The unfortunate reality is that so long as the U.S. keeps piling up more debt, there is only so much that clever maneuvers can do to ease the costs and vulnerabilities that go with it. The two key drivers of increasing debt have been expensive wars and massive government spending. Higher debt has driven up borrowing costs and higher yields on US treasury bonds, enough to cause the equity market to take a pause.
Inflation measured 2.9% in January 2026, but it has accelerated over the year. Inflation now stands at 3.7%. That is bad news for a few reasons. It marks the 65th straight month in which inflation has exceeded the Federal Reserve’s 2% target. The reality is that inflation has been above target for over five years, and it could remain so for some time due to the Iran war and tariffs. The longer inflation remains high, the more likely it becomes that elevated energy prices will bleed into other areas of the economy, such as transportation and manufacturing. The next reading of Inflation – the Consumer Price Index (CPI) will be posted this week.
On a positive note, the U.S. job market rebounded in August as employers added a surprising 162,000 jobs. The unemployment rate stayed at a low 4.1%. But hiring remains well below the 166,000 monthly jobs that were the norm in 2023 and 2024, The jobs report may increase the likelihood that the Federal Reserve will raise its key short-term interest rate when it next meets Sept. 15-16 and solid hiring sends a signal that current borrowing costs aren’t necessarily high enough to restrain the economy and cool inflation.
For the week, the Dow fell 0.27%, the S&P added 0.09%, and the Nasdaq pushed up 0.40%.
Future Wealth’s View
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The Laffer Curve represents an economic theory that, at a certain level, federal revenue actually starts to fall rather than rise as tax rates increase. On a similar note, increasing federal debt actually hurts aggregate demand rather than helps it after a certain point. As the Treasury pays out more in interest as the debt level grows, the government will reduce purchases because it has less money left. At high levels of debt, the economy still benefits from households getting more income they receive from higher rates on bonds. But, the positive effect on the economy is outweighed by lower government spending. Of course, there is the credibility of the dollar that also comes into question when other countries no longer buy US treasury bonds as a safe haven and instead look to gold or other commodities for protection. What happens when foreign countries don’t buy US treasury bonds? The treasury has to buy back its own bonds to suppress rising yields with money it does not have, thus raising debt levels even more. Treasury Secretary Bessant announced last week that it will be doubling its buybacks starting Sep 9. Why is this important? When 10 year treasury bond yields start to get past 4.75%, there begins a rotation from equities to bonds that becomes more meaningful when treasury yields hit 5%. Also, September historically is the worst month of the year for stocks. And, a lot of the growth in tech stocks has been debt fueled. With 10 year yields pushing 4.8%, we believe that, near term, material upside to the stock market may be limited from current levels. Stay vigilant. |