In this latest installment of our newsletter, we share our observations of the markets and the economy in the third quarter of 2026. Click here to go to the full October 2026 report on our website. Following are the highlights:
- The third quarter ended September 30th, 2026, saw increased volatility across both equity and bond markets due to continued uncertainties around the Iran War, skyrocketing oil prices, persistent inflation, and the upcoming U.S. midterm elections.
- The S&P 500 Index, the broadest measure of the U.S. equity market, posted a total return of 2.3% in the third quarter of 2026, a notable slowdown from the 15.2% total return in the second quarter. But for the nine months ended September 30th, the S&P 500 Index still notched a double-digit return of 12.7%.
- Much of the notable activity during the third quarter happened in the usually sleepy bond market, where a steep rise in yields in September sent bond prices falling. As a result, the Bloomberg Aggregate Bond Index declined -3.5% in Q3 and -2.9% for the year-to-date period.
- The rise in U.S. interest rates has occurred across the yield curve, meaning short, intermediate, and long-term bonds have all seen an increase in their respective yields. However, the gap between short-term and long-term rates has narrowed significantly.
- For example, the benchmark 10-year Treasury yield topped 5.3% in late September, a rate not seen since 2002, while the 30-year Treasury yield rose above 5.5%, a level last seen in 2004. The takeaway for many investors has been that it may not be worth taking the duration risk of longer-term bonds for only a marginally higher yield.
- The rapid rise in rates has not been limited to the U.S., with global bond yields reaching their highest levels since the mid-2000s, reflecting the mounting uncertainties around the Iran and Middle East conflicts, global trade disruptions, and persistent inflation.
- The Federal Open Market Committee (FOMC) raised its benchmark, short-term, Fed funds rate at its September meeting by 25 basis points (1/4 of 1%) to a target range of 3.75% to 4.0%. It was the first rate increase since 2023 and was driven mainly by stubbornly high inflation that has stayed well above the Fed’s target annual rate of 2%. Despite outside pressures, the FOMC stuck to its policy priorities and voted unanimously (12-0) for the rate hike.
- Despite all the economic challenges posed by higher inflation and interest rates, the U.S. economy continues to show remarkable resilience in several areas, including robust corporate earnings, positive GDP growth, and steady consumer spending.
- We are watching the labor market closely because, while remarkably steady over the last few years, it did post disappointing job growth data in September, which could impact everything from GDP growth to future Fed actions around interest rates.
- Our near-term outlook is that volatility may continue in equity and bond markets until there is more clarity around the conflicts in the Middle East, as well as the direction of oil prices, inflation, and interest rates.
- Despite these uncertainties, we do expect the U.S. economy to remain on a positive growth trajectory and for corporate earnings to continue to grow for the remainder of this year and into next year.
- We also expect the A.I. infrastructure boom to continue to drive growth in a variety of sectors, including information technology, healthcare, financial services, communication services, and utilities.
- Overall, our long-term, time-tested investment philosophy remains unchanged and continues to favor high-quality companies with strong revenue and cash flow characteristics, leading market shares, wide economic moats, and solid growth prospects. We believe our active approach to individual security selection allows us to construct broadly diversified client portfolios designed to weather market turmoil and be well-positioned for long-term growth and appreciation.
The Edgemoor Team
