At the September Federal Reserve meeting, benchmark short rates were held steady at 5.25% - 5.5%. Chairman Jerome Powell indicated one more hike is likely this year. He appears resolute in his intent to bring inflation down even if it means slowing growth. As a result, expectations for the timing of a possible return to rate cuts have been pushed out yet again. The “higher for longer” reality caused longer-term rates to rise which in turn dampened enthusiasm for buying stocks at current valuations. The Total U.S. Stock Market fell 4.8% for the month.

Bonds in a diversified portfolio

Following up a historically bad 2022, bond returns are once again negative this year, though only moderately. The Ten-Year Treasury ended the month at 4.6%, the highest since 2007.

We believe bonds are an important part of most portfolios because they typically provide stability. They feature lower volatility than stocks and are often negatively correlated with them, meaning they are likely to gain in value when it is most needed. Since 1926, intermediate government bonds have outperformed cash in 82% of five-year rolling periods. The trade-off for this growth is some risk and one of the exceptions was the last five years, which followed the end of a multi-decade bull market for bonds.

Happenings on Capitol Hill

Once again, the government tested the limits of the budget process. A last-minute agreement avoided a shutdown, but only until November when the issue will likely resurface. The subsequent removal of Kevin McCarthy as House Speaker potentially challenges the prospects of securing a longer-term agreement in a timely manner.

Unlike the debt ceiling debate from this spring, a shutdown would not imply higher risk of near-term debt default, which has much more serious implications. The debt ceiling has been lifted until the start of 2025. Still, it is unfortunate that this type of brinksmanship has become the norm in Washington, and it slowly undermines America’s standing with investors.

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