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Market strength is being tested—but we’re grading on a curve
After a six-month climb that lifted the S&P 500 by roughly 35% without a meaningful pullback, the rally finally hit some turbulence. A mix of renewed U.S.-China trade tensions, the ongoing government shutdown, and new worries about small regional banks’ credit quality weighed on sentiment. The CBOE Volatility Index (VIX)—Wall Street’s “fear gauge”—jumped above 20 for the first time since April, and Treasury yields fell as investors sought safety, with the 10-year note dropping to its lowest level in a year.
Economic data still looks solid. Second-quarter GDP was revised up to 3.8%, supported by strong consumer spending and business investment, while the Fed’s Beige Book painted a mixed but stable economic picture. Inflation continues to hover around 3%, with new tariffs threatening to keep prices sticky for longer. We’ll get the official September consumer price index (CPI) report on Friday, the lone government report immune from the shutdown. The government shutdown drags, however, entering its third week. There is real potential for this to be the longest shutdown ever, which would shave economic growth if it dragged on into November. While the market has mostly shrugged off the shutdown for now, a month or more of political gridlock could do real damage.
Earnings season offers a bright spot. Roughly 85% of companies reporting so far have beaten expectations, led by big banks like JPMorgan and Wells Fargo. Even the Fed struck a cautiously optimistic tone, with Chair Powell signaling that rate cuts are still likely this year to support a cooling labor market. And while a few regional banks made headlines over loan fraud issues, analysts largely see those cases as isolated rather than systemic.
Other market news: Gold prices shone brightly, marking their ninth straight week of gains. Oil and crypto markets saw more turbulence. Oil dipped on concerns of oversupply, and Bitcoin couldn’t escape the volatility of the tariff news or the leverage washout that followed.
What this means for investors:
Market fatigue is real, but the fundamentals appear sound. A little fear is a good thing for markets. If its all champagne and strawberries, then all the buyers are already here. Use volatility as an opportunity to rebalance, diversify, and add quality investments at better prices. The rally may be pausing but not ending.
Jamie Dimon’s quip about there never being just one cockroach should be taken to heart by all investors. The market is a hot and humid place right now with most markets up double-digits YTD, and it’s attracting some creepers. If you want to stay away from the bugs, stay away from the darkest, shadiest markets.
Market Activity
It’s a little strange to see Communication and Utilities as the 1-2 leaders for US stocks, but here we are. The yield curve has come a long way this year. I was a little worried we were going to get a repeat of September 2024 where the 10-yr bounced back up after the Fed cut, but we’re nearly below 4% again. We could see another jump after the October cut, but I’d be surprised if it sticks.
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Fixed income
Economic Reports
Jerome Powell talked about the end of quantitative tightening (QT) at his last speech. This could be a little worrying for the market. Counterintuitively, the end of QT signals that the Fed is seeing more fragility in the economy. The recent regional bank lending snafus aren’t helping.
The mention of it in this past Tuesday’s speech might mean they’ll announce the program’s end in October since they would otherwise have to wait until December (unless they did it outside of a regular FOMC meeting but that would for sure spook the markets).
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Earnings Releases
Per FactSet, the percentage of companies beating earnings is above average but the size of the earnings beats is smaller than average. Only 12% have reported so there is still a lot history to be written. So far, we’re tracking for year-over-year earnings growth for the 9th straight quarter.
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Recommendations
Markets and investing
- The Rules of Investing Are Being Loosened. Could It Lead to the Next 1929? (archive) | “[T]he American dream itself could be remade into a get-rich fantasy", but unlike the 1920s, normal and speculative investments are at all of our fingertips.
- Robinhood Is Banking on Babies and 401(k)s to Get Everyone Trading (archive) | Robinhood may still be small but it owns the under 45 market and the stock is on a tear. Their users are only getting wealthier (and wiser?) and the company’s growth into financial planning and other products will be huge. Don’t let your baby trade options yet, though.
- Anatomy of a crypto meltdown | Molly doesn’t pull any punches in this one. “October 2025 brought the most dramatic crypto flash crash of all time, but it was only a dress rehearsal for the systemic crisis the industry is building toward.”
Artificial Intelligence
- Straight talk about circular deals in AI | Financial alliance or financial incest? Some historical perspectives on how things work out when customers are investors, investors are suppliers, and everything in between.
- Read this if you want to know if AI is making you redundant | Worthwhile read, but AI’s ability to do any part of your job well has little bearing on it being able to do all of it. Granted, if you are a recent graduate and have the same level of soft skills as ChatGPT, then you could be in trouble.
Chart(s) of the week
This chart is from an article on wealth taxes, which will always be a bad idea, no matter how its dressed up. The wealth of all US billionaires ($7.6T) is just a little more than 1 year of US spending ($7T), it will never be enough. Also that blue bar for the U.S. is a product of all the best companies domiciling and going public here. We have the best capital markets in the world and we’re all richer for it.
Michael Cembalest is a national treasure, but you know this. He points out that “almost the entire increase in the gold share of reserves since 2009 is a function of the rising market price of gold itself.” Rising Central Bank reserves in gold aren’t causing prices to rise, rather rising prices are causing reserves to rise.
Check out the whole Eye on the Market for more.
A rising VIX and falling treasury yields signal some apprehension for risk. After the washout in the crypto market this past week and the continued strength of gold, I don’t think we’re at the irrational exuberance stage yet. If I didn't know better, I might think Trump is managing the market rally with some speed bumps here and there to keep things from getting to frothy. Regardless, a little fear is a good thing, and we can ride it higher into Q4. Just manage your risk and don’t get greedy.
Related: Markets Shrug Washington's Shut Down: What Investors Are Really Watching