Last week, U.S. equity investors cheered as the Federal Reserve resumed its monetary policy easing, propelling stock indices to new all-time highs. The excitement was palpable, with trading volumes on Friday reaching 27.7 billion shares — the third-busiest day since 2008 (Source: Bloomberg News).
The S&P 500 closed above the 6,660 level, driven largely by technology stocks as investors positioned for further gains. Historically, a Fed easing cycle in a non-recessionary environment has supported capital investment, consumer spending and ultimately earnings growth. Even the Russell 2000, a benchmark for small-cap stocks, reached its highest close since 2021 (Source: Briefing.com).
A Rate Cut — and Rising Mortgage Rates
The Federal Reserve lowered interest rates by a quarter percentage point (25 basis points) and signaled that two additional cuts could follow before year-end to support a weakening labor market.
Surprisingly, long-term rates moved in the opposite direction. After briefly dipping below 4% following the Fed’s announcement, the 10-year Treasury yield quickly rebounded to close the week at 4.15% (Source: CNBC). Mortgage rates followed suit, climbing from 6.62% to 6.83% for a 30-year fixed rate, according to Mortgage News Daily.
At first glance, this seems counterintuitive. Shouldn’t lower short-term rates bring borrowing costs down across the board? As the chief investment officer of Regan Capital — a core fixed income manager for Elevage Partners — explained, there’s an important dynamic at play.
When the Fed lowers short-term rates, it encourages borrowing and spending. That economic boost can fuel inflation, or at least the expectation of it. Investors, concerned about potential inflation, then demand higher returns on long-term bonds to compensate for that risk. The result: long-term yields — including those tied to mortgage rates — move higher, even as the Fed is cutting in the short-term.
In other words, while the Fed’s actions are designed to stimulate growth, markets may simultaneously react by pricing in inflation risk. For prospective homebuyers, especially younger first-time buyers, this can create real challenges. A broader discussion about addressing (i.e., reducing) government spending and budget deficits would be needed to truly bring down long-term rates, but that is a conversation for another day.
What to Consider When Markets Hit New Highs
When the stock market reaches record levels, it’s natural to feel optimistic. History shows that when the Fed eases policy, risk assets like equities often perform well over the following year. But times like these are also when it becomes especially important to ensure your strategy remains intentional and aligned with your long-term goals. Even seasoned investors can find themselves swayed by headlines or tempted to act on emotion.
At Elevage Partners, we focus on three key practices when navigating markets like these:
- Balance opportunity and risk: We pay close attention to portfolio positioning, evaluating when certain holdings may warrant review or adjustment.
- Stay discerning amid the hype: With more than 150 companies expected to go public this year (Source: Barron’s), we analyze opportunities carefully, seeking to avoid reactionary decisions driven by trends or fear of missing out.
- Consider the whole picture: As year-end approaches, we look at portfolios through multiple lenses — including tax implications — to help clients make informed decisions designed to optimize after-tax results.
These aren’t one-time actions, but part of an ongoing process of preparation and adjustment. The right decisions depend on more than market timing. They come from having a clear strategy that aligns your investments with your life’s priorities — and a partner who helps you stay on course through both opportunities and challenges.
As the old fable reminds us, “The tortoise beats the hare.” It’s a lesson in patience and persistence, one that was first published by French writer Jean de la Fontaine in 1668. We believe that in investing, as in the story, progress isn’t about speed or dramatic moves. It’s about steady, deliberate steps that, over time, lead to meaningful results.
Looking Ahead: Fed Speeches and Inflation Data
This week, investors will hear from several Federal Reserve officials, including newly appointed Governor Stephen Miran, who dissented at the last meeting in favor of a larger rate cut. His comments will be closely scrutinized, especially given his ties to the current administration.
On Friday, the August Personal Consumption Expenditures (PCE) Index, the Fed’s preferred inflation gauge, will be released. After accelerating in June and holding steady in July, expectations are for stability. Any surprise increase could raise doubts about additional rate cuts this year. We’ll monitor the data closely.
The information contained herein represents the views of Elevage Partners at a specific point in time and is based on information believed to be reliable. No representation or warranty is made concerning the accuracy of any data compiled herein In addition, there can be no guarantee that any projection, forecast, or opinion in these materials will be realized. Any statement non-factual in nature constitutes only current opinion which is subject to change. These materials are provided for informational purposes only and do not constitute investment advice. Any reference to a security listed herein does not constitute a recommendation to buy, sell, or hold such security. Past performance is no guarantee of future results. The historical returns of any securities and/or sectors mentioned in this commentary are not necessarily indicative of their future performance.