Yes, you read that right. For the first time in a long while, stocks celebrated what has historically been a reason to sell stocks the day after a rate hike. There are reasons why, and inflation is at the top of the list.

 

Historically, the S&P 500 Index has risen on only 35 percent of days when the Fed raises rates. The vote to raise rates was unanimous, with all 12 FOMC members voting to tighten. Fed Chair Kevin Warsh made it clear in his post-announcement remarks that he is not happy with the pace of the inflation fight.

 

The nation has been saddled with rising inflation for five years, and indications suggest the FOMC doesn't see inflation reaching its 2 percent target for another two years. Although he didn't say it, the market now believes this isn't a "one and done" hike. Most believe yesterday marked the start of a new interest rate hiking cycle.

 

The betting is that there will be at least two more hikes, if not more, in the months ahead. I looked back to find out how stocks behaved during similar cycles over the past 30 years. In the first several months, equities typically struggle for a few months before regaining their footing about 4 months later.

 

Two exceptions to this rule stand out. In 1997, the index gained 8 percent in the first two months as the dot-com boom began its climb. I see similar behavior today, thanks to the AI-driven environment. In March 2022, the opposite occurred, with the initial hike precipitating a negative period of more than 12 months and a 25 percent decline.

 

If I pull back and look at performance over the last century, the S&P 500 Index has risen during nearly every Fed rate-hike cycle, in eight of the last nine major tightening periods between 1971 and 2022.

 

If you have been reading my recent columns on the bond market, you know two issues were on the table going into this meeting. Would Trump-appointed Kevin Warsh bow to his boss and refuse to raise interest rates, casting the Fed's independence into doubt? And would a Fed interest rate hike further exacerbate climbing bond yields on the long end of the curve?

 

We now know the answer — no. It appears the president reconciled himself to his appointee's action because of a "very tough board," even though he insists U.S. interest rates should be 1 percent or less, according to his social media posts. That goes a long way to putting to bed the independence narrative.

 

As for yields, the benchmark 10-year Treasury bond yield fell from 5.01 to 4. 95 a day later. Whether that was due to a decline in oil prices or a little more confidence that the Fed was "doing something" about inflation remains to be seen. One day does not make a trend, but at least bond yields didn't go up (although by Friday the 10- year was back to 5 percent).

 

If there was ever a time to raise rates without risking negative repercussions to the jobs market and the economy, it is now. Both areas have proved strikingly resilient this year in Warsh's estimation. "Geopolitical developments," which is Warsh speak for the Iran War, have fueled a re-acceleration in inflation. This is driven by higher energy prices filtering through a broad range of consumer goods and services across the economy.

 

Given that inflation data will continue to accelerate through the next two months, I can see the narrative build among market participants that even more interest rate hikes will be necessary to quell inflation. That would be a mistake. It could result in the Fed tightening rates at a time when the economy begins to slow, thanks to a re-rating of the AI trade and the end of the administration's efforts to grow the economy before the midterm elections.

 

This week, the Fed's hike saved the stock market. Friday was a triple witching day when $7 trillion of options expire. I would discount any moves up or down in the market as a result since it is purely a bookkeeping event in the financial markets. Markets are balanced on a knife edge and next week could go either way depending on the path of oil prices, bond yields, and the Trump/XI summit.

 

While the stock market has declined only a few percentage points from its all-time highs, bond markets worldwide are reacting differently to higher oil prices, inflation, and government debt.

 

Japan's 10-year sovereign bond yield is almost at 3 percent, and the 30-year is above 4 percent. Australia's 3-year surged as much as 20 bps to 5.05 percent — it's highest since 2011 — and New Zealand's 2-year jumped 25 bps. Europe's yields are no different, but it is here in the U.S. that most concerns investors.

 

One could characterize the back up in bond yields and fall in bond prices across the globe as a buyers' strike from fixed income investors. Clearly, higher oil prices are part of the equation. Both WTI and Brent crude prices topped $100 a barrel this week.

 

Inflation, as I predicted, is moving higher, as reflected in the Producer Price Index (PPI), with the main culprit being August's increase in energy costs. Year over year, the PPI advanced 5.4 percent. The Consumer Price Index was not much better. It was a hotter number than most expected. As I have cautioned readers, that rebound in inflation will continue through at least September, if not longer. I can easily see inflation at 3.75 percent by the end of the fourth quarter.

 

We all know why oil is where it is, so I won't waste space recounting those facts. On top of that, the Trump administration's new and existing tariffs have driven up the price of everything — especially groceries. Diesel fuel, a major cost in transporting goods, is now above $6. This week, it didn't help that the president is promising $5,000 to every American if they deliver a GOP majority in both houses of Congress. That will add more than $1 trillion to our debt load.

 

This is at least the fourth time Trump has promised cash to Americans, and while the party faithful may believe him for a fifth time, few else will take him seriously. However, even suggesting it in the face of $40 trillion in national debt caused yet another spike in bond yields. The benchmark U.S. 10-year Treasury was above 4.93 percent while the 30-year hit 5.34 percent. Bond investors are clearly demanding higher real returns on their bond purchases, and they are getting them. Both the 10-year and 30-year auctions this week proved that. Given inflation forecasts, I expect more of the same.

 

So far, the U.S. Treasury Secretary Scott Bessent's attempt to rein in long-term bond yields has failed. At the same time, betting markets are wagering an 80 percent probability that the FOMC will raise rates after its Sept. 15-16 meeting. There is also a 90 percent chance that if not September, December will see a hike. That may happen, but I don't see how that will help the situation and may cause more problems in the months ahead.

 

Since the rise in inflation has been caused by the Iranian war, increased government spending, and higher tariffs, raising the short-term Fed funds interest rate will not address any of these issues. I suggest readers read my recent columns on bonds for further explanations.

 

At most, a Fed hike might reduce credit on the margin, which would impact AI, the very lifeblood of the equity market advance year to date. The AI revolution requires capital, and a hawkish move by the Fed will only curtail that borrowing (or at least make it more expensive).

 

Thus far, September is shaping up to be a difficult month for stock investors and certainly for those who hold bonds as I cautioned. This week the S&P 500 Index fell four days in a row only to bounce on Friday.

 

Life will get even more difficult if the Fed raises rates next week, but it is between a rock and a hard place. If they do nothing, bond vigilantes will likely keep dumping bonds because the Fed is sitting on its hands while inflation runs rampant.

 

If they do decide to hike rates, the stock market will most certainly take a real hit, as expectations for continued rises in equity earnings will need to be throttled back. The return of 7-plus percent mortgage rates will also not sit well with Main Street, nor will the fact that wages over the last six months have not kept pace with inflation.

 

The continued concerns over oil prices, inflation, debt/deficit, and renewed hostilities in the Middle East kept a lid on equities in these last days of summer. Despite all the fear and loathing over higher long-term bond yields in the last week or two, the markets are only down a few percentage points from all-time highs.

 

As readers are aware, I have been cautious in August and September, although I would see any consolidation as a buying opportunity. That said, there are more than enough concerns plaguing the market at the moment to make anyone cautious.

 

Oil almost  $90 a barrel again, a re-engaged, shooting war of sorts in the Middle East; bond yields at highs not seen in years; and, of course, the midterm elections, which are now only 60 days away. It is the last event that keeps me looking over my shoulder the most.

 

It bears repeating that during the last three midterm elections in 2014, 2018, and 2022, the S&P 500 fell more than 10 percent during either August or September. All three times the sell-off occurred during the third week of the month. That doesn't mean it will, but it might.

 

In the meantime, the U.S. Treasury will begin buying back bonds beginning today, Sept. 4. And like clockwork, the bond vigilantes pushed up yields on long-dated Treasury bonds until the middle of the week before taking profits yesterday. Stocks, precious metals and the dollar all fell as a result.

 

While the financial media wailed and gnashed their teeth at this predicament, bond traders (of which there are few dummies) prepared to take profits and cover their shorts. Why take the risk that Treasury Secretary Bessent orders his guys to step in and start buying bonds beginning Friday or over the weekend? For those who missed it, take a gander at my latest columns on the bond market for more background on the present situation in that world.

 

That brings us to Friday, and the results of the latest non-farm payrolls report for August. With earnings results mostly over, and most trading desks with a "do not disturb" poster on their computer screens this week, the number took on added importance. Even though everyone knows by now the number will be inaccurate and subject to large revisions.

 

The job gains for August were 162,000, much better than the 50,000 forecasted. Wow! What a surprise, good employment numbers just two months before elections! Markets took the number in stride even though it builds the case for an interest rate hike by the Fed. I am still doubtful that will happen, although the Fed probably sees what I see — higher inflation data in the future.

 

The announcement that the U.S. will purchase one-fifth of Venezuela's crude oil reserves through a private company run by a buddy of the country's dictator (with a checkered past) was no surprise to me. I guess it is better than just stealing 20 percent of their oil reserves. 

 

Back in November of last year, in "The Return of Gunboat Diplomacy," I argued that President Trump had his eye on obtaining Venezuela's vast oil reserves as opposed to wanting regime change and the end of the non-existent smuggling of Fentanyl into the U.S.

 

I am ignoring all the social media posts about how this will bring down gas prices and refill the Strategic Petroleum Reserve (SPR) lickety-split. It won't. If you read my November column, you will understand that it will take years and many billions of dollars to repair Venezuela's energy infrastructure and further develop that country's oil reserves.

 

In addition, the crude coming out of Venezuela is heavy oil. Our SPR was built for light and medium crude. That's going to be a problem. Is the deal worth doing? Yes, and we will do it — provided both countries agree to cooperate over the coming decade.

 

We have had a difficult past with that country's leaders and their oil wealth for a long time. U.S. oil companies have pumped massive amounts of wealth and expertise into the Orinoco Basin only to see a series of expropriations, takeovers by the state, graft, bribes, and you name it. It's a risk, but that was the strategic objective of our gunboat diplomacy last year and could over time double our own oil reserves.

 

The three-day Labor Day weekend marks the end of Wall Street's summer. It would not surprise me to see a little government action in the days ahead to bolster bond prices, with yields hovering at the top of their range. On the energy front, the summer driving season is coming to an end. That may relieve some of the price pressure on gas prices. 

 

As for the markets, they will still be there on Tuesday, so focus instead on relaxing, fun, and the family. Happy Labor Day.

 

It was a lovefest, as strong quarterly results from Nvidia, the linchpin of all things AI, once again wowed investors. Not even Kevin Warsh's hawkish speech at Jackson Hole could make much of a dent in investors' enthusiasm.

 

But looks can be deceiving. Yes, all three indexes gained on the back of the semiconductor company's earnings, but 10 out of 11 equity sectors fell on Thursday. How can that be, you might ask? Simple, technology stocks are now the largest weighting in just about every index. As such, the results rippled through so many tech stocks that everything else was dragged up with it.

 

That said, investors' love/hate relationship with certain aspects of the world's rollout of the artificial intelligence ecosystem took a turn for the better this week. Why so much attention on Nvidia? Because the semiconductor giant is at the center and the hub of the world's build-out of the infrastructure of AI. It beat second-quarter earnings and revenue expectations handily. And, even more importantly, Jensen Huang, the chairman, also provided a better-than-expected outlook for the third quarter.

 

Unlike previous quarters, when the company's stock price fell despite strong results, NVIDIA jumped almost 10 percent this time. Its report also helped other AI chip stocks and the technology sector in general recover after several weeks of lackluster performance. The company still derives the lion's share of its revenues from hyperscalers like Google, Microsoft, and Amazon.

 

Investors have worried that these companies were already spending too much to build out their own infrastructure, as the trillions of dollars they are spending on and off their balance sheets have raised concerns. The revenues from this area more than doubled in Nvidia's second quarter.

 

Investors are also concerned that these hyperscalers are beginning to build their own chips to reduce their dependence on Nvidia's chips. But none of that seemed to matter this week as investors eyed the $20 billion stock buyback and the $6 billion in dividends ($ 0.25/share) the company returned to existing shareholders.

 

In the meantime, Oman and Iran are working on a deal to jointly "administer" the Strait of Hormuz. Tolls figure prominently in that discussion. On the U.S. side, the latest economic pressure is to convince those who are trading with Iran to stand down. If companies and countries ignore the American directive, they would then be excluded from the dollar-based global financial system.

 

Exactly when and how this could be accomplished is up for discussion. Given that China imports more than 90 percent of Iranian crude in non-U.S. dollar trade, their cooperation would be of paramount importance. So far, their response has not been encouraging. Oil traders are unimpressed and have held crude prices in the $80- to $83-barrel range all week.

 

As for last week's attempts to cap the climb in U.S. Treasury bond yields, Secretary Scott Bessent appears to have succeeded, at least over the last few days. Yields on the Ten-year bond have dropped about 10 basis points. Those waiting to see whether the Fed would jump in and back the Treasury secretary's play were disappointed.

 

Fed Chairman Kevin Warsch underscored his commitment to reducing inflation instead. His speech in Jackson Hole was taken seriously enough to put an interest-rate hike back on the table by the betting markets. On Friday mid-morning, the probability of a rate hike was back up to 50 percent for the September FOMC meeting. So, the Treasury and the Fed are somewhat at odds on where they think interest rates should be, at least on the long end.

 

The three major indexes notched a positive week. An almost 2 percent move in the Nasdaq, a 1.2 percent gain in the S&P 500 Index, with the Dow trailing with less than 1 percent, indicates buyers are still willing to chase markets.

 

Gold fell toward $4,500 an ounce, its lowest level in a week, as investors digested what was perceived as hawkish commentary from Warsh. Given its rise over the last few weeks, the Fed comments provided an excuse for some profit-taking in bullion and in most precious metals and mining stocks.

 

Investors turned their attention to the bond market this week as yields on long-dated U.S. Treasury bonds hit multi-year highs. The government needed to step in to curb what looked like a rout in both stocks and bonds.

 

Mid-week, the 30-year Treasury bond, as well as the benchmark 10-year, fell in price as yields hit 5.24 percent and 4.74 percent. To stem the fall in bond prices, U.S. Secretary Scott Bessent announced Wednesday morning before the open that he would double Treasury bond purchases beginning in September.

 

Both bonds and stocks rallied on the news, but by Thursday, bond yields rose again, and stocks fell as traders doubted the impact of Bessent's new measures. Aside from reducing the pace of higher yields (which it did), they figured that buying back some bonds would not do much to stem the fundamental reasons for the climb in interest rate yields.

 

Higher oil prices, higher inflation, higher deficits, higher debt (now $40 trillion), and no end to government spending made the move's impact no more than a pimple on an elephant's derriere. But the announcement did force the dollar lower (as intended). So far this quarter, the dollar has declined 2.5 percent; that's a large move in the currency world.

 

What it did do was convince investors that with this attempt to force interest rates down, inflation could be here to stay at least for the foreseeable future. That caused a spike in the prices of inflation hedges like gold, bitcoin, and most other commodities. Right now, the negative correlation (one goes up, the other goes down) between the U.S. greenback and gold is above 90 percent, while bitcoin's correlation is roughly 83 percent.

 

Gold gained more than 4 percent on the dollar move, while gold mining stocks posted high single- and double-digit gains. Bitcoin climbed much more than that, although some of the gains were attributed to the president's attempt to jawbone Congress to pass the much-delayed crypto Clarity Act legislation. What Trump didn't say was that the delay is largely due to concern that passing the legislation (as is) would allow politicians to benefit from their existing crypto investments. Read the president and his family and friends.

 

In another TACO moment, the president's tariff tantrums against Canada have come to naught (surprise, surprise). As for the Middle East, markets have tuned out the meaningless stream of assurances on Truth Social just like they have on the tariff diatribes. Oil moved higher this week as investors realized that there will be no grand Hormuz openings. That adds to the inflation story, which fuels the rise in long-term bond yields and is a large reason why we are seeing gold, other precious metals, and commodities in general come back to life.

 

Gold has broken out of its range and is now above $4,500. Energy has quietly become the strongest performing sector so far this year, substantially beating technology with far less attention. Keep your eye on those soft commodities as well. The combination of less fertilizer flowing out of the Middle East, climate change, and my prediction of a Super El Niño beginning next month ( see my column "El Niño Is Flashing Red Light for the World") is boosting prices in wheat, corn, sugar, etc.

 

As for equity markets overall, August is off to a positive start, but stocks are beginning to wobble. This week the S&P 500 lost 1.5 percent while Nasdaq fell almost 2.35 percent. In the coming week, we have Nvidia's earnings, and the Jackson Hole boondoggle — the Economic Policy Symposium of central bankers on Aug. 28. Investors are hoping the keynote speaker, Fed Chairman Kevin Warsch, will share his view on long-term bond yields and the move by his fellow former hedge fund manager, Scott Bessent.

 

A big reason I have been cautious on the markets in August and September is the upcoming midterm elections. Consider this: in the last three midterm election years, the stock market has declined by at least 10 percent beginning on Sept. 19, 2014, Sept. 20, 2018, and Aug. 16, 2022. Coincidence? Possibly, but three in a row does make a trend. History is only a guide, but in this case, I'm listening to how it rhymes with the past.