October Economic Update
Market Summary
Large divergences continued in September with all eyes on the continuance of rising Treasury rates, with yields now reaching levels not seen in nearly 20 years. Equity markets somewhat shrugged off the interest rate move, depending on which sector you examine.
The broad S&P 500 held somewhat steady, ending the month down -0.40%, but the entire index was largely held up by a handful of mega cap tech companies while a large part of the remaining sectors pulled back. As such, the tech-heavy Nasdaq 100 index outperformed for a second month, gaining 3.28%. The small cap Russell 2000, which is much more sensitive to interest rates, underperformed for a second consecutive month, losing -5.39%. Even so, the rapid and massive move with interest rates is still not impacting the stock market as we have typically seen in past events. (1)
Treasury Bonds / Yields
By September 16th, the 10-year Treasury yield, which is the global market benchmark for rates, surpassed the key psychological level of 5% and is currently trading at 5.28% as of the writing of this newsletter. Not only is the size of the move impressive, but the speed at which this has unwound usually puts strain onto financial markets, as we saw back in 2023 during the last Fed hiking cycle.
Corporate bonds, especially high-yield “junk” bonds which are bonds with higher risk ratings, are especially notable. While they have pulled back somewhat, it’s not reflective of the move in the Treasury bond market. Treasury interest rate set the benchmark for corporate borrowing – even more than the Federal Reserve can control. Higher rates equals higher borrowing costs (expenses) for companies. Anytime divergences like this occur, it means that either the mover (bonds) will revert to the mean, or the correlated asset that hasn’t reflected the move (equities, junk bonds, etc.) need to move toward the leader’s move.
While treasury bonds have been a terrible place for investors over the past several months, they are beginning to become an attractive investment which will be worth consideration once the charts improve. The long end of the curve is particularly becoming intriguing as yields move toward 6%. (2)
Federal Reserve Policy
At the September 16 FOMC meeting, Federal Reserve Chair Kevin Warsh announced a unanimous decision to maintain the federal funds target rate in the 3.50% to 3.75% range. However, the committee’s updated Summary of Economic Projections (SEP) signaled a strictly hawkish trajectory, with the median projection indicating at least one additional 25-basis-point rate hike before year-end to counteract lingering structural price inflation. As of yesterday October 7th, it was conveyed that the Fed committee intends to raise rates another 0.25% at their upcoming meeting.
It’s worth making a quick note of the difference between the Fed’s interest rates versus the market’s rates which as set by market participants. The Fed sets a short-term interest rates which marks the bar for bank lending. This rate is mostly determined by the Fed following the 2-year Treasury bond. So while most people think the Fed has control over interest rates, this is not true. The market largely forces the Fed’s hand and often times even defies it, which is essentially what we have been seeing on the long end of the maturity curve (10 years plus). The market is conveying to the Fed that rates are too low given all of the risks at the present time, which the Fed has recently responded to by beginning to increase the Fed lending rate again.
Looking Forward…
Little has changed with our intermediate outlook. While the stock market remains around all-time highs, these divergences are very noteworthy, especially moving into a seasonably weak point of the year. Some other risks to the AI sector have also presented themselves which we will discuss in our newsletter next month.
Monthly Financial Tip:
Check your employer-sponsored benefits beyond just retirement matching. Programs like Health Savings Accounts (HSAs), Flexible Spending Accounts (FSAs), commuter benefits, tuition reimbursement, and wellness stipends offer tax advantages or direct subsidies that lower your out-of-pocket costs on everyday healthcare, transit, and professional development expenses.
Citations:
1. Schwab, Oct 1, 2026
2. Marketwatch.com Oct 08, 2026
Disclaimers:
This post has been derived from sources believed to be accurate. Please note - investing involves risk, and past performance is no guarantee of future results. Bob Lawson is not engaged in rendering legal or accounting services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.
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