Change is in the Air
Song lyrics sometimes say things better than anything else. Since this month’s commentary is about changes – seasonal changes, market changes, etc. – it seems appropriate to start with “Ch-ch-ch-ch-changes,” like from the song Changes by David Bowie. Maybe, however, the lyrics “Don’t stop believin’ hold onto that feelin’,” from the song Don’t Stop Believin’ by Journey fit better with investor’s mindsets right now than a change in market results does. In any event, we are entering a time of change, as summer gives way to fall, harvesting crops from growing them, kids back to school from summer vacation, and markets facing headwinds due to interest rates, inflation, war, and finally, the mid-term elections. We are in the midst of massive change in technology, the labor markets, and the financial markets due to AI. The building of data centers, while sometimes divisive, promises more jobs, the potential for lower taxes, and continued leadership in technological innovation. But it will, and does, mean change. Where it will end, no one knows, but no one knew exactly where things were headed in the late ‘90s either, with all the technological change that came our way then due to the expansion of the internet. In fact, the AI boom is perhaps just the next chapter in the technological boom that started back then. The markets are benefiting from strong earnings, lessening the fear of overvalued markets that we have been dealing with for some time, but will rising interest rates cause a change by ending the long-running rally in equities? Given expectations for strong earnings and a slowly, but steadily, growing economy, Journey may have had it right…” Don’t stop believin’” as we attempt to “hold on to that feelin’”!
Financial Markets
“Resiliency” may better describe the markets than the word “change” does. There has been a lot of volatility this year, especially in the technology sector, yet the markets continue to climb higher. August saw the Dow gain 1.47%, the EAFE 1.80%, the NASDAQ 3.99%, the S&P 400 0.15%, and the Bloomberg US Aggregate Bond Index 0.39%. The S&P 600 was the sole loser in the bunch as it lost 0.60%. The S&P 500 added 2.72% in August, while the equal weighted version of the index gained 2.06%. What is encouraging about those last two indexes is that the equal-weighted version of the S&P 500 is outpacing the standard version by 2.45% on year-to-date basis. That change means the market rally is spreading beyond just the Magnificient Seven and/or the top tech/semiconductor stocks. Earnings have been phenomenal this year as the current quarter is on track to be the seventh consecutive quarter of double-digit growth and the second consecutive quarter of earnings growth above 25%! While those levels are likely not sustainable, expectations for continued strong growth persist into 2027 and beyond.
On the fixed income side of the ledger, it is interesting to note that the index gained ground in August, even though there was a fair amount of turmoil in the bond market.
The bond market has been more volatile lately as interest rates have been more volatile. Our federal debt has now surpassed the $40 trillion level. That is an incredible change from just 26 years ago, when those who ran the National Debt Clock in New York had to shut the clock down because it was not meant to run backwards (indicating the national debt was being paid off). The clock was, unfortunately, turned back on in July of 2002 because budget deficits had returned. Hard to imagine how much prosperity the country would achieve if so much of our capital wasn’t used for debt service. Interest rates have been rising due to a variety of factors including the government debt, an appetite for debt by those in the AI/data center sector, and fears over higher inflation. Whatever the cause, the actual move in treasury yields, etc., is not that dramatic, but perhaps more symbolic (especially when the 10-year treasury yield surpasses 5%).
Market valuation data as of August 31st, 2026 (Buffet Indicator as of September 2nd, 2026), however, continues to show markets as strongly overvalued, although some have dropped slightly (the P/E ratio and the Buffett Indicator) as strong earnings data has helped offset market gains. It is interesting to note that the Forward P/E is now slightly below its 5-year average.
| Valuation Metric | Description | Latest | 30-year Avg. | Signal |
| P/E | Forward P/E | 19.4x | 17.2x | Overvalued (within one std. dev.) |
| CAPE | Shiller’s P/E | 41.9x | 28.8x | Strongly Overvalued |
| Dividend Yield | Dividend Yield | 1.4% | 2.0% | Strongly Overvalued |
| Buffett Indicator | Ratio of market cap to GDP | 209.99% | 111% to 135% | Strongly Overvalued |
The Economy
Our economy is at a crossroads. Many times that description causes some anxiety as the choices seem to be either good or bad. While that could be true, the better way to view the changes that are occurring is to look at what may be coming up versus where we are at today. Inflation and interest rates affect not only the investment markets, but also the overall economy, as higher costs get passed on to consumers and borrowers who might utilize their resources in other ways. While both were expected to fall this year, however slightly, both are now expected to remain elevated, at least in the short run, due to a variety of factors such as government and personal debt levels, and the war. The labor market has been undergoing change for a while now, as the sources of labor have changed. Declining immigration, leading to fewer workers, has resulted in a smaller workforce for certain sectors, and AI and robotics have taken over various jobs, increasing the need for a portion of the workforce to seek new skills or jobs. A change in leadership at the Federal Reserve has meant changes in transparency and a focus on monetary policy instead of just interest rates. The economy has always been fluid as it reacts to data, but the speed with which changes can occur these days is breathtaking. That is why it is encouraging to note that economy is performing just fine, given all the changes that are occurring. Sometimes change isn’t all that bad – but it does take time to work things out.
GDP (Gross Domestic Product) – Since we are in the middle of the quarter, the GDP data really hasn’t changed. First quarter GDP grew 2.1% and, per the second estimate, the second quarter grew by 1.5%. One adjustment to note, however, is that some economists are now pushing the full year number higher to something around 2.2%. Some of the early data for 2027 is encouraging as the forecasted rate of growth is a bit higher at 2.4% for the year. GDPNow’s third quarter estimate has come down a bit, as expected, but still sits at a strong 4.8% as of September 1, 2026. Consumer and manufacturing data remains healthy and, while that hasn’t changed, it is a bit of a change from the ongoing narrative of a struggling economy.
Inflation – The more things change, the more they stay the same. That could apply to both the raw data and the narrative surrounding the data. The raw data didn’t change much as the CPI rose by 0.1% in July yet the annualized rate fell to 3.4% during the month. So, not a lot of wiggle in the numbers. That didn’t deter market analysts and commentators from harping on the “rise” in inflation. So, again, no change! Likewise, the data as presented by Truflation bounced down a bit as well, to a rate of 2.28% as of September 1, 2026.
Employment – The saying, “the more things change, the more they stay the same” could also be applied to the government’s release of employment data for August. Payrolls increased by a much larger than expected 162,000, while the unemployment rate remained at 4.1%. The data implies a relatively strong economy, especially when combined with the fact that productivity increased by 1.4% during the second quarter of 2026 and labor costs increased by 1.2%. For those, however, that had been hoping for a rate cut by the Fed likely had their hopes dashed for now, as this data increased the likelihood of a rate hike in September, or at the very least for rates to be held steady. The Sahm Rule sits at -0.07 as of September 4th, down from -0.03 a month earlier. Not sure how to interpret a negative number, but anything above 0.50 would be considered recessionary and anything below that number (especially if falling) would indicate a recession is not imminent or likely. Madison’s preliminary unemployment rate for July fell to 2.90%, while Wisconsin’s preliminary unemployment rate remained at 3.30%. Both remain well below the national average.
The Fed Watch
To parrot William Shakespeare’s famous line, “To be, or not to be, that is the question” one can ask of the Fed, “to provide forward guidance, or to not provide forward guidance, that is the question.” Former Fed Chair Ben Bernanke instituted a policy of “forward guidance” whereby the Fed tried to be transparent in its thinking and would report on it after each meeting. Prior to Bernanke, the Fed would leave economists and the market somewhat in the dark and force them to speculate and make their own judgment as to what direction the Fed was headed. Fed Chair Warsh had given some indication that he was going “old school” on us by not providing forward guidance. It seems, however, that information will still be given, but using “Fedspeak” (using abstract words and phrases) as his language when giving his talking points. No matter the language used, the data seems to be pointing more towards a rate hike than a rate cut at this time, and one could occur as early as September. That would certainly be a change from what the markets expected at the beginning of the year and likely won’t appeal to President Trump nor those who are looking for lower rates to borrow at.
Outlook/Summary
While change is going on all around us, it is good to remind ourselves that there are things we can control. We can control how we react to change, even when it comes to how we invest. Timing the market becomes vastly more difficult during times of volatility and rapid change as does momentum investing. Riding a wave (from an investor’s point of view) works until change and volatility enter the picture. Both methods offer the potential for massive returns, but also for massive losses should one get greedy and stay in the game too long. The problem is that no one knows for sure when the wave will end or get hit by cross currents. That is why we remain diversified and don’t seek after highly risky processes like market timing or momentum investing. Slow and steady sounds boring until the turbulence (change) hits. Then, slow and steady becomes the methodology that soothes frayed nerves when the markets are unsteady (changing).
We know things can change quickly, although the one thing that won’t change is change itself. This year we have already faced war with Iran, rapid technological change due to AI and the data center build out and have more change coming given the mid-term elections in a couple of months. But, for now, as Journey told us, “Don’t stop believin’,” as the economy has remained resilient and corporate earnings are expected to continue to grow, providing investors with some solid footing amid all the change. No matter what, our approach will not change. We will not chase momentum, nor market time, but will remain diversified and look to protect the downside while seeking upside return. As we have said, it is a slow and steady approach, but it also allows us to deal more effectively, we believe, with the world around us.
Should you like to discuss your portfolio or learn if our strategy can work for you, please call the Wealth Management division of Lake Ridge Bank at (608)826-3570. We look forward to speaking with you.
Market/Economic Data
As of August 31st, 2026…. Unemployment data is through August for national, July for Wisconsin (preliminary) and Madison (preliminary); inflation data is through July, Truflation as of 9/1/26:
| Index | Month Return | YTD Return | Index | Month Return | YTD Return or Current |
| DJIA Industrials | 1.47% | 11.79% | EAFE | 1.80% | 11.77% |
| S&P 500 | 2.72% | 13.14% | Blm U.S. Agg Bond | 0.39% | -0.31% |
| S&P 500 Equal Weight | 2.06% | 15.59% | Inflation (CPI All-items) | 0.10% | 3.40% annualized; Truflation 2.28% |
| S&P 400 | 0.15% | 14.71% | U.S. Unemp. | 4.1% | 162,000 jobs gained |
| S&P 600 | -0.60% | 20.82% | Wisconsin Unem. | n/a | 3.30% |
| NASDAQ | 3.99% | 13.90% | Madison Unemp. | n/a | 2.90% |
Thank you for your business – we look forward to speaking with you soon. (Note – this commentary used various articles from JP Morgan, Morningstar, the Wall Street Journal, Investor’s Business Daily, Northern Trust, CNNMoney.com, msn.com, Kiplingers.com, nytimes.com, Fidelity Investments, American Funds, LPL Financial and other tools as sources of information.
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