Market Commentary: August 2025
Equity markets surged in the first half of August, driven by a strong earnings season and growing optimism that the Federal Reserve will cut rates in September. Mid and Small Cap stocks led the rally as investors largely shrugged off mixed and at times troubling economic signals. Many market participants are betting that fiscal stimulus from the Big Beautiful Bill and potential monetary easing will cushion the impact of rising tariffs and ongoing trade uncertainty. Consumer spending remained resilient in July, with retail sales rising 0.5%1. However, sentiment weakened in August, while one-year inflation expectations climbed to 4.9%2.
The labor market is the major economic focus after the July Non-Farm Payrolls report showed just 73,000 jobs added, well below expectations, and substantial downward revisions erased 258,000 jobs from the prior two months3. The downward revisions triggered political fallout, resulting in the firing of the head of the Bureau of Labor Statistics. The Trump Administration immediately nominated a well-known critic of the BLS, which has caused concern among many economists that data integrity or transparency may be issues going forward. Meanwhile, inflation remains persistent, with July’s CPI up 0.2% month-over-month and 2.7% year-over-year4. Despite inflation staying above the Fed’s 2% percent target, it's likely they will be forced to cut rates in September due to concerns the jobs market needs support.
Bond investors continue to "wait and see" what the impact of any rate cut might mean for valuations. The first two weeks of August have been flat, which is normal during periods of rising stock prices. It's normal for fixed income prices to move upward in advance of a rate cut and normalize afterwards, so the next 30 days could be good. Mortgage rates also dropped to the lowest point of the year, falling approximately 50 basis points from January, offering some relief to housing markets. Overall, we continue to see bond's primary role is to provide attractive yields and provide diversification during periods of market unrest.
The bottom line: Markets are holding up on the hope of rate cuts and continued consumer strength, but challenges are accumulating. Persistent inflation, weakening labor conditions, and rising tariffs are creating a more uncertain backdrop. Investors should stay cautious as volatility may rise while the Fed considers its next move.
Sources:
1. United States Census Bureau, https://www.census.gov/retail/sales.html
2. University of Michigan, https://www.sca.isr.umich.edu/
3. Bureau of Labor Statistics, https://www.bls.gov/news.release/empsit.nr0.htm
4. Bureau of Labor Statistics, https://www.bls.gov/news.release/cpi.nr0.htm
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