Markets: Strong Returns, Mixed Economic Signals

U.S. equities remained solidly positive through August, while a broad measure of U.S. bonds was roughly flat for the year to date. The divergence has rewarded equity investors so far in 2026, but recent economic data argue against treating the strong stock market backdrop as a signal that risks have disappeared.

What looks constructive: economic activity continues to expand, and equity-market momentum remains positive. Real GDP grew at a 1.5% annualized rate in the second quarter, down from 2.1% in the first quarter. At its July meeting, the Federal Reserve described economic activity as expanding at a solid pace despite elevated uncertainty.

What gives us pause: hiring and consumer spending both weakened in July. Non-farm payroll employment declined by 23,000, and while the unemployment rate ticked down to 4.1%, the lowest in over a year, that reflected people leaving the labor force rather than stronger hiring. These are not, by themselves, signs of recession, but they are worth monitoring if the weakness in spending and hiring persists.

What we’re watching: inflation and interest rates. The Consumer Price Index rose 0.1% in July and 3.4% over the prior 12 months. The Federal Reserve held the federal funds target range at 3.5% to 3.75% on July 29, though three members dissented in favor of an increase. Longer-term Treasury yields also remain elevated, influenced by inflation expectations, federal borrowing needs, and the outlook for monetary policy.

Why it matters: There are still reasons for optimism, including positive market momentum and continued economic growth, but softer labor and spending data, elevated inflation, and higher long-term rates lend support to staying disciplined and diversified rather than extrapolating recent stock gains.

Note: Past performance does not guarantee future results, and investing involves risk, including possible loss of principal.