%. Long-duration US Treasury Bonds were down as much as 30%.
- Portfolio Impact: The traditional 60/40 (stocks/bonds) portfolio failed in 2022 as both stocks and bonds fell together. While rare, it’s a real risk in our view.
Essential Market Themes for Investors
In our view, asset classes are intertwined, and inflation and interest rates are the two most important macro forces shaping investment returns. When inflation becomes persistent, both stocks and bonds will likely be repriced. Unfortunately, repricing becomes a challenge because asset classes do not necessarily act in the same manner as they did in the past. This is a challenge, but also an opportunity. We have three themes:
- A structural shift in yields. The era of ultra-low rates is over. Yields today reflect both inflation uncertainty and long-term fiscal pressures.
- Income is back. Between 2009 and 2021, finding yield in the bond market was a challenge. Today’s more elevated yields mean bonds once again provide meaningful income to a portfolio.
- Credit Spreads⁴ are tight. Corporate balance sheets, in general, appear strong, yet today’s investor is receiving relatively low compensation for the risk of lower-rated bonds.
- Volatility remains. Policy uncertainty, inflation surprises, and geopolitical factors continue to drive swings in long-term rates. We believe this will continue for the foreseeable future.
The Impact on Stock Market Investors
History typically does not repeat itself, but it does give us perspective on possibilities. At Magellan Financial, we look to the past to help make sense of what’s happening in the stock market in real time to shape portfolios. Our opinions are strong but lightly held. The world changes. Sometimes those changes are quick. At other times, change is unexpected. In any scenario, picking the winners and losers becomes much more challenging.
Persistent inflation and higher interest rates can push input costs (labor, materials, borrowing) higher. Eventually, increased costs can put pressure on corporate margins and earnings. In such a scenario, companies with strong pricing power tend to outperform; those in competitive industries often struggle with the ability to pass through costs to customers.
Valuation adjustments can become a defining feature in the current market environment. Higher interest rates lift discount rates, which can reduce the present value of future earnings that investors are willing to pay. Put more simply, high rates and persistently higher inflation can result in lower valuations. Changes of this sort can be gradual or sudden.
Final Thoughts
The stock market has been in an uptrend for more than 17 years now. It is our belief that the current market environment is changing. This is happening at a time when the average investor appears to be feeling very comfortable. And, honestly, we get it. Since the market bottom in March 2009, market downturns have generally been a reason to get more aggressive with your portfolio, not get more conservative.
It feels irrational at times. Every week we have meetings with clients and prospects who shake their heads at the dichotomy of the “crazy” world we live in and the positive performance of their portfolios. We explain that the market cares about earnings, which have been relatively high. In more cases than not, it still doesn’t make sense. Markets can stay irrational for extended periods of time.
Given this background, we believe risk management is more important now than it has been in a long, long time. Being disciplined about rebalancing your asset allocation and understanding the duration exposure of a bond portfolio is a good first step. Reducing speculation before the market does the reducing is a good second step in the process. Better to be prepared for changing markets than to react to them.
As always, we’re here to help you navigate the path ahead—whether it’s updating your plan, rebalancing your portfolio, or thinking through the next chapter of your financial journey. If you have questions or want to explore your options, don’t hesitate to reach out.
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 After World War 1 (1916-1920) inflation was persistently around 20% driven by wartime money printing to fund military expenses followed by the lifting of wartime price controls. From 1941-1951 inflation peaked in 1947 around 18%, for many of the same reasons as in the post-WWI period. The Great Inflation of 1968-1982 saw peak inflation at 14.8% in 1980 due to the combination of global oil supply shocks, an entrenched wage-price spiral, and monetary policy mistakes.
² The Inflation Tax: 113 Years of US CPI Data (1913–2026)
³ January 1 was a federal holiday, and January 4 was the first day of trading.
⁴ In bond markets, a credit spread is the difference in yield between a risk-free bond (like a U.S. Treasury) and a corporate bond with the same maturity.
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