Chris

Sam, Labor Day is now in the rearview mirror, and that tends to be the traditional end of summer, as everyone goes back to school and returns to work. You know, there are a lot of fun things about summer, but one of the things I like to do is grill, and I'm curious what your go-to grilling options are.

Sam

That's a good question, Chris. I would say normally it's been steak tips. I love steak tips; they're regional delicacy up here in New England. I just can't get enough of them. That being said, this summer I've kind of switched a little bit. I'm eating a lot more chicken as opposed to beef, and part of that's just because how expensive beef has gotten. You know, I think it's pretty safe to say that people are kind of feeling the rise in prices on food across the board. But Labor Day was a pretty good reminder of just what that means on a real kind of dollars-to-dollars basis, right? I was reading a really good analysis the other day that showed that year-over-year, the price growth for a traditional Labor Day barbecue was actually up about 4 percent this year. You know, not sky high, but following years of persistently high inflation, it's something that I think a lot of people have been paying attention to.

Chris

Yeah, there's no doubt about it, and it's not just what you buy. I like to spend a chunk of my summer in the vegetable garden, and the result of that is I end up grilling corn and beets and squash and tomatoes and the input costs this year, whether it's fertilizer or mulch, they're all much higher than they were last year. And I just think the cost of living in general has gone up, and people are starting to pay attention, and the bond market is certainly starting to pay attention.

Sam

You know, I think the last month the bond market has really gotten a lot of investor attention, primarily because we've seen rising yields, and rising yields means lower prices for existing bonds. And a big chunk of that rising-rate environment that we've seen, I would attribute it to concerns over inflation, right. We've seen a lot of kind of factors that have driven the rise in rates, certainly, but inflation seems to be top of mind for a lot of people, especially given the ongoing conflict in the Middle East and the surge in energy prices that we've continued to see. So, I think there's going to be a lot of, you know, investor attention about this, at least for the months ahead.

Chris

Yeah, I think you're right. There are other elements that could be explaining that. We've seen some of them in the headlines certainly a couple weeks ago when U.S. debt crossed $40 trillion that got a lot of headlines. That's just a number, but it is a risk going forward, and it has been for some time. I read an interesting article this weekend that one of the other things the bond market may be reacting to is stronger economic growth. That's certainly possible. All the investment that's going on in AI infrastructure is certainly fueling the economy, despite the headwinds. But it seems like, given the move we saw last week and the surge in yields off the CPI and PPI price print. But, as well as you mentioned, West Texas crude's back over $100, and the Middle East conflict doesn't appear to be moving toward resolution. It actually appears to be escalating, and I think the bond market sending that message is they're not sure there is an immediate end to that that gets the Strait of Hormuz open. Crude prices are likely to stay elevated. We've seen gas at the pump starting to go higher again, and they're sending the message that is inflation is here to stay. Interestingly, Kevin Warsh has said a couple times that he thinks the Fed ought to pay attention to what the markets are saying and take some cues from the bond market, and the bond market seems to be playing along and sending him a message. So, how do you think that's going to get interpreted?

Sam

Yeah, no, I think the messaging from the bond market is is pretty clear when it comes to short-term interest rates and what they expect from the Fed, and that's further tightening, right? So, I think markets are pretty reasonably pricing in rate hikes from the Fed going forward, given the sticky levels of inflation that we've seen, and also, quite frankly, the lack of clarity on the geopolitical front, right? I think there was a little bit of patience to see what was going on in the Middle East, to see what would happen to oil prices over the summer, and also, you know, as Chair Warsh started up his new term in the Fed, I think there is definitely a bit of a transition period. But going forward, I think markets are really sending the message that they expect the Fed to be reactive to the inflationary environment, and quite frankly, that means tighter monetary policy ahead.

Chris

Yeah, you know it's interesting as a young equity investor, one of the first lessons you learn is don't fight the Fed, and usually when rates are going up, that's not good for stocks. But I feel like we're at a point where the bond market has done a lot of work on interest rates already that if you start to get a tightening cycle, the market may actually take a step back and take a breath and go back to focusing on fundamentals. And as we talk about, fundamentals are really strong. The earnings growth that corporate America has delivered over the last 18 months, the expectations for the next two quarters and even 2027 remain really strong earnings growth. And I think if we can get to a point where investors can go back to focus on that, it does offer underlying support for markets over the long term. But we have to get there first, and you know I think the bond market probably has it right in the short term.

Sam

Well, I always think the bond market has it right, but I tend to agree with your take as well, Chris. You know, I think there are some risks out there, but as we've seen time and time again, while short-term headline noise can certainly drive markets, over the long run, it's really the fundamentals that matter, and the fundamentals for corporate America have been impressively resilient so far this year. So, hoping that continues going forward. It sounds like it's expected to, and I think that's ultimately going to be what investors can hang their hat on by the end of this year.

Chris

Yeah, I mean risks are always going to exist. You have to be aware of them. You have to think about how they can impact markets. But you know my view: fundamentals over the long term are what people are going to come back to.

Sam

Totally agree. Well, thanks for sharing your thoughts, Chris, and thank you for joining us. Join us again next month for another update from the Market Observatory. Certain sections of this commentary contain forward-looking statements as of the date published that are based on our reasonable expectations, estimates, projections, and assumptions. Forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. Opinions are subject to change without notice. This communication should not be construed as investment advice, nor as a solicitation or recommendation to buy or sell any security or investment product. Asset allocation and diversification programs do not assure a profit or protect against loss in declining markets. No program can guarantee that any objective or goal will be achieved. Investments are subject to risk, including the loss of principal.