Insights & Commentary

Q3 in Review

The biggest story of the quarter was a change in direction from the Federal Reserve. After markets spent much of the year expecting rate cuts, the Fed instead raised rates to 3.75–4.00%, its first increase since 2023, and signaled that more increases may follow. Bond yields rose in response, with the 5-year Treasury topping 5% for the first time since 2007.

A few other developments also shaped the quarter:

• Higher bond yields also pushed the average 30-year mortgage rate above 7% for the first time in more than a year, up from below 6% as recently as February. Home sales have begun to slow as higher borrowing costs price out some buyers.
• Oil briefly topped $100 per barrel, eased on hopes for peace with Iran, then climbed back above $100 late in the quarter after talks stalled.
• Inflation held steady at 3.4%, still well above the Fed’s 2% target.
• Market gains narrowed in September, with technology the only sector to finish higher.
• Consumer confidence fell to a 12-year low as higher prices weighed on households.

It is worth noting that not everything this quarter was bad news. Beneath the headlines, several signs of strength stood out:

• Stocks stayed near record highs, supported by strong corporate earnings, and forecasts for third-quarter earnings growth rose sharply over the course of the year.
• The economy continued to grow at a healthy pace, supported by a solid job market.
• Core inflation, which excludes food and energy, was a milder 2.4%, a sign that much of the inflation pressure is coming from oil.

Opportunities Looking Ahead

Artificial intelligence is in the headlines almost every day, so we won’t repeat the story most of you already know. What matters to us is where the long-term money is going. We believe an estimated $10 trillion could be spent on building out global AI infrastructure over the coming years. Rather than chase the most talked-about AI stocks, which, frankly, many portfolios already own through index funds and other broad holdings, we are researching the companies behind that build-out and staying disciplined on price. We are actively looking for opportunities to take positions for our clients, and to expand those positions as the build-out grows.

This build-out reaches well beyond the data centers themselves. Running AI at scale requires investment across a much broader set of industries, including:

• Electricity generation and the power grid, as data centers use far more energy than traditional buildings
• Nuclear power, which is drawing renewed interest as a reliable, around-the-clock source of clean energy
• Cooling systems, since AI chips generate significant heat and require specialized equipment to run
• Semiconductors, networking equipment, and the other components that tie these systems together

Q4 Outlook

Looking ahead to the fourth quarter, the market is doing what it has often done: climbing a “wall of worry,” meaning stocks keep moving higher even while investors worry about the headlines. That does not mean throwing caution to the wind. There are real risks ahead, including:

• Oil prices and the ongoing talks with Iran
• The November midterm elections
• Further rate increases from the Federal Reserve
• Third-quarter earnings reports, which begin in mid-October

Any of these may bring some short-term ups and downs. It is also worth remembering that the stock market is not the economy, and by most measures we believe the economy remains strong. The pain point is inflation, and much of that comes back to oil, which touches everything from gas prices to groceries. For you, higher rates mean cash and money market funds continue to earn more, and new bonds offer some of the highest yields in nearly two decades, although rising rates can temporarily lower the value of bonds you already hold. Periods like this can be unsettling, and they are when our work matters most. Much of what we do happens behind the scenes. It is work you may not see on your statement, but it goes on in the background to keep your portfolio aligned with your goals and balanced with your risk tolerance. If your goals or comfort with risk have shifted, a quick call is all it takes for us to revisit your portfolio. In the meantime, we stand ready to make adjustments as conditions change.

Your financial plan is about more than your investments. If your family or financial situation has changed, or if you simply want to talk through a question, we are always here to help. Call us at 888-340-3778 or email firm@rwmweb.com.