Three things are competing for investors’ attention right now: oil near $100 as the Iran conflict resumes, a Federal Reserve that just raised rates for the first time in three years, and midterm elections that could flip control of Congress. Each is a legitimate concern. None of them is a reason to change a well-built plan. Let us walk through why, starting with the Fed, because that’s the one with the most immediate cause and effect on your portfolio.
First, the Scoreboard
August was another reminder that strong markets don’t require a picture-perfect backdrop. The S&P 500, Nasdaq, and Dow rose 2.6%, 3.9%, and 1.3%, bringing year-to-date gains to 12.3%, 13.5%, and 10.7%. International developed markets returned 1.8% and emerging markets 3.2%. Volatility fell below its long-term average, with the VIX closing the month at 16.
The 30-year Treasury touched its highest yield since 2007, closing at 5.24%; the 10-year ended at 4.75%. Gold finished at $4,437 an ounce, the dollar index slipped to 99.43, and Q2 GDP was left at 1.5% annualized.
September opened rougher. The June U.S.–Iran ceasefire fizzled in July over Strait of Hormuz shipping restrictions, and the resulting strikes sent crude up nearly 10% in the first week of the month. The 10-year hit 4.79% on September 1, its highest since January 2025. Then Friday’s jobs report surprised everyone—payrolls rose 162,000 against a 53,000 consensus, unemployment held at 4.1%, and July’s reported loss was revised away entirely.
The Fed Raised Rates. Here’s What Happened and Why.
On September 16, the Federal Open Market Committee voted 12–0 to raise the federal funds rate a quarter point, to a range of 3.75%–4.00%. It was the first hike since July 2023, and it surprised no one: Fed Funds futures had put the odds above 90%. Chair Kevin Warsh was blunt: inflation is too high, has been for too long, and this summer’s readings did not show underlying trends improving. The action, in his words, will support a timelier return to the 2% goal.
The data that got them there: August CPI came in at 3.4% year over year, unchanged from July, with energy up 16.3% from a year ago—gasoline alone up 27%, fuel oil up 52%. Core CPI actually slowed to 2.4%, the lowest since March 2021, but the monthly core reading ticked up to 0.3%, and with oil back above $100 the Fed chose not to wait for energy to bleed into everything else.
The market’s response was instructive. Stocks took the hike itself in stride since it was fully expected, then sold off during the press conference. The Dow fell more than 600 points (1.2%), the S&P 500 lost 0.5%, the dollar had its best day since June, and the 10-year Treasury moved back above 5%, its highest since 2007. That was the third straight down day and the seventh loss in eight sessions. The S&P ended the week slightly lower; the 10-year closed at 5.00%.
The Fed also published its updated Summary of Economic Projections. Warsh again did not submit his own, as in June, but the rest of the committee expects one more hike this year—December is now the market’s base case—and, more importantly, doesn’t see rates coming back down until 2028. These projections shift meeting to meeting, but they tell you how policymakers are thinking: higher, and for longer than most investors assumed a year ago.
Then Monday happened. Oil eased back toward $100, the 10-year slipped to 4.95%, and the S&P 500 jumped 1.5% to 7,765, within 0.4% of its record, while the Nasdaq closed at an all-time high. Same Fed, same rates, opposite day. That whipsaw is the lesson: the market’s reaction to a hike is rarely about the hike.
Cause and Effect: What a Rate Hike Actually Does
A quarter point sounds small. It isn’t nothing, but it works through the system in a specific sequence, and understanding that sequence is what keeps you from overreacting to any single day.
First, short-term rates reset immediately—money markets, T-bills, and floating-rate debt. That’s the part you feel in a week. Second, borrowing costs rise for mortgages, cards, and corporate debt, which cools spending and hiring over the following quarters. Third, a stronger dollar makes imports cheaper and exports harder. And fourth, a higher discount rate compresses what investors will pay for future earnings, which is why long-duration growth stocks are the most sensitive on the day.
Two points we’d underline. The bond market moved first—the 10-year was already above 5% before the meeting—and the Fed followed. As one strategist put it, the market adjusted rates and the Fed simply confirmed it. And for savers and balanced investors, the arithmetic is favorable: existing bond prices dip when yields rise, but every dollar of maturing and new money is reinvested at rates we haven’t seen in nearly two decades.
Here’s the perspective on that. From 2010 through the pandemic, the 10-year averaged 2.72% and spent long stretches below 2%. Today it sits near 5%, with the 2-year around 4.7%. That’s not a crisis level; it’s a return to the kind of yields that prevailed before the financial crisis, and it’s why the income side of a balanced portfolio finally earns its keep again.
Why This Isn’t 2022
It matters why the Fed is raising rates. In 2022, the Fed was seen as too slow to react to inflation that was already broadening across the economy, so the rapid catch-up hikes were punishing for both stocks and bonds. Today’s inflation is largely an oil story that will eventually resolve through supply, and core is at its lowest in five years. That’s the main reason markets have absorbed this cycle with a bad week rather than a bad year. And if modestly higher rates stem inflation while underlying growth continues, history says that can be constructive for stocks and bonds alike.
The risk case is real and worth naming. Morgan Stanley estimates the S&P 500 could fall as much as 7% if energy rises further while the 10-year holds near 5%, and the next hike is already being priced. The Fed is fighting a supply shock, not a broken economy, but a supply shock that lasts long enough eventually becomes a demand problem. That’s the line we’re watching. Longer term, though, what sets rates is growth and productivity, not oil, and the questions that will decide Fed policy over the next few years are about artificial intelligence and the labor market, not the price of a barrel.
Earnings: The Part the Headlines Miss
Q2 S&P 500 earnings growth is tracking 28.5%, the third straight quarter above 25%. Ten of eleven sectors grew, nine by double digits—this isn’t a handful of mega-caps carrying the index. Consensus sees $349 per share by year-end and 15% growth in each of the next two years, versus a 7% historical average.
The chart above is the one we’d ask you to keep in mind whenever the headlines get loud. Over 35 years, through two bubbles, a financial crisis, a pandemic, and now a war, the index has followed earnings. At the tech bubble peak in 2000 the S&P stood at 1,527 on $53 of earnings. At the housing peak in 2007, 1,565 on $93. Today it’s 7,674 on $327. Prices run ahead of earnings and fall behind them, sometimes for years, but the blue area is what ultimately sets the level.
Strong earnings are why valuations have held around 20x—above the 16x historical average, but improved from recent peaks because estimates rose faster than prices. Valuations don’t predict the next quarter, but they do guide how we allocate over the next decade. In this environment, balance across sectors, asset classes, and geographies matters more, not less.
The Midterms: What’s at Stake, and What History Says
With November approaching, midterm election coverage is intensifying. Polling suggests a divided government is the most likely outcome, though margins are thin. Republicans hold 219 House seats against 218 needed for a majority—Democrats could take the chamber by winning a handful of races. The Senate is firmer at 53 Republican seats, though expectations have been shifting.
As citizens, this matters. Congress shapes taxes, Social Security, defense, and the national debt, and the outcome will influence the administration’s room to maneuver on tax provisions, tariffs, and the Iran conflict. Trade is a live example: after the Supreme Court struck down last year’s “Liberation Day” tariffs in February, replacement tariffs have been implemented, expired, and replaced again under different laws, while $129 billion in original tariffs is being refunded. Canada’s retaliatory tariffs took effect on September 8. A change in Congress would change that dynamic.
As investors, though, history is clear. Since the Great Depression, stock returns have been positive across presidential, midterm, and non-election years, under Republican majorities, Democratic majorities, and divided governments. When markets struggled in a midterm year—2022’s inflation, 2018’s growth and Fed worries—the economy drove the outcome, not the election. Presidents Biden, Obama, Bush, and Clinton all lost Congressional majorities at midterms; markets and the economy kept growing.
Political change is gradual and lagged. Even substantial policy shifts, like recent changes to taxes and tariffs, have had smaller and slower economic effects than headlines suggested. Corporate earnings, inflation, employment, and innovation—the 1990s tech revolution, the housing cycle, the post-pandemic inflation surge, today’s AI buildout—have moved markets far more than which party held power. This year is no different: oil, rates, and AI are the drivers, and the indices have delivered strong returns despite all of it.
Where the Election Does Matter for You: Planning, Not Portfolios
This is the distinction we want to draw. The election is unlikely to change how your portfolio is built. It may change how your plan is executed. A shift in Congress could put tax provisions, estate exemption levels, and entitlement funding back on the table over the next two years. That doesn’t call for a prediction; it calls for flexibility.
This could mean reviewing gifting and exemption use before any legislative window, Roth conversion timing, capital gains realization, and business-owner exit timing.
These are conversations we’ll be having with you this fall regardless of the outcome, because the right time to build flexibility into a plan is before the rules change, not after.
Our View
- The hike changes the price of money, not the direction of your plan. The labor market is stable, earnings are strong, and the market recovered its losses within three sessions.
- Higher yields are a gift for the conservative side of your portfolio. A 10-year near 5% against core CPI at 2.4% is the widest real yield in years.
- We’re not chasing oil; we’re making sure nothing you own depends on where it goes.
- In an environment of elevated valuations, balance across sectors, asset classes, and geographies matters more, not less.
- Expect more of last week: sharp days both directions around the October and December Fed meetings and the election. That’s normal. Your plan already accounts for it.
We’ll be watching all three with interest. If anything materially changes, you’ll hear from us. And if anything here raises a question about your own situation, especially on the planning side, please reach out. That’s what we’re here for.
– Your Wealth Management Team at JJ Burns & Company
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The foregoing content reflects the opinions of J.J. Burns & Company, LLC and is subject to change at any time without notice. Content provided herein is for informational purposes only and should not be used or construed as investment advice or a recommendation regarding the purchase or sale of any security. There is no guarantee that the statements, opinions or forecasts provided herein will prove to be correct.
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