Markets: Strong Returns, Mixed Economic Signals

U.S. equities remained solidly positive through August 28, while a broad measure of U.S. bonds was roughly flat for the year. The divergence has rewarded equity investors so far in 2026, but recent economic data argue against treating the strong 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: the labor market and retail sales fell in July. Non-farm payroll employment declined by 23,000, although the unemployment rate ticked down to a modest 4.1%, the lowest in over a year. These are not, by themselves, signs of recession, but they are worth monitoring if the weakness in spending and hiring persists.

Inflation and interest rates remain important. 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. 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 support staying disciplined and diversified rather than extrapolating recent stock gains.

The chart below compares year-to-date performance through August 28 for SPY, an ETF that tracks the S&P 500 Index, and BND, an ETF that tracks the broad U.S. investment-grade bond market.

The chart is provided for market context and does not represent client-account performance. References to SPY and BND are for illustrative purposes only and are not recommendations to buy or sell. Past performance does not guarantee future results, and investing involves risk, including possible loss of principal.