Market Report: August 2026

Repeat or Rhyme?

“History doesn’t repeat itself, but it often rhymes” is a quote often attributed to Mark Twain, although there is no actual evidence of him using that statement (it appears that the quote should be attributed to Theodor Reik, a psychoanalyst, who supposedly coined the phrase in 1965). The question here is whether the markets will repeat past events, mimic (rhyme) those events, or chart their own course. The markets are clearly overvalued (see below) and, therefore, while one could expect a severe correction like those that occurred in 1987, the Dot-Com crash, or the Great Recession, to bring them back into balance, is that really in the cards or are circumstances different this time? While not ruling out that possibility, there do seem to be some meaningful differences between today and past events that could help future events deviate from those in the past. But we cannot get caught with our head stuck in the sand (to quote another saying) either, as hopefully we have learned from past mistakes (another oldie, but goodie). Corporate earnings, employment data, technological innovation, etc. are powering our markets to new heights. Do those things guarantee future success, no, but they sure do not hurt. We will discuss each of them and more as we move through this commentary. Read on!

Financial Markets

There is one thing that does seem to be repeating itself this year, and that is market volatility. The markets struggled in July as the war in Iran was on, then off, then on again, energy prices bounced up and down, inflation ticked higher in May (reported in June, although June’s reading reported a slight decrease as reported later in July ), and the Fed held rates steady dashing expectations of both those that wanted a rate cut and those that expected a rate hike. The equity markets generally ended lower with the notable exceptions being the Dow (gained just 0.38% during the month) and the MSCI EAFE (gained 1.91% during July). The S&P 500 (down 0.06%), S&P 400 (down 2.38%), and S&P 600 (down 1.90%) all lost ground during the month. The NASDAQ took the biggest hit, as the index lost 3.19% in July.  The good news is that year-to-date, all the above equity indexes are nicely positive. Not wanting to be left out, bonds followed suit, as the Bloomberg US Aggregate index gave up 1.3% in July and has lost 0.69% year-to-date. Given the continued strong earnings growth we have seen so far in 2026, the losses have helped tighten valuations slightly.

Market valuation data as of July 31st, 2026 (Buffet Indicator as of August 6^th, 2026), however, continues to show markets as strongly overvalued, although some have dropped slightly (most notably the P/E ratio) as strong earnings data has helped offset market gains.

The Economy

Economic factors have certainly affected how the markets have performed in the past, both to the upside and the downside. Because of where valuations are today, our focus is more on the downside and trying to find correlations with past events. The 1980’s began with an economy in turmoil as the Fed raised interest rates significantly to fight sky-high inflation and a recession ensued. Ultimately, however, the economy recovered and soared, and so did the stock market. By 1987, however, inflation and interest rates were creeping higher again, the dollar was falling, and the stock market was significantly overvalued. Black Monday, October 19^th, 1987, was an unexpected event, however. That day the Dow Jones Industrial Average lost 22.6%, the largest one-day drop in the index’s history, as so-called portfolio insurance and computerized program trading only exacerbated the selling. Compared to today, interest rates were substantially higher (Fed Funds rate at 6%+ vs. 3.6% today), and inflation was similar (3.65% vs. 3.50% today). The markets were substantially overvalued when compared with long-term averages, as they are today (both periods with P/E ratios near 20), although the big difference is that the long-term average in 1987 was around 14 vs. 17 today. So, compared to 1987, there may be some rhyming but likely no repeating what happened on Black Monday.

The Dot-Com bust was due, in part, to extremely overvalued tech companies that had little, or in some cases, no earnings at all. The internet was the new technology and its rapid growth fueled excitement over just about any company in the internet space. When the bubble burst, stocks plunged, led by the NASDAQ’s drop of 78% by October of 2002. The big difference between then and now is that big tech companies today continue to post record earnings and their elevated stock prices are therefore somewhat justified. If anything, the overall economy of the late 1990’s was growing at a faster clip than today making valuations then seem even more tenuous. While there are those that want to compare today’s market environment for tech stocks to that of the late 1990’s, the earnings environment is so different that expecting another bubble burst because of tech stock valuations is not really realistic and so we are likely to rhyme that environment at worst.

The Great Recession of 2008-2009 was caused by risky subprime mortgage lending, toxic investments such as mortgage-backed securities, and the bursting of the U.S. housing market bubble. Several financial institutions and other companies either failed or had to be bailed out by the government. The crisis led to the stock market losing 55% of its value by March of 2009. Prior to the recession the U.S. was growing at a 2.0% clip (GDP), inflation was at 2.7%, and unemployment hit 5.0% by December of 2007. Economically, things were not much different than today, other than the housing bubble, which was fueled by easy money and prevalence of variable rate mortgages. We are certainly not facing a housing bubble due to easy money or a booming housing market today and continued economic growth and earnings growth (earnings fell by 18% during 2007) means this time is different than 2008.

There certainly are challenges to today’s economy. The jobs market is slow for a variety of reasons: interest rates and inflation remain higher than anyone would like, the war in Iran is hampering energy markets, and on-again, off-again tariffs continue to cause trade uncertainty. Offsetting these issues is the continued strength of the American consumer, a stable unemployment rate, rising market valuations (helping 401k balances), and lower taxes. There is a reason so many want to come here – the hope of a better life is still there.

GDP (Gross Domestic Product) – No matter what period you review, there are always differences in how economies fare and that impacts GDP. Remember a couple of years ago when Taylor Swift and Beyoncé were in the midst of major tours resulting in a boost to GDP due to sold out concerts around the country? Today, we are in the midst of an AI fueled tech economy that is just in its early days, and how that will ultimately impact productivity and economic growth, no one truly knows at this point. Today, consumers continue to lead a slowly growing economy, as GDP added 1.5% in the second quarter of 2026 according to the advance (first) estimate. First quarter 2026 GDP grew by 2.1%, and full year growth is expected in the 2.0% range. GDPNow is forecasting a rate of 5.8% (yes, 5.8%!) as of August 6, 2026. This high initial estimate is largely due to strong construction and manufacturing activity (the ISM July manufacturing gauge rose to 55.6, the highest since May of 2022) and continued consumer strength. It is almost certain that the GDPNow number will fall, but what a great starting point. All those World Cup fans must have bought a ton of ranch dressing!

Inflation – Volatility in the energy sector continues to hit CPI. And not just from gas prices, but everything that utilizes oil in its manufacture is getting hit too. While energy prices will fall once the war is over (we have seen this in the volatility of the price of oil), it will take some time for it to spread throughout the economy. So, higher for longer might be the new mantra. The Fed did nothing at its latest meeting to help push inflation lower as it did not raise or lower interest rates. In June, the CPI fell by 0.4% leading to an annual rate of 3.5% over the past 12 months. In this case, the volatile energy markets worked in our favor as the decline was largely due to the fall in gas prices. Truflation posted a rate of 2.30% as of August 6, 2026.

Employment – The employment environment is sometimes a conundrum, and the current environment certainly shows that. July saw a surprise drop in payrolls (loss of 23,000 jobs) but the unemployment rate dropped to 4.1%. Average hourly earnings ticked slightly higher as positions were added in health care, offsetting job losses in local government and retail. It is hard to say if history is repeating itself or rhyming or what when it comes to employment because it all depends upon how the markets view the reports. In this case, the markets are cheering on the softness as expectations for a rate hike have lessened. So, is somewhat bad news, actually somewhat good? The report does show an economy that is struggling to create a lot of jobs, but also one where workers are not being let go either. The Sahm Rule sits at -0.03 as of August 7^th, down from 0.07 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 June rose to 3.00%, while Wisconsin’s preliminary unemployment rate fell slightly to 3.30%. Both remain much better than the national average.

The Fed Watch

History may be repeating itself when it comes to the Fed. At least when it comes to “forward guidance.”  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. Yes, a lot of economic information is readily available, but the Fed did not give any additional insight as to their thinking. Certainly, there can be pluses and minuses to that course of action, but rightly or wrongly that is the direction the Fed is in under new Chair Warsh. For now, though, the Fed has continued to keep rates where they are. It would seem that any rate cut is off the table until at least the December meeting and there is a chance the Fed will raise rates in September. It is likely that nothing will happen between September’s meeting and the mid-term elections, as the Fed will not want a rate decision to appear political. So, some change is afoot, but it is really an attempt to return to past policy.

Outlook/Summary

For those of us that follow fundamentals when it comes to investing, it is great to see earnings continue to grow at such a robust pace, and that they are broadening beyond the top handful of stocks. That has helped valuations come down slightly, but it also helps build the case for higher valuations overall. With the economy doing relatively well and earnings strength likely to continue into 2027, and beyond, as we have noted, the case can be made that history (in terms of a market sell-off) will not repeat itself at this time. Perhaps things are rhyming a bit when it comes to the market rally, but the underlying strength seems to be there.

Having said that, we all know things can change quickly. We have seen how the markets have reacted to changing circumstances in the war with Iran and so we do need to be aware of what is going on there, in the economy, and the markets especially if something more drastic would happen with the war or even if there was a dramatic change in Washington after the mid-terms. No matter what, our approach will not change. We will not chase momentum 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 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 July 31st, 2026…. Unemployment data is through July for national, June for Wisconsin (preliminary) and Madison (preliminary); inflation data is through June, Truflation as of 8/6/26:

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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