🔎 At a Glance

• Pimco Sees A 6% 10-Year. Here’s Why "Bad Inflation" Caps Yields
• Market Brief & Technical Review
• From Lance's Desk: Bad Inflation Cures Itself. Good Inflation Doesn't - RIA
• Market stats, screens, and risk indicators

🏛️ Market Brief - Earnings Season Opens On A Raised Bar

The market sold off hard to finish the week. The S&P 500 fell 1.09% on Friday to 7,659.44, closing the week down 1.95%, its worst week since June. The Nasdaq Composite fared worse, dropping 2.15% Friday and 4.48% for the week. Meanwhile, the Dow eked out a 0.67% weekly gain, and the Russell 2000 lost 3.05%. That split tells you most of what you need to know about what happened: there was a continued rotation from growth and risk to value and safety.

The selling was concentrated and professional. The trigger was a scare about how the AI buildout would be financed. CoreWeave lost a quarter of its value this week, with its bonds yielding above 15%, and that gave investors an excuse to dump anything "AI-adjacent." The semiconductor ETF (SMH) fell 10.5% on the week. Lam Research dropped 17.2%, Micron 14.6% and Intel 14.2%. Per Goldman Sachs prime brokerage data, hedge funds net sold global AI stocks for five straight sessions, unwinding every dollar of net buying since early 2025. Long sales outpaced short sales roughly 3.5 to 1, so this was "de-risking," not a new bet against the market.

The macro backdrop didn't help. Hotter consumer and producer inflation reports pushed the odds of a December rate hike to 74.3%, as Fed Chair Warsh argued that a spending surge (read: Capex) is fueling inflation. Brent crude jumped 3.7% on Friday to $109.86 with no deal in sight on Iran. The VIX climbed to 20.16 from 14.84 a week ago. Of course, when dollars look for safety, there is nothing as good as Treasury bonds. The rotation from risk to safety showed up in the 10-year yield falling to 5.09% from 5.24%.

Here is the part the headlines missed. It was NOT a liquidation of everything. Staples rose 5.0%, energy 4.9%, and health care 3.5%, and the equal-weight S&P 500 actually gained 0.5% while the cap-weighted index fell 2.0%. As we warned in last week's Bull Bear Report, technology was extremely extended above its long-term mean, and a growth-to-value rotation looked likely into year-end. That rotation arrived faster than expected. Bob Farrell's Rule #2 says excesses in one direction lead to an opposite excess in the other, and a crowded AI trade is unwinding the way crowded trades always do.

Does that set up a rally? Possibly. Positioning is cleaner, and Goldman puts hedge fund AI allocation at 26.1%, down from 31.7% in June. But the same Goldman note says this deleveraging is "closer to its beginning than its end," with gross leverage still near five-year highs, of course, that note was before Friday's selloff.

Next week, earnings will be the swing factor. FactSet reports that 84% of companies have beaten estimates so far, yet the market is selling beats by 0.2% on average versus a normal 0.9% gain. The bar is high. Magnificent 7 earnings are expected to grow 33.2%, but excluding Nvidia and Meta, that drops to 7.5%.

That makes next week's reports, particularly Meta on Wednesday, the real test. The thread to follow is whether the rotation stays a rotation. If defensives and value continue to catch bids while tech stabilizes, a reflexive bounce is likely. If the selling spreads into the equal-weight index, the problem is bigger than AI.

📈Technical Backdrop -  MACD Turns Up Just Below The Record

The S&P 500 closed Friday at 7,659.44, down 1.95% for the week and 2.0% below the October 6 record close of 7,818.93. More importantly, the index closed below its 50-day moving average (7,712) for the first time since September 30. It remains 5.3% above the 200-day moving average (7,276), so the longer-term uptrend is intact. The short-term trend is not.

Last week, we said a close below 7,700 would shift the near-term trend to neutral. That happened. Momentum confirmed it. The 14-day RSI fell to 43.8 from 59.9 a week ago. The MACD crossed below its signal line on Thursday, reversing last week's buy signal. That's a sell signal, but from a level that is far from oversold.

The Bollinger Bands frame the setup. The index now sits 1.47 standard deviations below its 20-day mean of 7,739, just above the lower 2 SD band at 7,631. Notice in the chart below that each of the last three closes below that lower band, on June 10, July 29 and September 16, marked a short-term low within a few sessions. The lower 3 SD band at 7,577 lines up almost exactly with the September 16 low of 7,567. That is the line in the sand.

Breadth is the saving grace. The equal-weight S&P 500 rose 0.5% while the cap-weighted index fell 2.0%. Even late in Friday's session, roughly 228 of the 500 members were higher on the day. The damage is in the largest names. Such is the difference between a rotation and a market where everything breaks at once.

On positioning, we made no trades this week. Two weeks ago, we trimmed technology exposure and added to value. We also harvested tax losses and rebalanced bond portfolios, slightly shortening duration to capture higher yields. That rotation did its job this week.

Don't sell into the hole. A reflex rally toward the 50-DMA and the 20-day mean (7,712 to 7,739) is likely. Use it to rebalance rather than chase. A close below 7,567 is the signal to raise cash and add hedges. Below that, the 200-DMA near 7,276 is the next major support. Until Wednesday's earnings clear, keep technology positions at or below target weights.

The single most important level next week is 7,567. Hold it, and this is a pullback inside an uptrend that sets up a tradeable bounce. Lose it on a closing basis, and the market is telling us the AI unwind has further to run.

🔑 Key Catalysts Next Week

Next week is when earnings season gets serious. According to FactSet, 79 S&P 500 companies report, including five Dow components. After this week's AI liquidation, the question those reports will answer is simple: was the selling driven by fundamentals or by positioning?

Wednesday after the close is the week. Meta, Tesla, Lam Research, Texas Instruments and IBM all report after the bell, which means five of the most AI-sensitive names in the market will deliver their verdicts in a single evening. Meta carries the most weight. It's one of only two Magnificent 7 names doing most of the group's heavy lifting. Its capital spending guidance will be read as a verdict on whether the AI buildout can keep financing itself with yields above 5%. Lam Research, down 17.2% this week, gives the semiconductor equipment read. Texas Instruments covers the industrial and analog cycle that the AI trade left behind.

The rest of the calendar leans toward the "old economy" that just outperformed. Netflix, GE Aerospace, RTX, and Capital One report Tuesday. Procter & Gamble, Union Pacific, Lockheed Martin, Honeywell and Blackstone follow Thursday. Exxon Mobil and American Express close out the week Friday. If staples, industrials, and energy confirm their earnings strength, the rotation out of tech has a fundamental leg to stand on.

The economic calendar is light. Housing starts, building permits and pending home sales arrive Tuesday, with weekly jobless claims and the leading economic index Thursday. Friday brings the flash S&P Global PMIs and the final University of Michigan survey. Its one-year inflation expectations number matters more than usual after this week's hot CPI. Watch Wednesday's $13 billion 20-year Treasury auction too. A weak bid could push yields right back up after this week's flight to Treasuries.

The Fed enters its quiet period on Saturday ahead of the October 27-28 meeting, so there are no scheduled Fed speakers. Markets now price a 74.3% chance of a December hike. Oil remains the wild card, with Brent near $110 and no resolution on Iran or the Strait of Hormuz.

The most market-moving event of the week is Meta's report Wednesday night. The asymmetry is clear. A capex raise paired with a clear financing plan could spark a sharp short-covering rally. Positioning in the sector has already been cleaned out. A cut, or any hint that funding is getting harder at 5% yields, would hand the AI bears their next leg down.

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💰 Pimco Sees A 6% 10-Year. Here’s Why "Bad Inflation" Caps Yields

Will interest rates go up to 6%? That's the question on many investors' minds since Pimco's chief investment officer, Dan Ivascyn, told the Financial Times last Friday that a 6% 10-year Treasury yield is "certainly possible." This week’s hotter-than-expected September CPI report only added fuel to that argument.

I get it. The 10-year closed at 5.31% on October 5, the highest close since May 2002. It started the year at 4.18%. However, look at what is actually driving inflation. Then look at how every major yield spike since 1990 ended. The case for a sustained move to 6% gets thin quickly.

Pimco's 6% Call, And Why It Landed

In case you didn’t read the article, let's start with what Ivascyn actually said, because the headlines compressed it. He did not forecast 6%. He said it was possible, and he tied a big part of the recent move to market plumbing rather than economics.

"It is certainly possible, even from a short-term trading perspective... some of the activity we've seen in the last couple of weeks is tied to some negative technicals."- Dan Ivascyn, Pimco, to the Financial Times, October 9, 2026

Furthermore, he also flagged "stop-out activity from the platform hedge funds and other levered investors," and warned that a move to 5.5% or higher would bring "some decent weakness in risk markets, both credit and equity."

Read that last part twice, because I'll come back to it, and it was a topic we touched on when we discussed the “Basis Trade.” The backdrop is real. Oil has spiked. The Fed raised rates in September for the first time since 2023. And today's CPI showed headline inflation accelerating to 3.7% from 3.4% in August.

Such is the setup that makes a 6% call feel inevitable. But a forecast that depends on forced selling by levered funds is a forecast about positioning, and positioning reverses. When the "technicals" that drove a move wash out, the fundamentals reassert themselves. So the real question for investors is what the fundamentals say.

Will Interest Rates Go Up On Inflation? Look Under The Hood

The bond bears' case rests on inflation. So let's look at inflation. The Bureau of Labor Statistics reported this morning that the energy index rose 20.4% over the past year, with gasoline up 34.2%. Gasoline alone rose 9.1% in September. Strip out food and energy, and core CPI rose 2.6% over the year. A year ago, that same core rate was running at 3.0%.

Notice in the chart above that the red and black lines diverge in March 2026. That is the oil shock, and it hasn't spread into the core. Wages tell the same story. Average hourly earnings rose 3.0% over the past year, per the September jobs report, which is hardly a "wage-price spiral." Employers added just 29,000 jobs in September, and July was revised to a loss of 10,000.

Is this the kind of inflation that sends yields to 6% and keeps them there? No. This is "bad inflation," the supply-shock variety that eats into household budgets until spending slows, hiring stalls, and the very price pressure that started the scare begins to fade on its own. It doesn't justify "higher for longer" forever. Gasoline now runs $4.33 a gallon nationally, up from $2.98 before the current oil shock (AAA data cited by CBS News). That extra $1.35 per gallon isn't spent elsewhere, and the economy slows under its weight. Energy-driven inflation without wage growth behind it is a tax on consumers, and taxes slow economies. Slowing economies don't sustain 6% bond yields.

Every Yield Peak Since 1990 Ended The Same Way

Bob Farrell's Rule #1 is that markets tend to return to the mean over time. Bond yields are no exception, and when I went back through the Federal Reserve's daily Treasury data and pulled every major 10-year yield peak since 1990, 6 of them stand out, and each one looked unstoppable at the time.

Here are the details of that research. The table below uses the daily closing high for each episode, then measures where the yield sat 12 and 24 months later. It also lists what was happening as yields fell, because yields rarely fall for "positive" reasons.

Step back for a moment and think about the data. Since 1990, there have been 6 interest rate peaks, and 6 periods of lower yields two years later. The mechanism was the same each time: higher rates tightened financial conditions until something gave, whether that was the economy, a levered corner of the market, or the Fed's resolve. The average decline was 1.64 percentage points, within a range of roughly 1 to 2.25 percentage points.

There are two caveats to mention. The first is that a peak is only a peak in hindsight. This study tells you how these episodes resolved, not the day they ended. Secondly, the 2018 figure includes the pandemic collapse in rates, which flatters it. Still, even 12 months out, every case was lower, by more than three-quarters of a point at minimum. So, will interest rates go up from here? They can, for a while. The history says that the higher yields climb, the faster they break the thing that is pushing them higher.

"Yields don't peak because investors get comfortable. They peak because something breaks, and at 5.3% the list of candidates is getting long."

Real Rates Are Already Doing The Fed's Work

This is where the data gets even more interesting. When we measure against core inflation, the 10-year Treasury now pays a "real yield" of roughly 2.7%. That's the highest since 2010, and well above the 1.6% average since 1990. Real yields are what borrowers actually feel, regardless of what the "soft landing" crowd says. A business deciding whether to build a plant is weighing that number, just as much as a family deciding whether to buy a house. This is why if you are wondering whether interest rates go up from here, you should watch "real yields" closely.

I've written about where I thought fair value sat for some time. To wit:

"By the mean-reversion logic the framework implies, the fair value of the 10-year is closer to 5.3% than to 4.6%." - Rising Interest Rates: Why The Narrative Fails Against The Data, May 22, 2026

Interest rates have already returned to normal, and a move to 6% would be an overshoot of roughly 70 basis points beyond fair value. That level would also arrive just as payroll growth has nearly stalled and unemployment has climbed to 4.2%. 

"But Lance, the debt is far bigger now than in any of those past episodes."

I agree, and it certainly is. That is exactly why the overshoot is harder to sustain, not easier, because every extra point on the 10-year eventually rolls into the interest bill on the trillions of dollars of debt that Washington refinances every year. The CBO's preliminary numbers show net interest on the public debt hit $1.143 trillion in fiscal 2026. That's up 11% in a year and accounts for about 21% of all federal receipts.

Higher rates on a bigger debt pile drag on growth. That drag eventually shows up as lower yields, not higher ones. I made that case in detail in "Normal Interest Rates: What The Debt Panic Gets Wrong."

Will Interest Rates Go Up Further? What It Means For Investors

Go back to the line I asked you to remember. Ivascyn's own scenario says a move to 5.5% or higher brings "some decent weakness in risk markets, both credit and equity." That is precisely the environment in which high-quality bonds tend to do their job. If rates spike far enough to hurt stocks and credit, the spike itself often sets up the bond rally. In other words, the 6% scenario partly contains its own cure.

That doesn't mean loading up on long-duration bonds and walking away. In this past weekend's Bull Bear Report, we noted that we've slightly shortened clients' bond duration. Overall bond allocations remain in place. The trade-off is plain: duration protects you in a growth shock, when yields fall and bond prices rise, but it hurts you in an inflation shock, when yields keep climbing and longer bonds take the most pain.

If you are drawing income from your portfolio, a 5% yield is also a real cushion. It helps against the sequence of return risk I covered last week.

For the full case on owning Treasuries at these levels, see "Bonds At 5%: Is The 10-Year Treasury Finally A Buy?"

Waiting for 6% before doing anything is a bet in itself. Every peak in the table above looked like it had more room to run at the time. Whether interest rates go up another half point or roll over next month, a few basics hold. Know your portfolio's duration and whether it matches your time horizon. Staggering maturities means you're never forced to bet everything on one rate call. And if an oil-driven second wave would damage your plan, some inflation protection earns its keep. Such is the difference between managing risk and forecasting it.

Bottom line:The 10-year could touch 6% on forced selling, but with core inflation cooling and growth stalling, 6% looks far more like the top of this cycle than a new floor.

Every one of the last six yield peaks felt like the start of something new. Each one turned out to be the end of something old. The only question is what breaks first this time.

🖊️ From Lance’s Desk

This week's #MacroView blog explores why the economy is running bad inflation, and the bad kind is the temporary kind, which is precisely why the bond market refuses to panic.

Also Posted This Week:

• Think Rates Are Peaking? Consider Mortgage-Backed Securities - RIA- by Michael Lebowitz
• Bonds At 5%: Is The 10-Year Treasury Finally A Buy? - RIA- by Lance Roberts

📹 Watch & Listen

Hotter-than-expected CPI inflation data sent stocks lower Wednesday, erasing the S&P 500's recent breakout to all-time highs and pushing markets back into the trading range that has persisted since August. With the index now threatening to test its 100-day moving average, is a larger correction developing, or is this simply normal October market behavior?

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📊 Market Statistics & Analysis

Weekly technical overview across key sectors, risk indicators, and market internals

💸 Market & Sector X-Ray: Market Gains Ground

This next week, Q3 earnings season swings into full gear. The rotation this past week pushed the previously very oversold sectors (like bonds, staples, real estate, and utilities) back toward more overbought levels, while technology, mid-cap, and small-cap stocks sold off. Energy remains the outlier, and the one sector with the largest sell off potential, given its deviation from long-term means, but is dependent on the direction of oil.

📐 Technical Composite: 70.49 - Sell Off Reduces Overbought Conditions

The technical condition eased somewhat last week as the technology sector came under decent pressure. However, the technical conditions didn't deteriorate as much as one would have expected, given last week's rotation from growth to value and improving breadth. With the technical conditions more "neutral," the market's direction next week isn't clear, but it will certainly be driven by the deluge of corporate earnings starting on Monday.

🤑 Fear/Greed Index: 54.87 – Holding At Neutral

Even though the market sold off last week, the underlying market allocation and sentiment remain more neutral. There was a continued drop in the Commitment of Traders equity allocations; however, investor sentiment turned slightly more bearish last week. If the market can continue to hold up into earnings season, it could present a good buying opportunity over the next month or so.

🔁 Relative Factor Performance

Two weeks ago, we stated that "Factor performance has diverged over the last couple of weeks, with Growth, Speculative Technology, and Megacaps now extremely overbought, while Value, Low Beta, and Dividend Yield (interest rate-sensitive sectors) are now the most oversold." This past week, we saw that reversal come on strong, with Technology selling off and healthcare and staples rallying. While the reversal may have some more room to go next week, there is likely a coming opportunity to start buying some technology companies here soon.

📊 MFBR Index (Money Flow/Breadth Ratio Indicator)

The Money Flow Breadth Ratio (MFBR) model is a rules-based equity allocation framework that uses weekly S&P 500 money flow data to generate buy, sell, and neutral signals. The MFBR systematically adjusts portfolio equity exposure in response to the direction and persistence of institutional capital flows. It aims to reduce drawdowns while capturing the majority of market upside.

"As of October 16, 2026, with the S&P 500 at 7,659.44, the Money Flow Breadth Ratio (MFBR) stands at 55%, down from a peak of 75% set 7 weeks ago and falling versus 60% the prior week. The trailing four-week change is still -10 percentage points, but the near-term trend has rolled over. This places the indicator in the 50-60% range. The raw zone signal reads NEUTRAL, but the model still flags a TOP REVERSAL, with 20 points now off the peak. Read that NEUTRAL as a zone label, not as fresh confirmation - the model reached this band by falling out of overbought, not by building up from below.

Bottom line: hold the target weight. The roll-over off the 75% peak is real and worth watching, but it has carried the gauge into the band that has historically been the best place to own equities. This is neither a chase nor a de-risk. A sustained break below 60% would move the grid to an underweight; a move back above 70% would re-engage the contrarian trim."

📊 Sector Model & Risk Ranges

We noted last week that "Energy and Technology are now extremely deviated above their long-term weekly means. Historically, such deviations lead to corrections or consolidations, so profit-taking and rebalancing are recommended." That advice worked well this past week as the rotation from Technology to Value picked up steam. Bonds also rallied but remain very oversold. While some of the overbought conditions have reversed, there could still be some additional pressure next week, so trade accordingly.

Have a great week.

Lance Roberts, CIO, RIA Advisors

The post Pimco Sees A 6% 10-Year. Here’s Why “Bad Inflation” Caps Yields appeared first on RIA.

CoreWeave shares have fallen by nearly 50% since April, including a 15% decline on Wednesday. More concerning, its 9.625% notes maturing in 2032 traded for less than 80 cents on the dollar. That equates to a yield of nearly 15%. For context, the yield was below 10% earlier this week. Its five-year credit default swap spreads nearly doubled in a week, from 368 basis points on October 6 to 643. Based on its CDS spread, the market implies an approximate 35% chance the company defaults within five years.

The timing of the sharp increase in its funding costs is very problematic. CoreWeave carried roughly $35 billion in debt and $5.5 billion in cash at the end of June, with combined debt and lease obligations near $52 billion. It has $4.4 billion of debt maturing through this year, and $6.2 billion in 2027. Refinancing at 15% is likely not economically feasible. Issuing new shares is also problematic given its recent downward trend.

CEO Mike Intrator recently told his employees the company is “confident in our backlog which more than supports all of our debt obligations,” pointing to $104.2 billion of contracted revenue. Its order backlog is a strong source of revenue, but it probably isn't immediate enough to fund its current needs.

Gartner, an IT advisory firm, drove recent concern with its claim that more than 80% of neocloud providers, including Coreweave, will cease independent operations by 2030. Will a white knight like Nvidia come to Coreweave's rescue?

What To Watch Today

Earnings

Economy

Market Trading Update

Yesterday, we discussed the split in bank earnings between trading desks and lenders. We also noted that narrow leadership had left equal weight near a three-year relative low. Today, let's ask whether fundamentals can carry the equal-weight rotation that started last week. Citadel's Scott Rubner tackled that question in his October update, "Fundamentals in Focus," and his answer cuts both ways.

Start with the good news. Consensus expects roughly 27% S&P 500 earnings growth for Q3, the third-highest bar entering a reporting season since 2010. Companies have beaten pre-season estimates in 19 of the last 20 quarters. Estimates rose 1.6% into the season. The buyback window is also about to reopen. Only 24% of index weight sits outside blackout today. That climbs to 55% by month-end and 85% by November 9.

BUT look at who carries that growth. Micron and Nvidia alone account for 36% of expected earnings growth, and the top ten contributors make up about two-thirds. Strip those ten out, and growth drops to roughly 11%. The smallest 300 companies in the index are expected to grow earnings about 5%. That's the fundamental reason equal weight spent two months getting run over.

So the turn matters. The RSP/QQQ ratio slid about 11.5% from late August to its October 7 low. Citadel puts the index version at its lowest level since April 2000. It has since bounced 4.7%, and RSI has climbed from below 30 to 54. However, the ratio still sits 2.2% below its 50-day moving average and 5.4% below its 200-day. Such is the difference between a bounce and a trend change.

Wednesday added a wrinkle. A hotter September CPI print knocked the S&P 500 down 1.08% to 7,721 and the Nasdaq 100 down 2.02%. That ended a run of more than 50 sessions without a 1% decline, a streak Rubner flagged only two days earlier. Meanwhile, retail investors bought $2.6 billion of semiconductors last week, a 96th-percentile reading. When retail piles into the few names carrying the earnings math, any stumble there hits the index and the crowd at once.

Bob Farrell's Rule #7 says markets are strongest when broad and weakest when narrow. Rubner adds a caution of his own. Fewer than half of similar rebounds from extreme relative lows kept going over the following month.

Here's how we're handling it. As noted yesterday, we've been steering trimmed mega-cap gains toward lagging groups. We also added to financials in the Equity Aggressive Growth model ahead of earnings. We're sticking with that process, but we aren't chasing the bounce. If you're overweight semiconductors, trim to target weight before October 28 to November 3, when nearly half of the index weight reports. Add equal-weight exposure on pullbacks toward the 20-day mean, not on up days. If the ratio breaks back below the October 7 low, the "rotation" failed, and we'll treat it that way.

Narrow markets rarely announce when they break. They just break.

The Other Side Of The CoreWeave AI Trade

If CoreWeave’s stocks and bonds are the bear case for the AI industry, Taiwan Semiconductor Manufacturing Company (TSMC) earnings report is the bull case. TSMC is the world’s largest contract chipmaker, producing the advanced processors designed by Nvidia, Apple, and AMD. Its shares primarily trade on the Taiwan Stock Exchange (2330), with American Depositary Receipts (ADR) on the NYSE under TSM.

TSMC reported third-quarter revenue of $46.72 billion compared to estimates of $45.7 billion, up 41.1% from a year ago. Its gross margin was 66.4% and net income rose 68.7%. Fourth-quarter earnings guidance of $52.3 to $54.3 billion easily topped consensus.

Even with TSMC's strong results, chip stocks fell, still reeling from the CoreWeave story and its implications for chip makers and producers, like TSMC. Despite TSMC's strong earnings, South Korea’s Kospi dropped 8%, and trading was halted. Japan’s Nikkei fell nearly 5%. Taiwan’s Taiex lost 3%, and TSMC itself fell 2%.

We think the takeaway from the CoreWeave and TSMC stories is that demand for chips remains incredibly strong. However, the market is not repricing demand; it is repricing the financing behind the AI buildout and its beneficiaries.

PPI And Retail Sales Support Another Rate Hike

September headline PPI rose 1.3% more than double the 0.5% consensus, lifting the annual rate to 6.3% from 5.6%. That is the largest yearly gain since 2022 and the highest since May. Energy drove a sizable share, with diesel prices up more than 70% year over year. Strip out food, energy, and trade services, and PPI still rose 0.5% monthly and 5.0% annually. Core PPI was 0.7% against a 0.2% estimate. It's worth noting that PPI tends to be more volatile than CPI and PCE and harder to estimate.

Retail sales rose 0.8%, beating the 0.4% expected. Unfortunately, nearly all of it was gasoline. Excluding autos and gas, sales rose just 0.2%. The control group, which feeds the GDP calculation, rose 0.1%. Both figures were below the inflation rate, meaning real spending on everything outside energy was negative in September.

For the October 28 FOMC meeting, this week delivered hot CPI, hot PPI, and a consumer showing resilience but solely on the back of rising gas prices. Given this week's data, it's hard to see how the Fed doesn't hike in two weeks, yet Fed Funds futures only assign a 30% chance of a hike.

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The economy is running bad inflation, and the bad kind is the temporary kind, which is precisely why the bond market refuses to panic.

Most of the argument about inflation right now is a fight between people using the same word for two completely different things. One side sees a 3.7% headline print and starts sketching a repeat of 1979. The other sees core running more than a point below it and declares the problem solved. Both are reading the same release. The distinction that matters is not how big the number is, but whether anybody's income is financing it. That is the line between "good" inflation and bad inflation, and almost nobody draws it.

Good Inflation, Bad Inflation, And The Difference Nobody Makes

There is a general framework to inflation, and it is older than any of us. Prices can rise because buyers are bidding for scarce goods with money they've actually earned. Or prices can rise because the cost of producing something has jumped for reasons unrelated to demand. An oil embargo will do it, as we saw in the 1970s. So does a shuttered Strait of Hormuz, a new tariff schedule, or a pandemic that takes half the world's shipping capacity offline for eighteen months.

This is an important point for the “debasement” crowd, whose narrative overlooks the underlying fundamentals.

“The following economic illustration is taught in every ‘Econ 101’ class. Unsurprisingly, inflation is the consequence if supply is restricted and demand increases via monetary interventions.”

However, there is a very important distinction to be made about inflation. The first type is the "good" kind of inflation, and it is genuinely good. Demand pushes prices up; firms book wider margins; tight labor markets funnel those margins into paychecks, and the higher paychecks fund the higher prices. The loop closes and becomes self-reinforcing because every leg of it is paid for by real output.

The second kind, the “bad” kind of inflation, closes nothing. A tariff is a tax, just like an oil shock is a tax. Somebody's cost went up, and the money has to come out of a budget that did not grow. Every dollar of that price increase is a dollar not spent somewhere else. Bad inflation doesn't create the income that pays for it, so it destroys the demand that supports it. Such is the mechanism behind the oldest saying in commodities: “high prices cure high prices.”

Think of it this way.  A group of people drives the same way to work every day. Half get a raise, the other half doesn’t. The city decides to put a toll booth on the road they drive to work; each year, that toll rises. Both groups have an increasing number draining their bank accounts each month. However, only one group has sufficient compensation to continue using the toll road. The group without the compensation raise is eventually forced to stop using the toll road; traffic falls, and the operator cuts the toll to win them back.

What The September Print Actually Says

Let’s review the recent August data to see what the message, versus the narrative, actually is. The headline CPI came in at 3.7% year over year in September. Core came in at 2.6%, a tick higher than August. Read that pair again, because it is the whole argument. The gap between them widened from nine-tenths of a point to one and a tenth, meaning the headline accelerated roughly three times faster than the core.

That gap suggests a very different narrative than what the media suggests. Gasoline rose 9.1% in the month alone and 34.2% over the year, and the BLS attributes over half the entire monthly increase in the all-items index to that one category. Energy overall is up 20.4%. Meanwhile, core goods, where a genuine demand boom would show up first and loudest, rose 0.7% over twelve months, sitting exactly where it was in August. Shelter ticked up to 3.2%

Now the part I owe you, because I set a test in advance. Core ticked up, shelter ticked up, and services' less energy reached 3.1%, which would eventually prove me wrong. One month of tenths is noise rather than a trend. It is also the first month this year that those three moved the wrong way together, and core goods holding flat at 0.7% is why I am not moving yet, because that is where a demand boom announces itself first, and it has not.

Headline CPI pulled further away from core in September. The shaded area is the spread, and the spread is energy. Source: BLS via Massive Market Data, September 2026.

I've been making this argument since June, when I wrote about why the May 4.2% headline was an oil story rather than a demand story. To wit:

"A 4.2% headline that is three-fifths gasoline is not the same animal as a 4.2% headline driven by wages, rents, and services broadening."

Four months later, the composition has not changed. What has changed is that the evidence against the demand-pull story got considerably stronger.

Labor Just Set A 79-Year Low

The most important evidence comes from the labor market. If this were the “good” kind of inflation, workers would be capturing some of it. They are not.

Real average hourly earnings fell 0.7% over the twelve months through September, more than double the August decline. Nominal wages rose 0.1% on the month against a 0.6% CPI print, so purchasing power went backward at the fastest pace of the year. Run the same calculation off average hourly earnings and CPI, and you land in the same place. Real wage growth is near -0.7%, down from over 1.5% as recently as last spring.

In April 2026, real wage growth crossed below zero and hit its weakest reading in September. The gold bars represent the months when wages grew faster than prices. The red bars are months when they didn't. Source: BLS via Massive Market Data, August 2026.

Then there is the one number that everyone simply overlooked. In the second quarter, labor's share of nonfarm business output fell to 52.8%. The Bureau of Labor Statistics flagged that as the lowest level in a series that begins in the first quarter of 1947. Read that again. There have been 79 years of data, 2 dozen business cycles, 4 major wars, the Volcker shock, the China trade shock, and the pandemic. Despite all that, in what is supposed to be an economic boom, we just set a record low.

Here is what it looks like graphically. This is not what an inflationary boom looks like.

Labor's share of output has been falling for a quarter century and just made a series low. Good inflation requires this line to rise. Source: BLS, Productivity and Costs, Q2 2026.

Stop and notice that in the chart above, this is not a 2026 event. The erosion in labor runs back to the early 2000s, long before “artificial intelligence” or “surging debt.” The last two years have simply accelerated the numbers. With respect to the inflation question, the timing matters most. A price level that is rising while labor's slice of output hits an all-time low is the textbook signature of cost pass-through rather than demand-pull. In this environment, corporations are fixated on protecting profit margins, while workers are absorbing the difference.

The economic activity surveys tell the same story if you take the time to read past the headlines. The ISM services printed 54.9 in September, with new orders easing to 59.8. That reads like a demand boom until you see prices paid at 74.0, the highest since July 2022, while the employment index has not exceeded 50.1 in three months. Steady orders, hot input costs, flat payrolls. When respondents were asked what was driving those costs, fuel came up about twice as often as anything else.

Where The Inflation Bulls Have A Point

As always, we need to examine both sides of every argument, as the inflation bulls do have a valid point.

The strongest one is the AI buildout. Memory is genuinely scarce; its scarcity is genuinely caused by capital spending, and the producer price index for storage devices has climbed 23% since the end of 2024, while import prices for computers and parts are up 37%. J.P. Morgan's research team puts the memory shock at 0.2% to 0.4% on core inflation. That is capex-driven price pressure; it is real, and it did not come from an embargo. However, that scarcity will eventually reverse. As with oil prices, high prices eventually curtail demand.

The second argument is that tariffs are a policy choice, not a weather event. That is a true statement, and a tariff regime that stays in place for years produces a price level that stays elevated for years. Calling that "transitory" is a semantic trick. I can't argue with that. A permanent tax produces a permanent price. However, the current tariffs were not enacted by Congressional legislation, which would make them more permanent. In this case, they were enacted through executive order, which means the next Administration can repeal them quickly.

The third is that energy is not reliably mean-reverting on any schedule you can trade. Geopolitics doesn't run on a calendar. However, high oil prices, as shown in the chart below, reliably mean-revert over time.

Those are all sound and valid arguments, but there is a problem with all three, though. Every one of them describes a SUPPLY constraint. A memory shortage is, by definition, a shortage. Call the tariff what it is: a tax. And the Middle East risk is a supply risk. None of them creates the income that pays the higher price. All three fail the same test: gasoline fails, and a more flattering story doesn't change what the bill does to a household budget.

Why Bad Inflation Cures Itself

"Inflation is inflation. My grocery bill doesn't care about the taxonomy."

That is a fair statement. The pain from inflation is the same either way, and when you are staring at the number on the gas pump, the squeeze on household budgets happens regardless. Just because it happens to be the academically preferable kind, the household budget just doesn’t care. However, the taxonomy isn't about how it feels, but how it ends, and bad inflation ends in a way the good kind never does.

Every major energy spike since 1971 has reversed within one to two years. The 2008 spike gave way to a 25% collapse. The 2022 spike gave way to a 17% collapse. Source: BLS, CPI energy index via FRED, through September 2026.

Notably, look at what happens after every spike on that chart. In June 2008, energy jumped by more than 24%, then subsequently fell by 25% over the following year. In June 2022, energy surged by 41.5%, then only to fall by 16.6% by 2023. Every period from the 1974 and 1980 shocks, the 2000 run, and the 2015 collapse is the same. The pattern repeats itself because it has to, since “demand destruction” is not an economic theory; it's just arithmetic. The current reading of roughly 20% sits well inside the range that has always reverted.

Such is why the bond market refuses to panic. The 10-year breakeven inflation rate is 2.33% as of October 13, and the September monthly average was 2.36%. That number has barely moved all year, holding a range of roughly 2.24% to 2.44% while headline CPI swung from 2.4% up to 4.2% and back to 3.7%. The one market that gets paid to be right about inflation looked at an 180-basis-point headline swing and didn't blink. It then watched September print three-tenths hotter and tick down.

Critically, this is where the case from the “Persistent Purveyors Of Doom” gets confused with itself. Yes, bond yields are elevated, and the bears point at that as vindication for their case. The 10-year sits near 5.1% and the 30-year above 5.55%. But if you decompose it, the rise is due to real yield and the term premium, not inflation expectations, because expectations have been pinned near 2.3% for 18 months. Since early September, the long bond has added about 30 basis points, while the breakeven has given up 3. The bears are right that the long end is repricing. They just have the wrong reason.

Five tests, and five answers pointing in the same direction, which all bring to mind a rule to live by.

“When every strategist on television agrees that inflation is structural and yields only go up, the setup is usually pointed the other way.”

What This Means For Portfolios

Will bad inflation cure itself on a schedule you can put in a calendar? No. Demand destruction takes quarters, not weeks, and an energy shock can persist long enough to cause real damage as it resolves. Such is the frustration of running a process that works in quarters for clients who measure in weeks. But will it resolve without the Fed having to break something? On this evidence, probably yes, and that is a very different portfolio than the one the inflation-forever crowd is selling.

It argues for duration, which is the position I laid out in my discussion about wage growth as a leading inflation indicator. Since then, the real wage data has reinforced that positioning. Investors who bought commodity-linked exposure as an inflation hedge may have the wrong trade. The reason is that commodities would hedge the one kind of inflation that has historically unwound. However, quality equities with pricing power beat the debt-heavy cyclicals that need a nominal boom to work. Most notably, watch the labor data rather than the CPI headline. Labor is where the answer lives.

In the current environment, as laid out in the “Druckenmiller Warning,” an effective bond sleeve would look something like this.

Here is what would change my mind, stated plainly so you can hold me to it. If core services excluding shelter reaccelerate, if the Employment Cost Index turns up, if real hourly earnings cross back above zero, and the quits rate rises, then the wage loop is closing, and this inflation became the durable kind while I was arguing it wasn't. Watch those four. I'd rather be corrected by data than by a client's statement.

The thing to fear was never that prices would keep climbing. It's that they'll stop climbing because nobody can afford them anymore, and labor's share of output has been telling us for twenty-five years exactly which of those two we're heading toward.

Sources & Notes

1. U.S. Bureau of Labor Statistics, Consumer Price Index, August 2026, released September 11, 2026. Headline 3.4% year over year, core 2.4%, gasoline +27.4% year over year, energy +16.3%, core goods +0.7%, shelter +3.0%.
2. U.S. Bureau of Labor Statistics, Real Earnings, August 2026. Real average hourly earnings down 0.1% on the month and 0.3% over twelve months.
3. U.S. Bureau of Labor Statistics, Productivity and Costs, Second Quarter 2026. Labor share 52.8%, described in the release as "the lowest level in the series, which begins in the first quarter of 1947." Nonfarm productivity +1.4% annualized in Q2 and +2.2% over four quarters.
4. Institute for Supply Management, Services PMI, August 2026: headline 55.4, new orders 60.9, prices paid 72.6, employment 47.8. Respondent commentary cites tariffs and the conflict in the Middle East.
5. Federal Reserve Bank of St. Louis, 10-Year Breakeven Inflation Rate (T10YIE), 2.36% as of September 11, 2026. Monthly series from Massive Market Data show 2.29% for August 2026 and a range of 2.24% to 2.44% across 2026.
6. U.S. Treasury constant maturity yields via Massive Market Data, September 9, 2026: 10-year 4.83%, 30-year 5.28%, 2-year 4.43%.
7. J.P. Morgan Global Research, on the AI-driven memory shortage. PPI for storage devices +23% since end-2024; import prices for computers and parts +37%; estimated 0.2%-0.4% lift to core inflation.
8. Replication note per house practice: the real wage series plotted above was rebuilt from BLS average hourly earnings and CPI rather than taken from the BLS real earnings release. The rebuilt series shows -0.26% year-over-year for August, compared with the release's -0.3%. The difference is rounding and the release's use of CPI-U seasonal detail. Both agree on sign and direction, and the argument does not hinge on the third decimal place.
9. Data note: the October 2025 CPI observation is absent from the source series and has been left as a gap rather than interpolated.
10. Prior RIA analysis referenced: May Inflation Print: Why the 4.2% Headline Is an Oil Story (June 13, 2026) and Wage Growth As A Leading Inflation Indicator (July 3, 2026).

The post Bad Inflation Cures Itself. Good Inflation Doesn’t appeared first on RIA.

As we noted in prior commentaries, last month's softer-than-expected CPI and PCE reports, along with weak labor data, gave the Fed room to wait on further rate hikes. Yesterday's CPI data takes some of it back.

September headline CPI rose 0.6% for the month, matching expectations, and 3.7% over twelve months against 3.6% expected. Core CPI, more closely followed by the Fed, rose 0.3% versus a 0.2% estimate, lifting the annual rate to 2.6% from 2.4%.

The energy contribution was large and widely expected. Gasoline rose 9.1% in September and accounted for more than half of the headline CPI increase. The energy index rose 5.2% in the month and is up 20.4% year over year. Food was unchanged.

Strip out energy and prices still rose 0.3%. The BLS report showed price increases across recreation, used cars and trucks, education, airline fares, medical care and apparel, with communication among the few categories that declined. Shelter rose 0.4% after 0.3% in August.

That breadth of the data will concern the Fed. The Fed can look through headline inflation driven by a gasoline supply shock. Gains spread across services, goods, and shelter will be tougher to ignore.

Two things stand out in the report. The year-over-year core CPI at 2.6% is moving in the wrong direction after August’s 2.4% marked the lowest reading since March 2021. And the monthly chart shows headline CPI at 0.3%, 0.4%, 0.6% over the last three months, an acceleration rather than a plateau.

For the October 28 FOMC meeting, this data will reopen the hike question the market had seemingly closed. Odds of a hike sat near 20% after the September jobs report, down from roughly 70%. The September minutes showed most participants expecting another increase by year-end, and Lorie Logan, Beth Hammack, and others have argued for 50 basis points or more. The graphic below shows the knee-jerk reaction to the CPI data in the Kalshi betting markets.

What To Watch Today

Earnings

Economy

Market Trading Update

Yesterday, we used a gutsy fourth-down call in Tampa to argue that protecting a lead beats running up the score. Today, there's another reason to think about that lead. An equity supply surge is headed for Wall Street, and history has something to say about it.

Goldman's Ben Snider estimates U.S. companies raised $431 billion this year through IPOs, follow-ons, converts, and SPACs. That puts 2026 on pace to top the 2021 record of $540 billion. Next year looks bigger. Goldman expects $600 billion of new issuance plus $1.7 trillion in shares freed by expiring lockups. SpaceX has already raised $75 billion, and both Anthropic and OpenAI have confidentially filed draft S-1s. Including those unlocks, Goldman expects the largest increase in net U.S. equity supply since 2000.

The chart below shows the problem. The net balance of corporate demand, meaning buybacks and cash M&A minus issuance and unlocks, drifts toward zero in 2027. It only went negative in 1996 and 2000. On CNBC, Paul Tudor Jones called it the "most negative flow picture" since 2002. He plans to be short "the whole year."

The research leans his way. Malcolm Baker and Jeffrey Wurgler tested it in a 2000 Journal of Finance study of 1928 to 1997. When equity accounted for a top-quartile share of new issuance, the next year's market return averaged about-6%. Bottom-quartile years averaged roughly 14%. Companies sell stock when buyers are willing to pay the most for it. Such is the nature of a seller's market.

Of course, supply is NOT a timing tool. "But what about 1996?" asks the patient bull, and it's a fair question. That IPO wave was followed by three more years of 20%-plus gains. The 1999 and 2021 peaks tell the other story. The first year after each landed in the red.

The difference was valuation and breadth. The S&P 500 closed Tuesday near 7,797, a whisker below its Oct. 6 record and about 7.5% above its 200-day moving average. Meanwhile, Snider notes the median stock sits 16% below its own high, the weakest breadth reading since the dot-com era. Goldman counters that households and foreign investors bought over $1 trillion of stock in the first half. That's true. It's also why Washington is suddenly selling an "ownership society." Someone has to absorb the paper, and Bob Farrell's Rule #5 reminds us the public buys the most at the top.

None of this argues for selling everything today. Most of the supply lands in 2027, and demand is still strong. However, it changes the math for portfolios crowded into AI. When OpenAI and Anthropic list, managers must sell something to own them. The likeliest "funding source" is the mega-cap AI names already dominating portfolios. Rebalance winners to target weights, skip the day-one IPO chase, and hold cash for unlocked shares at better prices.

The underwriters always get paid. The only question is who's holding the paper when the lockups expire.

Reader Question: Why Buy MBB?

After our recent article, "Think Rates Are Peaking?" a reader questioned, as quoted below, whether a mortgage-backed securities ETF like MBB makes sense when its dividend yield sits far below today’s 7%-plus mortgage rates. It’s a fair question worth exploring. (Note: the question claims the yield is 3.5%, whereas the 30-day SEC yield is 4.52%)

The problem michael is that if you want to capture the current juicy yield of 7 plus u cannot find that in an etf so there is zero incentive buying an mbs etf that yields 3.5 pc in my book.

Q: Why can’t MBS investors earn 7%?

The current 7.40% average mortgage rate per Freddie Mac is what homeowners pay, not what investors receive. Servicing and agency guarantee fees take a cut of nearly 0.75% to 1.00%, so new MBS pools pay investors about 6.50% to 6.75%.

Q: Why is MBB’s dividend only about 4.5%?

Most of MBB’s holdings are older mortgages with an average coupon of 3.63%. Its dividend reflects those low coupons.

Q: So should you expect MBB’s return to be near 4.5%?

No. Those low-coupon bonds trade below par; thus, every dollar homeowners prepay or return with repayments comes back at par (100). Thus, with MBS prices in the low 90s, that principal return adds extra return. This explains why MBB’s yield to maturity is 5.87%, per iShares. That return over the dividend yield shows up in the share price, not the dividend.

Bottom line: Judge MBB by its yield to maturity, not its dividend.

Think Rates Are Peaking? Consider Mortgage-Backed Securities

Think interest rates are peaking? If so, agency mortgage-backed securities (MBS) deserve a look. Think rates have further to climb? MBS may still earn a place in your fixed-income allocation, potentially offering more yield than Treasuries and essentially no credit risk.

Here is the twist. In 2022 and 2023, MBS investors learned a painful lesson. As rates surged, homeowners stopped refinancing, and MBS durations rose at the worst possible time. Today, that dynamic has largely run its course. With 30-year mortgage rates at 7.25% and nearly 80% of homeowners holding a rate below 6%, refinancing has all but stopped, leaving MBS durations little room to extend further. The feature that hurt MBS investors in 2022 and 2023 has little room for further harm.

MBS are a unique type of bond because mortgagees can prepay part or all of their mortgage at any time without penalty. Thus, MBS investors, who have essentially lent mortgagees money, are, inherently, short a prepayment option. The prepayment option accounts for much of the extra yield MBS offer over Treasuries, as well as their greater interest rate risk. But when the risks are limited, MBS holders are often in an advantageous position.

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The post CPI Hotter Than Expected: Is A Hike Back On The Table? appeared first on RIA.

Think interest rates are peaking? If so, agency mortgage-backed securities (MBS) deserve a look. Think rates have further to climb? MBS may still earn a place in your fixed-income allocation, potentially offering more yield than Treasuries and essentially no credit risk.

Here is the twist. In 2022 and 2023, MBS investors learned a painful lesson. As rates surged, homeowners stopped refinancing, and MBS durations rose at the worst possible time. Today, that dynamic has largely run its course. With 30-year mortgage rates at 7.25% and nearly 80% of homeowners holding a rate below 6%, refinancing has all but stopped, leaving MBS durations little room to extend further. The feature that hurt MBS investors in 2022 and 2023 has little room for further harm.

MBS are a unique type of bond because mortgagees can prepay part or all of their mortgage at any time without penalty. Thus, MBS investors, who have essentially lent mortgagees money, are, inherently, short a prepayment option. The prepayment option accounts for much of the extra yield MBS offer over Treasuries, as well as their greater interest rate risk. But when the risks are limited, MBS holders are often in an advantageous position.

In this article, we weigh the pros and cons of MBS at current yields, explain what will drive future returns, and share how individual investors can gain exposure.

Setting The Stage

Mortgage rates and Treasury yields have moved sharply higher over the last six months. Per Freddie Mac, the average 30-year fixed mortgage rate was 7.28% as of October 1, the highest since November 2023, and up from 6.34% a year ago.

The graph above shows that virtually all mortgages originated from the early 2000s have a rate below the current rate. Accordingly, refinancing activity has dried up. To wit, the Mortgage Bankers Association (MBA) reported that its refinance index is over 50% below the same level a year ago. Per Joel Kan of the MBA:

Mortgage rates jumped to their highest level in almost three years, pushing borrowers to the sidelines.

The iShares MBS ETF (MBB), a reasonable proxy for the agency MBS index, holds securities with a weighted average coupon of 3.63%, roughly 3.50% below the current mortgage rate. With most mortgages at least 2% below current rates, very few homeowners have an economic reason to refinance.

In bond terminology, their prepayment option is worth little. To better understand why this matters for MBS investors, let's focus on MBS duration.

Understanding MBS Duration

Duration measures a bond’s price sensitivity to changes in interest rates. A bond with a duration of seven years should lose about 7% of its value if yields rise by 1% and gain about 7% if yields fall by 1%. For Treasury, municipal, and corporate bonds, duration is fairly predictable because their interest and principal cash flows are fixed.

MBS investor cash flows depend on when and by how much homeowners pay down their mortgages, which depends largely on interest rates. Therefore, changes in interest rates have a much more profound impact on MBS durations than Treasury and corporate durations.  

MBS investors track effective duration, a model-based duration estimate that accounts for how prepayments are expected to change as rates move.

• When rates rise, refinancing slows, cash flows are pushed further into the future, and duration lengthens.
• When rates fall, refinancing accelerates, principal comes back sooner, and duration shortens.

The graph below shows a hypothetical comparison of MBS and Treasury duration for a range of Treasury yield levels. Note how quickly MBS duration changes when rates are between 4% and 6%. At the same time, note the relatively flat, downward-sloping Treasury duration once rates are above 6%. The lower graph shows that refinancing activity is highly sensitive to rate changes when 10-year Treasury yields are in the 4% to 6% range. 

Coping With Duration Shifts – Negative Convexity

The graph above shows that MBS rate exposure tends to shift in the wrong direction at the wrong time for investors. For instance:

• Duration increases when yields rise, so price losses are greater than they would have been if duration had remained constant.
• Duration declines when falling rates would otherwise produce larger price gains had duration remained constant.

Those negative consequences are called negative convexity.

This all means that the stated duration of an MBS or portfolio of MBS is a snapshot, not a constant. Investors should expect it to change as rates change and watch where current mortgage rates sit relative to the point at which homeowners can profitably refinance.

Extension Risk Is Largely Spent

Extension risk, or rising duration, has been harming MBS investors since rates started rising in late 2021.  As rates rise, refinancing slows, the expected life of the mortgage pool lengthens, and duration increases precisely when investors least want more duration. MBS holders acutely felt the negative convexity in 2022 and 2023.

Today, despite the recent rate increase, much of that extension has already occurred. When a mortgage pool is deeply out of the money, or not economically refinanceable, as many are today, prepayments are driven almost entirely by factors unrelated to interest rates such as:

• Home sales.
• Scheduled amortization of principal.
• Defaults, which, for agency MBS, return principal at par.
• Cash-out refinancing, which is limited at current rates.

These and other sources of principal repayment create a floor under prepayment speeds.

Today, prepayments can't slow much more; thus, further rate increases would not extend duration much. Put differently, MBS investors buying today are taking on duration that is relatively capped on the upside. Accordingly, the risk/reward for MBS looks more balanced than it did a few years ago.

The Con: The Double Whammy If Rates Fall

The flip side of limited duration extension risk is the MBS problem when rates decline. If mortgage rates fall meaningfully, higher-coupon pools face two penalties at once:

• Principal earning higher rates returned through prepayments must be reinvested at lower rates.
• Duration shortens. As refinancing accelerates, the expected life of the MBS declines, capping price appreciation relative to a comparable Treasury.

This is the cost of the prepayment option MBS investors essentially sold to homeowners. The extra yield they earn over Treasuries is the premium they are paid for bearing it.

The Silver Lining To The Double Whammy

Within the double whammy, i.e., negative convexity, lies a potential reward in today’s market. If mortgage rates fall by almost 2.5% to 5%, over two-thirds of mortgages, as we share below, have no financial incentive to refinance. 

For most of the MBS market, falling rates in the recent environment are a good thing:

• Because refinancing will be slow to kick in, duration declines should be minimal; investors can capture a large amount of the price benefit of lower yields.
• Faster prepayments become a gain. Lower rates tend to boost home sales, and every sale pays off a loan at par. For MBS trading below par, each dollar returned early is profit pulled forward.

Bear in mind it's not just the low number of high-rate loans that will likely limit prepays when rates fall.  Refinancing takes months for borrowers to notice lower rates, shop lenders, and close loans. Furthermore, given the lack of recent refinancing and home sale activity, lender capacity could become a bottleneck if applications surge.

Also, many borrowers never refinance. Some lack the credit score or home equity to qualify, some have balances too small to justify closing costs, and others simply do not act. As a result, investors continue to collect above-market coupons on the loans that remain.

Falling rates can be very beneficial to MBS holders given today’s backdrop.

How To Invest In MBS

For institutional investors, the agency MBS market is one of the deepest and most liquid fixed income markets in the world. Owning individual MBS is ideal in theory. It allows investors to choose the coupon, vintage, and prepayment characteristics that best fit their views. However, in practice, it is challenging and impractical for smaller investors for the following reasons:

• Pools factor down. Every month, a portion of principal is returned. A $100,000 position may be $60,000 within a few years, and small, “odd-lot” positions trade at meaningful discounts to larger pools.
• Monthly principal must be reinvested. Small, irregular cash flows are difficult to put back to work efficiently.
• Prepayment analysis requires data and models most individual investors do not have.
• Dealer access and pricing transparency for small trades are limited.

For these reasons, an ETF or mutual fund may be a more practical option for smaller investors. Funds handle reinvestment, maintain diversification across coupons and vintages, and benefit from professional management, institutional models, and lower trading costs.

Passive ETFs such as MBB offer broad index exposure at low cost; its expense ratio is 0.04%. Actively managed MBS funds, such as JMBS, can shift their holdings toward coupons and specified pools that managers believe offer better convexity profiles, albeit at higher fees.

Investors should review a fund’s coupon distribution, effective duration, and use of leverage or derivatives. Two funds with similar durations can behave differently.

The graphic below compares the most popular passive MBS ETF, MBB, to the largest active ETF, JMBS.

Summary- Investment Thesis

A bullish thesis rests on two key points. First, interest rates stabilize and start to fall.

Second, even if rates rise, the duration shift is largely capped, as the graph below shows. Accordingly, assuming MBS-to-Treasury spreads do not change, the price change between an MBS and a similar-maturity Treasury will not be that indifferent.

Three years ago, extension risk was the reason to avoid MBS. Today, it is one reason to own them. With most mortgages far below market rates, MBS duration has little room left to extend or refinance. Investors are left with an asset class that offers high yields, minimal credit risk, and stable duration.

The post Think Rates Are Peaking? Consider Mortgage-Backed Securities appeared first on RIA.

Diversification is the practice of accepting a lower potential return to reduce risk and increase the likelihood of reaching your financial goals. A recent NFL game clearly illustrated the value of managing portfolio risk.

The Tampa Bay Buccaneers led the Dallas Cowboys 24-10 with 8:36 remaining. With the lead and a likely victory, the Buccaneers faced fourth-and-goal from the Cowboys' one-yard line. They had two options.

• A chip-shot field goal would have made it 27-10, a three-score game. Doing so would have forced the Cowboys to score three times in under nine minutes. Two of those scores had to have been touchdowns.
• Go for the touchdown, which is the option they chose. The Buccaneer’s running back did not score. Within minutes, Dallas drove 99 yards, made it a one-score game, and had plenty of time left to play good defense, get the ball back, and try to tie it up.

The Buccaneers held on and won 24-16. Buccaneers coach Todd Bowles was asked about the questionable decision afterward and said, “We talked about it, and I knew three was better,” yet he went for seven. Bowles admits the low-risk option was sufficient to win. But while pushing for a higher score, he nearly turned a near-certain win into a loss.

Investors face the same decision today. A five-year Treasury offers 5% returns and roughly 9.4% if yields fall a point. Yields would have to climb 116 basis points before a 5-year buyer loses anything. Moreover, if they hold the bond to maturity, they lock in 5%. Stocks may outperform 5%, but an investor already ahead in the race to fund retirement does not need to maximize the margin. They need to avoid losing.

This is not a message to sell stocks and buy bonds, but properly adjusting your stock-bond allocation for potential risks and returns can give you a better chance of winning the ultimate game: meeting your financial objectives.

What To Watch Today

Earnings

Economy

Market Trading Update

Yesterday, we looked at how narrow leadership has pushed the equal-weight index to a three-year relative low, and why we're steering trimmed mega-cap gains toward lagging groups. Tuesday's big bank earnings reports put one of those laggards under the microscope. The message was far more split than the headlines suggest.

Goldman Sachs blew the doors off, earning $17.01 a share against estimates near $13. Equities trading revenue jumped 72% from a year ago. JPMorgan posted a "rare" miss at $5.57 versus roughly $5.90. Jamie Dimon conceded that trading and dealmaking "did moderate somewhat during the quarter." Wells Fargo squeaked past on earnings at $1.87, but revenue and net interest income both came in light.

Here's where it gets interesting. The firms tied to trading, deals, and financing are booming, while the lenders grind through thinner margins. When Wall Street's trading desks outrun Main Street's loan books, you are usually closer to the end of a cycle than the beginning. Goldman also disclosed that its investment banking backlog fell at the end of June. That pipeline is the forward-looking number, and it's shrinking.

A skeptic in the back row would ask, "If the banks are posting near-record quarters, why have the stocks gone nowhere?" The market priced the good news in by summer. Our equal-weight composite of JPM, GS, BAC, and WFC peaked on August 12 and closed Monday 11.1% below that high. Notice in the chart below that it now sits 6.4% below its 50-day moving average and about 1% below its 200-day moving average. RSI reads 38 after dipping under 30 last week.

That's an oversold bounce attempt, NOT a confirmed turn. "Banks always beat in October" was about as consensus as it gets. This morning brings the second test, as Bank of America and Morgan Stanley report before the open alongside September CPI. Bank of America sits squarely on the lending side of this split. Its net interest income guidance matters more than any headline beat.

Here's how we're handling it. The composite's 200-day average near 159.6 is the line, and we'll respect it rather than argue with it. In the Equity Aggressive Growth model, we've added to our financial holdings and increased weights slightly heading into earnings. We favor the capital-markets names over pure lenders, with stops just under the October 7 low near 154.9. A failure there opens the lower band near 151.

Such is the nature of late-cycle earnings. The best quarters tend to arrive right before the worst guidance.

Banks Kick Off Earnings Season

JPMorgan missed on earnings Tuesday, reporting $5.57 per share compared to expectations of $5.90. JPM shares rose despite the miss, as the underperformance came from markdowns in its corporate book due to higher yields and wider spreads, rather than its loan book. Outside of EPS, everything else was good, with net interest income up 13% and net income of $15.3 billion, up 6%.

Credit improved across the board. Provisions for losses fell 19% year over year to $2.7 billion. This signals JPM's positive outlook for its loan book. This optimism likely stems from a decline in net charge-offs to $2.2 billion from $2.4 billion in the second quarter and $2.6 billion a year earlier. Furthermore, its credit card services net charge-off rate fell to 2.91% from 3.34% last quarter, well below the roughly 3.2% full-year rate management guided to last quarter.

Goldman Sachs blew out EPS, posting $17.01 versus roughly $13.07 expected. Revenues were up 23%, with equities revenue up 72%. It also added a $368 million loss provision, driven by impairments on wholesale loans.

Credit is not deteriorating at the consumer level. Card losses are falling at JPM, the country's largest card issuer. Instead, credit concerns appear to be increasing at the commercial level, as both firms are building reserves against wholesale and commercial exposures.

CPI Preview

Today's CPI report may be the tail wagging the Fed's rate decision on October 28th. Accordingly, let's review expectations and consider how various scenarios could impact the outcome from that meeting.

Wall Street expects headline CPI of 0.5% monthly and 3.6% annually, with core at 0.2% and 2.4%. As we share below, the Fed Funds futures market has largely stopped expecting a hike. October odds sit near 20%, down from above 60% three weeks ago, after core PCE came in at 3.0% against a 3.4% estimate and September payrolls were a paltry 29,000 with 60,000 in downward revisions.

A core CPI print at or below 0.2% likely confirms market expectations and makes an October hold likely. The next rate hike debate would shift to December.

A core print at 0.3% or higher could change rate expectations. It would validate Lorie Logan, who estimates another 50 basis points or more is needed, and the September minutes, which showed most participants expecting another increase by year-end.

Despite the high CPI expectation of 0.5%, the market and Fed will likely look through it, as it's largely driven by oil prices.

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Over the last couple of months, the technology sector has grossly outperformed the market, as many other sectors have fallen victim to higher yields and oil prices. While seemingly immune to the bond market, Tech stocks were hit late last week after the Financial Times reported that OpenAI told investors its annualized revenue was approaching $50 billion as of the end of September. Nine days earlier, Reuters reported the same figure at nearly $70 billion, citing people familiar with the financials. Because OpenAI is private, both estimates came from people employed by or briefed by the company.

The abrupt change in the forecast is probably not deception or a lower revision. It is the annualized revenue metric itself. Annualized recurring revenue (ARR) typically means taking one month’s revenue and multiplying by twelve. Reuters noted the issue in its own story, calling ARR “sometimes misleading” and discussing the multiplication problem. Different months may define recurring differently, and different treatment of enterprise contracts can produce different answers. OpenAI’s ARR numbers are not audited like a public company.

In leaked SEC filings for an IPO, OpenAI reported $5.7 billion of revenue in the first quarter and $6.7 billion in the second, per the Wall Street Journal. That is $12.4 billion in the first half. Per the FT, an  OpenAI investor deck in September projected $36 billion for the full year.

So three different revenue numbers describe the same company: $36 billion projected for 2026, $70 billion annualized at the end of September, and $50 billion annualized now. When valuations are based on a self-reported, unaudited metric that can move $20 billion depending on who provides it, the number deserves less weight than it gets, and it certainly shouldn’t affect other companies. However, if OpenAI sees weakening revenue and earnings forecasts, the initial negative impact on technology stocks may be correct. Unfortunately, until OpenAI goes public, it's largely just a guessing game!

What To Watch Today

Earnings

Economy

Market Trading Update

Yesterday, we discussed the bond auctions you never hear about, and our tape read flagged narrow market leadership, with only three of 11 sector ETFs above their 50-day moving averages as the S&P 500 pressed against its record. Today, I want to stay with that thread, because Spencer Jakab at the Wall Street Journal just put a sharper historical frame around it.

To wit: only a third of S&P 500 members traded above their 50-day average on Friday. Since ChatGPT's release in November 2022, the cap-weighted index has out-earned its equal-weighted twin by nearly 50 percentage points of total return. The kicker is the analog. The same number of trading days after Yahoo's April 1996 IPO, the gap was almost identical.

Notice the dark line doesn't stop at "You are here." It keeps climbing for the rest of the dot-com run before the reckoning arrives. That's Bob Farrell's Rule #4 in one picture. Excesses run further than you think, but they don't correct by going sideways. The analog doesn't tell you to sell today. It tells you how the reversal behaves when it finally comes.

Our own read of the RSP/SPY price ratio says the rubber band is badly stretched. The ratio set a three-year low on October 7, and its September month-end was the weakest in the decade of data we pull. It sits 2.9% below its 50-day average and 4.2% below its 200-day. Equal weight actually led into late February, and the ratio has given back 8.4% since its February 27 peak. Three closes below the lower 2-standard-deviation band in September, plus an RSI that touched 21 last week, tell me this move is mature.

Of course, the "breadth doesn't matter" crowd has a point. The skeptic's rebuttal writes itself: "Stocks have been narrow for three years, and the index keeps rising." Fair enough. Jakab concedes that short-term breadth readings usually flag only minor pullbacks. BUT he also shows equal weight has beaten the S&P 500 since 1990. When it wins, it catches up far faster than it fell behind. Such is the nature of a rubber band.

So, what do we do? We don't abandon the leaders over one chart. We also don't add money to the most crowded trade in the market. The big banks kick off earnings season this morning, and that's a good moment to act. In the Equity Aggressive Growth model, we're trimming mega-cap technology winners back to target weight, and the proceeds are going toward equal-weight laggards with improving relative strength, while stops on the leaders sit close to their 50-day averages. The gap can stretch further, as long as you aren't the one holding the overweight positions when it snaps back. Nobody rings a bell before a rubber band breaks. It just hurts the hand holding it.

Breadth Moderates- Year-End Rally Ahead?

This past weekend's Bull Bear Report laid out a condition that would make us more comfortable about a bull market into year-end. To wit:

Oversold sectors are exactly where a broadening move has to come from, and the equal-weight index outperformed this week. But the defensive rally came as semiconductors fell 4.5%, with chips driving earnings growth. Evercore also counts a record 140 S&P 500 members with negative beta, per Friday’s commentary. A record standing on a few names is NOT the same as a broad advance.

Breadth did improve last week. As we share below, the scores for the sectors have all gravitated toward fair value- the center of the graph. The bottom graph isolates the changes in the absolute and relative score for the most overbought sector Technology and those most oversold like Utilities, Real Estate, and Staples. While dispersion is still wide, trading over the last week is a little more encouraging. It also leads to a question of whether the years underperformers will lead a year-end rally with the high flying technology sector falling back. Earnings, which will come out for the banks this week, and the majority of companies over the next few weeks may be an indication of whether that can occur.

Bonds At 5%: Is The Ten-Year Treasury Finally A Buy?

The 10-year Treasury yield closed September north of 5.2%, the highest level in roughly 24 years. Most of the headlines treat that as a warning. I think it’s the most interesting opportunity investors have seen in bonds since before the Financial Crisis. The question I keep getting is simple: are bonds at 5% actually worth owning, or is this just another trap after the worst bond bear market in modern history?

That answer depends on three things that most mainstream coverage skips.

1. How bonds are priced,
2. Why do you own them in the first place, and
3. What the starting yield tells you about the decade ahead.

Let’s work through each one.

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With the 10-year Treasury yield at its highest level since 2002, buying bonds at 5% is the first real alternative that stock investors have had in nearly two decades.

The 10-year Treasury yield closed September north of 5.2%, the highest level in roughly 24 years. Most of the headlines treat that as a warning. I think it's the most interesting opportunity investors have seen in bonds since before the Financial Crisis. The question I keep getting is simple: are bonds at 5% actually worth owning, or is this just another trap after the worst bond bear market in modern history?

That answer depends on three things that most mainstream coverage skips.

1. How bonds are priced,
2. Why do you own them in the first place, and
3. What the starting yield tells you about the decade ahead.

Let’s work through each one.

The Fed Has Left The Bond Market

It is crucial that we begin this discussion by discussing what changed. For most of the years after 2008, the Federal Reserve was the largest buyer in the Treasury market. It held overnight rates near zero from late 2008 through 2015, and again from 2020 into 2022. It also bought trillions of dollars of bonds through "quantitative easing." The purpose was explicit: push long-term yields below where a free market would set them.

It worked. From 2009 through 2021, the 10-year yield averaged about 2.3%. From 1990 through 2007, the average was closer to 5.8%.¹ The 2.3% era was not normal. It was the product of a central bank deliberately suppressing the price of money.

Today, the setup is the reverse.

• On September 16, the Fed raised its target range by a quarter point to 3.75%-4.00%. That was its first hike since 2023.
• The median official expects another before year-end.² 
• The Fed's "reserve management" bill purchases were cut to zero in August.³ 
• The balance sheet remains large at about $6.76 trillion, but is no longer growing. Notably, its share of GDP continues to fall.

Such is the backdrop for every bond investor right now. The buyer who set the price for 15 years has stepped back. It's now private investors setting yields based on what they need to be paid. That's the first reason 5% bonds deserve a fresh look.

How A Bond Yield Gets Set

A bond is a loan. You hand the government $1,000; it pays you a fixed coupon and returns your $1,000 at maturity. The yield is what lenders demand for tying up money for that long. As I wrote in a recent piece on what the data actually says about rising interest rates, demand has two main inputs: the growth the economy offers elsewhere and the inflation that erodes the dollars being repaid. On top of that sits the "term premium," the extra pay for accepting the risk of holding a ten-year commitment.

Price and yield move in opposite directions because the coupon is fixed. If you own a bond paying 4% and new bonds pay 5%, nobody pays full price for yours. That's the entire mechanism behind the 2022 losses. Rates went up, and prices went down, but nothing about the government's ability to repay changed

Is A 5% Treasury Yield Really "High"?

It feels high because a generation of investors is anchored to a 2% world. History says otherwise. Since 1953, the 10-year yield has averaged roughly 5.6%, and it has typically run a bit below the economy's nominal growth rate.¹ To wit:

"If real growth is 2.5% and inflation is 3.5%, then a 6% nominal yield breaks even before any term premium. The investor isn't going to lend at 2% in a 6% nominal economy because that's a guaranteed loss of purchasing power and a worse return than the broader economy offers."

Plug in today's numbers. Real GDP grew about 2.2% over the past year, and headline CPI ran 3.4% in August.⁴ That puts nominal growth somewhere in the mid-5% range. A 10-year yield of 5.24% is sitting right where the economy says it should. A 5% yield is simply the price of money in an economy growing 5% in nominal terms.

Here's where I'd add one caution to the popular version of this story. Wage growth is NOT what's pushing yields up. Average hourly earnings rose 3.1% over the past year, slightly below the inflation rate.⁵ Workers are treading water in real terms. And when I broke down what is really driving normal interest rates, looking at the move in the 10-year from 2023 through mid-2026, roughly 97 of the 117 basis points came from real yields and term premium, with long-run inflation expectations moving only about 20.^6. In other words, the market is demanding more pay for duration in a world of $40 trillion in federal debt. That matters, and we'll come back to it.

Look at the last row. In 2021, stocks offered more earnings yield than Treasuries offered in interest. That was the whole case for "TINA," There Is No Alternative.

Today, a Treasury pays more than twice the stock market's cyclically adjusted earnings yield. Even on Wall Street's more generous forward estimates, the S&P 500 trades at 19.2 times earnings. That implies an earnings yield of about 5.2%, essentially identical to the 10-year, so an investor weighing bonds at 5% against stocks isn't giving up any current yield to own the safer asset.⁷ My colleague Michael Lebowitz laid out this shift in From TINA To TIGA: Diversification Pays Again. There Is a Good Alternative.

Why Do You Own Bonds In The First Place?

This is the question I think too many investors have lost sight of after 2022. They check the price of their bond fund every week, see red, and conclude that an asset class that has cushioned portfolios through nearly every stock market crash of the last century is somehow "broken" because of one inflation shock. That's like judging a house by one season's weather. The price is the weather. The coupon and the maturity are the climate.

You own bonds for three reasons: lower volatility, the return of your principal, and a reliable stream of income. Since 1928, the annualized volatility of a 10-year Treasury has been about 5.5%, compared with roughly 15.5% for stocks.1 A Treasury held to maturity returns its full face value regardless of what happened to its price along the way. And with bonds at 5%, the income finally does real work. As I argued in "Why ditching bonds in your portfolio is the wrong move," those three jobs don't disappear because one bad year made headlines.

I understand the frustration. Those losses came from a 1.5% starting yield, and the chart above shows how rarely bonds fail at their actual job. Notice that the failures cluster in a specific kind of year. The five years when stocks lost while bonds also fell were 1941, 1969, 1987, 2018, and 2022. Most were years of rising rates or rising inflation. Bonds protect you against a growth shock. They don't protect you against an inflation shock, because inflation is the one thing that hurts both. That's the trade-off you accept, and it's why the starting yield matters so much. A bond bought at 1.5% had no cushion when inflation hit. A bond bought at 5% has a lot of it.

Let’s do some basic math. At a 5.24% yield, a 10-year Treasury has a duration of about 7.7 years. That means yields could rise roughly 0.68 percentage points over a year before the price loss wiped out the income. In late 2021, with the yield near 1.5%, that cushion was about 0.16 points.⁸ The same asset, purchased at a different price, carries a completely different risk.

Are Treasuries Still The "Risk-Free" Asset?

"The U.S. has $40 trillion in debt and lost its last AAA rating. How can anyone call Treasuries risk-free?" 

It's a reasonable question, and the facts behind it are real. Moody's cut the U.S. to Aa1 in May 2025, joining S&P and Fitch at AA-level ratings. Net interest costs are projected to reach about $970 billion in 2025, roughly triple the 2017 to 2021 average.⁹

However, "risk-free" has always meant one specific thing: credit risk. The United States borrows in the currency it issues, and its debt is the collateral that banks, money market funds, foreign central banks, and the plumbing of the global financial system all run on every single day. Default isn't the risk. The probability of the Treasury failing to pay a coupon or return principal is about as close to zero as finance gets. Such is why the downgrades barely moved the market on the day they happened. A rating agency changing its letter grade didn't change the government's ability to print the dollars it owes. The fiscal path still matters, though. Investors feel it through a higher term premium and bigger price swings rather than missed payments.

Let me be very clear on this point. When it is stated that Treasury bonds are a “risk-free” asset, that doesn’t mean Treasuries carry no risk at all. They carry two, and both showed up in 2022. The first is inflation risk, the chance that the dollars you get back buy less than you expected. The second is duration risk: price swings that come with long maturities when rates move. Right now, the Fed's own messaging makes clear which one worries it most.

"The plain fact is that inflation is too high, and has been for too long." - Kevin Warsh, Chair, Federal Reserve, September 2026

So the answer is yes and no. Treasuries remain the closest thing to a risk-free asset for return of principal. They are not risk-free for purchasing power, and they never were. The 1970s proved that long before 2022 did.

What Should Bond Investors Expect Over The Next Decade?

This is where the data gets compelling. Bonds have rarely been this unloved, and with good reason. Through September, the 10-year Treasury's total return over the trailing five years ran about -2.4% a year. The low point came in May 2025 at roughly -3.7% a year, the worst five-year stretch in data going back to 1871.¹⁵ It's natural to assume an asset class with that record is broken. History says the opposite.

Before this cycle, the 10-year trailing five-year return had fallen to roughly zero only four times since 1871: 1959, 1970, 1981, and 2018. The first three were each followed by a better decade, and two of them by a much better one.

Notice the pattern inside the pattern. The size of the rebound tracked the yield investors were left holding after the damage was done. In 1981, the losses had pushed the 10-year to 15%, and the following decade was one of the greatest bond bull markets in history. In 1959, the yield was under 5% and kept climbing through the 1960s, so the recovery was modest. And 2018 is the warning. Trailing returns were near zero then, too, but the yield was only 2.9%, and bond investors earned less than 1% a year over the following eight years. Bad trailing returns are only half the signal. What matters is whether they leave you holding a high starting yield.

Today, they do. The losses since 2020 came from yields rising from about 0.5% to more than 5%, which is precisely the setup that preceded the 1970 and 1981 recoveries. That's also why the starting yield remains the best single guide to what comes next. Since 1881, it has explained about 91% of the variation in the 10-year return over the following decade. For anyone buying bonds at 5% today, starting points between 4.75% and 5.75% produced an average annualized ten-year return of about 5.6%, and the worst outcome in that group was still about 3.2% a year.¹ Past results don't guarantee future returns, and a bond sold before maturity can return more or less than its starting yield. Such is the advantage of owning a contract rather than a claim on future profits. Stocks don't offer anything close to that kind of predictability.

Equities work differently, but valuation still matters over long horizons. I've written about this before in the best measure of future stock market returns, and the pattern below is why I keep coming back to it.

Think about that carefully before deciding to ditch bonds from your portfolio. Over the last 126 years, whenever stock market valuations traded above 30x, Treasury bonds outperformed stocks 93% of the time.

A caveat matters here. Those 57 starting points with a CAPE above 30 come from just two episodes, 1929 and 1997 through 2002. That's a thin sample, and two episodes can't prove a rule. But the full regression of the CAPE against forward stock returns points in the same direction, implying roughly 1% to 2% per year from today's level.¹ Vanguard's capital markets model, which uses a broader set of inputs, produces a hypothetical projection of 4.2% to 6.2% a year for U.S. stocks over the next decade.¹⁰ Even the optimistic end of that range sits barely above what a Treasury pays today, with far more volatility attached. Will stocks underperform bonds over the next ten years? Nobody knows for certain. But are investors being paid much to take that bet? No.

Where The Bond Bulls Could Be Wrong

The strongest case against buying bonds at 5% is that yields keep going up. The bears are right about the deficit math. The government is projected to add another $22 trillion of debt over the next decade. That means a steady flow of new supply that the market must absorb.9 Oil is above $91 a barrel, 16 of 18 Fed officials expect another hike this year, and the term premium has been climbing.² If inflation reaccelerates into something closer to the 1970s, with energy prices feeding into wages and the Fed forced to keep hiking into a slowing economy, a 10-year bought at 5.2% could see yields of 6% or higher first. That outcome is possible.

Here's the problem with treating it as the base case. Inflation shocks driven by energy have historically destroyed demand within months, which pulls growth and yields back down. Higher borrowing costs also work against demand the longer they last. And the starting-yield math works in your favor even in a bad scenario. This is because the income keeps compounding while you wait. A bond investor who bought at 5% and watched yields rise to 6% is reinvesting coupons at 6%. That's how bond math repairs itself, slowly, without anyone needing to call the top in rates.

As Bob Farrell's Rule #9 reminds us, when all the experts and forecasts agree, something else is going to happen. Today, the consensus is that rates are going higher for longer and that bonds are dead money. I'd be careful betting on that consensus at the highest yields in a generation.

What Bonds At 5% Mean For Your Portfolio

Let's take a moment to visualize this carefully. The real payoff from bonds at 5% shows up in portfolio outcomes rather than in any single yield. Suppose an investor needs a portfolio to earn 6% a year to stay on track with long-term goals. For this example, put half the money in Treasuries yielding 5% and the other half in dividend-paying stocks yielding 2%. This is a hypothetical example, not a recommendation, but the arithmetic is worth walking through.

The Treasury half contributes 2.5 percentage points in interest per year. The stock half contributes another 1.0 point in dividends. That's 3.5 points of the 6% target, or roughly 58%, delivered as cash before the stock market moves at all. The remaining 2.5 points have to come from price gains on the stock half. Since 1928, the S&P 500's price alone, excluding dividends, has gained 6.4% annually.¹⁴ 

Therefore, with only 50% of the portfolio exposed to market risk, market volatility risk is greatly reduced. For example, during a 10% market decline, the portfolio would be down 5% in price. However, the portfolio would still pick up the 3% in income and dividends. Such would leave the portfolio with only a 2% decline during a 10% drawdown. That math allows investors to survive the long-term investing horizon. Today, with Treasuries at 5%, a 6% portfolio target asks stocks for less than their long-run average price gain.

Now run the same portfolio in late 2021. The Treasury half yielded about 1.5%, so interest contributed only 0.75 points, and total income covered just 1.75 points of the 6%. Stocks had to rise roughly 8.5% a year to close the gap. Over rolling ten-year periods since 1928, the S&P 500's price has compounded at 8.5% or better only about 45% of the time. It has compounded at 5% or better about 64% of the time.¹⁴ The target is the same, but the odds are very different. Higher bond yields add income and lower the bar the stock market has to clear.

It also changes what a bad decade looks like. Recall the valuation data above, which suggests stocks may struggle to deliver much from today's prices. If stock prices had simply gone sideways for 10 years, the 2021 version of this portfolio would have earned about 1.75% per year, below inflation. The version built with bonds at 5% would still earn about 3.5% a year from income alone. That's hardly a great outcome, but it's a survivable one, and getting through bad decades is the entire job of the bond side of a portfolio.

It is crucial to know that none of the numbers above is guaranteed.

1. Dividends can be cut,
2. A bond sold before maturity can be worth more or less than its face value, and
3. Fees, taxes, and inflation all reduce what an investor keeps.

What is most important is how you build the bond side of your portfolio.

• A ladder of individual Treasuries lets you lean on the starting-yield math directly.
• Shorter maturities reduce duration risk, and
• Inflation-protected Treasuries, with real yields near 3%, hedge the risk that nominal bonds can't.¹¹ 

The right mix of bonds in your portfolio depends on your time horizon, income needs, and how much volatility you can tolerate. That’s exactly why it’s worth working through with an advisor rather than a headline.

Bottom line: At 5%, the 10-year Treasury offers a return that history says has been far more predictable than what a stock market priced for perfection is likely to deliver.

The last time bonds paid this much, the market was just starting a decade in which stocks went nowhere. Trade accordingly.

Sources & Notes

1. RIA Advisors calculations from Robert Shiller's monthly U.S. stock market and long-term interest rate dataset (GitHub mirror, datasets/s-and-p-500), 1871 through September 2023. Ten-year Treasury total returns were modeled as those of a constant-maturity par bond repricing monthly. Shiller's rate and price series are monthly averages, so calendar-year figures run one to four points off published returns (for example, 2022 Treasuries at -15.0% here versus roughly -17.8% in NYU Stern's Damodaran dataset), with signs matching in every year checked. Forward-return studies use monthly starts from January 1881 through September 2013. Pre-1953 rates are long-term government yields rather than a constant 10-year maturity.
2. Federal Reserve FOMC statement and Summary of Economic Projections, September 16, 2026, as reported by Advisor Perspectives and Chase. Chair Warsh quote via Chase, "Fed Raises Rates in September, Officials Signal One More Hike in 2026."
3. Wolf Street, "Fed Cuts Reserve Management Purchases (RMPs) to Zero, Starting August 14," August 13, 2026. Balance sheet at $6.76 trillion, 20.7% of Q2 GDP. The pause was extended into October per reports on September 16, 2026.
4. Bureau of Economic Analysis, GDP third estimate for Q2 2026, released September 30, 2026. Bureau of Labor Statistics, CPI for August 2026, released September 11, 2026: headline 3.4% and core 2.4% year over year. Nominal growth estimate is an RIA approximation combining year-over-year real GDP and CPI.
5. Bureau of Labor Statistics, Employment Situation for August 2026: average hourly earnings up 3.1% year over year.
6. Lance Roberts, "Normal Interest Rates: What The Debt Panic Gets Wrong," RealInvestmentAdvice.com, August 21, 2026.
7. FactSet Earnings Insight, September 25, 2026: forward 12-month P/E of 19.2. Shiller CAPE near 41.5 per Michael Lebowitz, "From TINA To TIGA," September 30, 2026. December 2021 CAPE and yield from the Shiller dataset. 10-year yield of 5.24% on October 1, 2026, per Trading Economics, cross-checked against a 5.26% close on September 29. WTI crude at $91.49 per Charles Schwab market update, October 1, 2026.
8. RIA Advisors' calculation of modified duration for a 10-year par Treasury at 5.24% (7.7 years) and 1.5% (9.3 years). Break-even yield rise is the yield divided by duration, a one-year approximation.
9. Peter G. Peterson Foundation, "Is the U.S. Headed for More Credit Downgrades?" 2026. Moody's downgrade to Aa1, May 16, 2025.
10. Vanguard, "Setting Realistic Expectations," Vanguard Capital Markets Model forecasts as of June 30, 2026. Forecasts are hypothetical and not guarantees.
11. 10-year TIPS real yield near 3.0% per Michael Lebowitz, "From TINA To TIGA," September 30, 2026.
12. 10-year Treasury yields (constant maturity) and the effective fed funds rate from Federal Reserve data via Massive Market Data, January 2000 through September 29, 2026, plotted as monthly averages with the final point at the September 29 close. Regime averages computed from daily data: 4.60% (January 2000 to mid-December 2008), 2.27% (mid-December 2008 to mid-March 2022), and 4.04% (mid-March 2022 to September 29, 2026).
13. Kim-Wright 10-year term premium of 1.02% on September 25, 2026, via FRED (THREEFYTP10). Market 10-year breakeven inflation of 2.29% for August 2026 via Massive Market Data, with the Cleveland Fed model estimate at 2.57% for September. Real rate shown as the remainder. Term premium estimates vary by model, and the NY Fed ACM model read about 0.8% in May 2026.
14. RIA Advisors' calculations. S&P 500 price-only compound growth of about 6.4% a year from January 1928 to September 2026, and rolling ten-year price returns since 1928, from the Shiller dataset (monthly average prices). The 50/50 portfolio is a hypothetical illustration, not a recommendation or a record of actual results. It assumes a 2% dividend yield, Treasuries held to maturity at the stated yields, and no fees, taxes, dividend changes or rebalancing.
15. RIA Advisors' calculations of trailing five-year and forward ten-year annualized total returns for a modeled constant-maturity 10-year Treasury, using Shiller long-term rates from 1871 through September 2023 and Federal Reserve 10-year yields via Massive Market Data from October 2023 through September 2026 (monthly averages, which agree with Shiller's series to within 0.01 point over 2015 to 2023). "Near-zero" episodes are the lowest trailing five-year return within each stretch of returns below 1.5% per year. The April 2018 forward figure covers 8.4 years. Because the series uses monthly average yields, returns will differ modestly from index data.

The post Bonds At 5%: Is The 10-Year Treasury Finally A Buy? appeared first on RIA.

A weak Treasury auction brings doom-and-gloom headlines, while strong ones go largely unnoticed. Simply, the good auctions don't feed the bearish bond narrative. Despite bond bears warning yields will hit 6% or higher, demand for this past week's 10- and 30-year auctions was off the charts.

The 10-year note auction on Wednesday sold $39 billion at a 5.300% high yield. It stopped 1.7 basis points through the when-issued level, meaning it cleared much better than the market expected. Thursday’s 30-year $22.5 billion bond auction was similar. The box plots below, courtesy of Exante Data, show how far outside normal both readings sit. The bid-to-cover measures the amount of dollars bid for every dollar sold. The 10-year came in at 2.77 compared to a twelve-month average of 2.51, higher than any of the last 50 auctions. The 30-year was 2.54 against a 2.40 median, at the upper edge of the last 50 auctions.

Primary dealer participation may be the most important auction statistic. The Treasury’s primary dealers must bid and absorb whatever nobody else wants. When an auction has a high percentage dealer take, it means the auction struggled, and Wall Street got stuck with inventory. Dealers took a mere 2.5% of the 10-year, their lowest share on record for the tenor, and 6.8% of the 30-year. Indirect bidders, largely foreign central banks and domestic institutions, took 80.3% and 72.3%, both far above their averages.

As we have noted before, one auction just paints the supply-and-demand story at that brief moment in time. A series of poor auctions, as we have recently had, tells us that investor demand has been weak. While the 10- and 30-year auctions we discuss are outstanding, they are just two auctions. If the Treasury can string together more good auctions with accompanying falling yields, this would be a good sign the bond market may be reversing.

What To Watch Today

Earnings

Economy

Market Trading Update

The S&P 500 closed Friday at 7,811.51, up 1.15% for the week and less than 0.1% below Tuesday's record close. The index sits 1.4% above its 50-day moving average near 7,700 and 7.7% above its 200-day average near 7,250. Both averages are rising, which keeps the primary trend intact.

Zoom out, and the chart shows a market that spent two months in a range. Since mid-August, the index has chopped between roughly 7,570 and 7,800 before this week's push to a record close. Ranges that resolve near the highs usually favor continuation, but this one is resolving on a narrow foundation. The 200-day average sits 7.7% below the close, so the longer-term trend has plenty of cushion. That distance also shows how far a normal correction could run without breaking the bull market.

Momentum improved. The 14-day RSI rose to 59.8 from 54.5 a week ago, leaving room before the 70 line that marks overbought territory. MACD crossed back above its signal line this week, a fresh buy signal after September's chop. The index also sits about 1.5 standard deviations above its 20-day mean, so the upper Bollinger Band near 7,846 is the first ceiling.

Breadth is where the story gets more complicated. Only three of the 11 sector ETFs sit above their 50-day averages. Technology leads at 5.1% above, followed by energy at 3.7% and health care at 1.2%, which reclaimed its line this week. Last week, only two sectors cleared that bar. The laggards also closed much of the gap. Real estate improved to 4.1% below its average from 7.1%, and utilities to 2.0% below its average from 6.7%. Financials, the group that reports first next week, still sit 3.1% below their average.

That improvement cuts both ways. Oversold sectors are exactly where a broadening move has to come from, and the equal-weight index outperformed this week. But the defensive rally came as semiconductors fell 4.5%, with chips driving earnings growth. Evercore also counts a record 140 S&P 500 members with negative beta, per Friday's commentary. A record standing on a few names is NOT the same as a broad advance.

For traders, the playbook is simple. Don't chase at the highs. A close above the record and the upper band near 7,846, with semis participating, would open a run toward 8,000. Pullbacks toward the 50-day average near 7,700 are the place to add exposure. A break below the Sept. 16 low of 7,567, which also lines up with the lower Bollinger Band, would warrant raising hedges and cash. We continue to recommend rebalancing winners back to target weights ahead of earnings and using the 50-day average as the stop-loss line.

The level that matters next week is the record close at 7,818.93. A close above it with chips joining in confirms the breakout. A failure there, with bank earnings and CPI on deck, likely keeps the index boxed between 7,700 and 7,850. A close below 7,700 would shift the near-term trend back to neutral.

The Week Ahead

With the Fed's decision on whether to hike rates coming in three weeks, CPI on Wednesday and PPI on Thursday will be important gauges. CPI is expected to increase by 0.5% on a monthly basis. However, the core reading, excluding food and energy, is expected to rise only 0.2%. Higher energy prices are driving headline inflation. PPI is similar, with 0.5% headline expectations and 0.3% core. After rising a much better-than-expected 1.2% last month, retail sales are expected to be weak, at just 0.1%. This data will provide an early indication of how higher rates are affecting consumer spending.

The big banks and brokers release earnings this week, including JPMorgan, Bank of America, Goldman, Citi, and Wells Fargo. Bank commentary on credit conditions will likely matter more than headline earnings, as financials are down slightly this year while the S&P 500 is up 14%.

Today is Columbus Day. Bond markets are closed, but stocks are trading on a regular schedule.

Gambling Epidemic: Gen Z Bets Against Their Future

Something changed this summer. Bank of America, which monitors money moving across its customers’ accounts, found that roughly 5% of its customers sent cash to an online betting platform in July, with the number of bettors up 40% since January. The Gen Z gambling epidemic stopped being a headline and became a trend line. First-time bettors in June and July ran more than triple the January pace. And here is the part that should stop every parent and every advisor cold: one in five of these users now calls it “investing.”

By generation, Gen Z and Millennials now make up 88% of online betting activity. Gen X trails at 9%. Boomers barely register. As recently as this spring, Millennials were the bigger group. Then Gen Z passed them, and Bank of America called it a “turning point.” A turning point is the moment when a behavior stops being the domain of early adopters and becomes the default for a whole cohort.

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🔎 At a Glance

• Equity Risk Premium Has Vanished, And Stocks Aren't Cheap.
• Market Brief & Technical Review
• From Lance's Desk: Gambling Epidemic: Gen Z Bets Against Their Future - RIA
• Market stats, screens, and risk indicators

🏛️ Market Brief - Earnings Season Opens On A Raised Bar

The S&P 500 gained 1.1% this week to close Friday at 7,811.51, just shy of Tuesday's record close of 7,818.93. The Dow added 0.9%, and the Nasdaq Composite rose 0.6%, while small caps slipped nearly 1%. Last week's Q4 outlook noted that Treasuries now offer a return that stocks haven't matched since 2002. This week, the 10-year yield pushed to its highest level since 2002 on Wednesday, then eased to about 5.25% after strong demand at the 10-year auction. Brent crude held above $100 after President Trump said the U.S. would not strike Iran before the midterm elections.

The bigger story was positioning for Q3 earnings, which start in earnest Tuesday with the big banks. As Friday's Daily Market Commentary laid out, Wall Street did something unusual this quarter. It raised the bar. Per FactSet, Q3 estimates rose 1.4% during the quarter, against an average cut of 2.2% over the past five years. A record 72 companies issued positive guidance, and expected growth now sits at 29.6%.

History says that the number often climbs higher. Actual growth has topped the end-of-quarter estimate in 37 of the last 40 quarters, and FactSet's math implies Q3 growth above 35%. That math is why the "beat rate" headlines rarely disappoint. The early reports fit the pattern, with 84% of the first 19 companies beating estimates. The catch is where the growth lives. Semiconductors are expected to grow earnings by 126.7%, energy by 118.8%, and technology by 62.6%. Consumer discretionary, utilities, health care, and financials range from 1% to 4.4%. The earnings tape is as narrow as the price tape.

Now look at where the money went. Utilities, staples, and energy led, while technology slipped and the semiconductor ETF fell 4.5%. The equal-weight S&P 500 gained 1.6%, beating the cap-weighted index. Outside of energy, investors bought sectors expecting roughly 4% growth and sold the group expecting 127%. Such is the tension heading into the season. The index still leans on the chipmakers to deliver, while money is quietly hedging against them.

The Fed adds a wrinkle. September's minutes showed most participants expect another hike by year-end, even as payrolls slowed to 29,000 and core PCE came in at 3.0%. With analysts raising numbers and companies guiding higher, consensus has rarely leaned this hard in one direction. From a contrarian view, when the experts all agree, something else tends to happen.

Tuesday's bank reports are the first real test. A clean read from the financials would support the broadening that started this week. However, after this coming week, a stumble by the leaders will hit the only part of the index doing the heavy lifting.

📈Technical Backdrop -  MACD Turns Up Just Below The Record

As noted, the S&P 500 closed Friday at 7,811.51, up 1.15% for the week and less than 0.1% below Tuesday's record close. The index sits 1.4% above its 50-day moving average near 7,700 and 7.7% above its 200-day average near 7,250. Both averages are rising, which keeps the primary trend intact.

Zoom out, and the chart shows a market that spent two months in a range. Since mid-August, the index has chopped between roughly 7,570 and 7,800 before this week's push to a record close. Ranges that resolve near the highs usually favor continuation, but this one is resolving on a narrow foundation. The 200-day average sits 7.7% below the close, so the longer-term trend has plenty of cushion. That distance also shows how far a normal correction could run without breaking the bull market.

Momentum improved. The 14-day RSI rose to 59.8 from 54.5 a week ago, leaving room before the 70 line that marks overbought territory. MACD crossed back above its signal line this week, a fresh buy signal after September's chop. The index also sits about 1.5 standard deviations above its 20-day mean, so the upper Bollinger Band near 7,846 is the first ceiling.

Breadth is where the story gets more complicated. Only three of the 11 sector ETFs sit above their 50-day averages. Technology leads at 5.1% above, followed by energy at 3.7% and health care at 1.2%, which reclaimed its line this week. Last week, only two sectors cleared that bar. The laggards also closed much of the gap. Real estate improved to 4.1% below its average from 7.1%, and utilities to 2.0% below its average from 6.7%. Financials, the group that reports first next week, still sit 3.1% below their average.

That improvement cuts both ways. Oversold sectors are exactly where a broadening move has to come from, and the equal-weight index outperformed this week. But the defensive rally came as semiconductors fell 4.5%, with chips driving earnings growth. Evercore also counts a record 140 S&P 500 members with negative beta, per Friday's commentary. A record standing on a few names is NOT the same as a broad advance.

For traders, the playbook is simple. Don't chase the market while it's sitting at the resistance of previous highs. A close above the record and the upper band near 7,846, with semis participating, would open a run toward 8,000. Pullbacks toward the 50-day average near 7,700 are the place to add exposure. A break below the Sept. 16 low of 7,567, which also lines up with the lower Bollinger Band, would warrant raising hedges and cash. We continue to recommend rebalancing winners back to target weights ahead of earnings and using the 50-day average as the stop-loss line.

The level that matters next week is the record close at 7,818.93. A close above it with chips joining in confirms the breakout. A failure there, with bank earnings and CPI on deck, likely keeps the index boxed between 7,700 and 7,850. A close below 7,700 would shift the near-term trend back to neutral.

🔑 Key Catalysts Next Week

Two narratives collide next week. Q3 earnings season starts in earnest with the big banks, and the September inflation data lands before the Fed goes quiet ahead of its Oct. 27-28 meeting. Monday is Columbus Day, so stocks trade while the bond market stays closed.

Tuesday morning brings JPMorgan, Wells Fargo, Citigroup, and Goldman Sachs, along with Johnson & Johnson and UnitedHealth. Bank of America, Morgan Stanley, BlackRock, Progressive, and ASML follow on Wednesday. Thursday is the heavyweight session, with Taiwan Semiconductor, Charles Schwab, PNC, U.S. Bancorp, BNY, and Prologis. Travelers closes the week on Friday.

Banks are expected to grow earnings 15.2%, well above the 4.4% expected for the financial sector overall. Watch net interest income, loan growth, and credit quality with yields near their highest level since 2002. If the banks show loan growth and steady credit with the 10-year above 5%, the broadening case gets real support. TSMC on Thursday is the most important read on AI demand after this week's chip selloff, and ASML gives the equipment side a day earlier.

On the data side, Wednesday's CPI report is the main event after August's headline rate of 3.4%. Thursday is crowded, with PPI expected to be up 0.5% for the month, retail sales expected to be up 0.3%, plus the Empire State and Philly Fed surveys. Cleveland Fed President Beth Hammack speaks Monday.

Markets are currently pricing in roughly a 20% chance of an October hike, but traders see about an 80% chance of a move by December. The Fed's quiet period begins Saturday, Oct. 17, so next week is the last chance for officials to shape expectations before the meeting. Expect any hawkish or dovish lean in their remarks to show up quickly in the 2-year yield.

Oil remains the wild card. Trump's pledge not to strike Iran before the Nov. 3 midterms pulled Brent back, but it still sits above $100.

The single most market-moving event is Wednesday's CPI. A soft print would support the "pause" camp and pull the 10-year back toward 5%. A hot one revives bets on December rate hikes and pushes yields higher, which matters more than usual given that stocks offer little premium over bonds.

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💰 Equity Risk Premium Has Vanished, And Stocks Aren't Cheap.

Last week's Q4 market outlook laid out why the calendar, earnings, and buybacks lean bullish into year-end. I still think that. But one line in that report deserved more than a sentence. With the 10-year above 5%, Treasuries now offer a "risk-free" return that stocks haven't matched since 2002. So this week, I rebuilt that claim from the raw data. The equity risk premium, the extra return investors demand for owning stocks over bonds, is the thinnest it's been in a generation. What history says happens next is the more interesting part.

The Equity Risk Premium Has Turned Negative

The simplest version of the math compares what the S&P 500 earns with what a Treasury note pays. At Tuesday's record close of 7,818.93, the index traded at about 27 times trailing as-reported earnings, according to Robert Shiller's data. ChartRow's independent count is 26.4. Either way, that's an earnings yield of roughly 3.7%. The 10-year closed at 5.31% on Monday. In other words, every dollar in the index currently "earns" about 1.6 percentage points less than a dollar parked in a government bond.

Notice in the chart above how rarely the spread sits this far below zero. Shiller's monthly data, now running through October 2026, puts the average since 1950 at about +1.0 point. Aside from the 2009 earnings collapse, the last time stocks yielded this much less than bonds was in 2002.

Someone will tell you trailing earnings are the wrong yardstick when profits are growing at nearly 30%. Fair enough. Use the forward numbers instead. FactSet's forward P/E of 19.0 implies an earnings yield of about 5.3%, which is right on top of the 10-year. Such is the problem. Even on Wall Street's most optimistic earnings math, investors get paid next to nothing extra to own stocks over bonds.

A Negative Premium Only Hurts When Stocks Are Expensive

Here's where it gets interesting, and where I had to check my own bias. I sorted every month since 1950 by its starting premium, then measured the S&P 500's real total return over the following decade. A negative premium on its own was NOT a reliable sell signal. The 1980s are the reason. Through the first half of that decade, the 10-year yielded well into double digits, stocks earned less than bonds month after month, and investors who bought anyway were rewarded with one of the best ten-year runs the market has ever produced.

The difference was the starting price. In the early 1980s, the S&P 500 carried an earnings yield above 5%, and at times above 12%. Stocks were cheap, and bonds were cheaper. The premium was negative because yields were enormous, and when yields collapsed, both assets soared. Starting points like that averaged a 10.3% real annual return over the next ten years. Only about one in twenty lost money.

Now look at the other bucket. When the premium was negative and the earnings yield was below 5%, the average real return fell to 3.7% per year. More than one in four of those ten-year stretches finished in the red. Most of those starting points came during the 1990s run-up and the dot-com peak. Such is the distinction that matters. Today's 3.7% earnings yield puts us squarely in the expensive bucket, not the 1980s one.

A negative premium is survivable when you buy cheap. It's a problem when you pay up for the privilege.

Cash And Bonds Now Pay You To Wait

For the better part of fifteen years, zero-yield money markets fueled the "there is no alternative" trade. Savers got pushed out of the risk curve because cash paid nothing. That flow can run in reverse, and Michael Lebowitz laid out why in "From TINA To TIGA." Here's what the alternatives pay today.

"Stocks return 10% over time. Why would I lock in 5%?" 

Because that 10% assumes you start at an average valuation, and we aren't starting there. Adam Taggart and I covered this on October 3rd in our conversation about buying bonds if a bear market worries you. A 5.3% Treasury held to maturity has no drawdown risk on the way to that return.

The bulls do have a valid point. When you measure stocks against inflation-protected Treasuries, instead of nominal ones, the premium survives. Currently, that premium ranges from roughly 0.8 to 2.3 points, depending on whose earnings you trust. That's a thin margin, and the higher end depends on nearly 30% earnings growth arriving on schedule. For me, there is also some irony here. In my view, yields will eventually come down due to the disinflationary impact of debt on the economy. This is why I've argued for keeping bonds in your portfolio rather than ditching them. If yields fall, the premium rebuilds from the bond side, and stocks get rescued by the same math that hurts them today. If they don't, the comparison to 1997 through 2002 stops being an analogy.

Notably, the recovery math is what investors consistently underestimate. We previously discussed that if a portfolio suffers a 24.7% drawdown, it requires a 33% gain to get back to even. However, if it suffers a more “Financial Crisis” impact of a 52.6% decline, that 111% recovery can take years to return to the previous level. Bonds not only reduce losses but also shorten the climb back, and that difference compounds over the years of a retirement timeline.

Here is another crucial point for owning bonds in your portfolio, particularly if nearing retirement. Income is better today than at any point in two decades. The 10-year yields 5.3%, more than three times what it paid at the end of 2021. That is contractual cash flow rather than hoped-for appreciation, which means you aren’t forced to sell equities into weakness to fund a withdrawal.

Lastly, the behavioral issue determines outcomes. DALBAR’s 2026 study found that the average fixed-income investor earned 2.41% in 2025, while the Bloomberg Aggregate returned 7.30%, a gap of 4.89 percentage points. Investors pulled a record 2.30% of assets out in a single month, July 2025.8 Read that again. The asset class returned more than 7%, while the people who owned it captured a third of the return. They sold into the drawdown and bought back after the recovery, which is the same behavior that the stock-bond correlation debate is now encouraging on a much larger scale.

What Should Investors Do Now

Let’s state the obvious: none of this discussion is about wholesale dumping of stocks before year-end. As discussed in last week’s report, the seasonal and earnings tailwinds still stand. Furthermore, the equity risk premium is a ten-year signal, not a ten-week timing tool. However, it does argue for changing what you own and how much risk you carry while you own it. A negative equity risk premium only normalizes in two ways. Bond yields fall, or stock prices do. The table below presents both outcomes simultaneously.

For our clients, this means a few recent changes. We shortened the duration slightly, but are still maintaining the overall bond allocations across all stock/bond allocation models. This is not because bonds are exciting, nor because the past five years treated them kindly. We keep those bond allocations because they remain the cheapest insurance against the one scenario that most severely damages a retirement plan. That is when a deep equity drawdown arrives early in the withdrawal phase.

Owning bonds in your portfolio is a choice. If you choose not to, there is nothing wrong with that decision as long as you can manage portfolio risk. If you choose to own bonds in your portfolio, they should be sized to your circumstances rather than to a number somebody printed in 1952. Forty percent is not a law of nature. Your income needs, your time horizon, and your honest tolerance for watching a statement fall determine that figure.

Understand the limitation clearly. Duration protects you in a growth shock and hurts you in an inflation shock. If inflation is the risk that keeps you awake, the answer is inflation-sensitive assets and a shorter duration.

The bond market is finally paying investors to be patient. The stock market is still charging full price for impatience.

🖊️ From Lance’s Desk

This week's #MacroView blog explores the rising Gen Z gambling epidemic that is quietly moving a generation’s money from the market to the house, and the bill comes due later.

Also Posted This Week:

• Worried Consumers Keep Spending: Here's Why - RIA- by Michael Lebowitz
• Sequence Of Return Risk: The Math That Breaks Retirements - RIA- by Lance Roberts

📹 Watch & Listen

The S&P 500's breakout to all-time highs is losing momentum. With stocks retreating into their recent trading range, is this a failed breakout or a healthy pullback before a stronger fourth-quarter rally?

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📊 Market Statistics & Analysis

Weekly technical overview across key sectors, risk indicators, and market internals

💸 Market & Sector X-Ray: Market Gains Ground

As we kick off Q4, Technology and Energy remain the key market drivers and are overbought relative to most other markets and sectors. This setup continues to suggest, as noted in the Factor Model below, that a market rotation from growth to value is becoming more likely heading into year-end. On a short-term basis, bonds and interest rate sectors are extremely oversold and are likely opportunistic for a tradeable rally.

📐 Technical Composite: 81.39 - Increased Sharply This Week, Still Overbought

The technical condition increased sharply this past week. However, overall, the market remains technically overbought, and sentiment remains mostly bullish for now with no significant technical breaks. The indicator does suggest more struggles for the market next week.

🤑 Fear/Greed Index: 56.28 – Holding At Neutral

Even though the market rose a bit last week, the underlying market allocation and sentiment remains more bearish. There was a continued drop in the Commitment of Traders equity allocations, however, investor sentiment turned slightly more bullish last week. If the market can continue to hold up into earnings season, it could present a good buying opportunity over the next month or so.

🔁 Relative Factor Performance

Last week, we stated that "Factor performance has diverged over the last couple of weeks, with Growth, Speculative Technology, and Megacaps now extremely overbought, while Value, Low Beta and Dividend Yield (interest rate sensitive sectors) now the most oversold." This past week, we saw the early stages of a potential reversal occurring as the growth factors pulled back somewhat what the value sectors advanced. With earnings starting this week, we will see if these factors continue to converge.

📊 MFBR Index (Money Flow/Breadth Ratio Indicator)

The Money Flow Breadth Ratio (MFBR) model is a rules-based equity allocation framework that uses weekly S&P 500 money flow data to generate buy, sell, and neutral signals. The MFBR systematically adjusts portfolio equity exposure in response to the direction and persistence of institutional capital flows. It aims to reduce drawdowns while capturing the majority of market upside.

"As of October 9, 2026, with the S&P 500 at 7,811.54, the Money Flow Breadth Ratio (MFBR) stands at 60%, down from a peak of 75% set 7 weeks ago and flat versus 60% the prior week. The trailing four-week change is still -10 percentage points, but the near-term trend has rolled over. This places the indicator in BUY territory (60-70%). The raw zone signal reads NEUTRAL, but the model still flags a TOP REVERSAL, with 15 points now off the peak. Read that NEUTRAL as a zone label, not as fresh confirmation - the model reached this band by falling out of overbought, not by building up from below.

Bottom line: hold the target weight. The roll-over off the 75% peak is real and worth watching, but it has carried the gauge into the band that has historically been the best place to own equities. This is neither a chase nor a de-risk. A sustained break below 60% would move the grid to an underweight; a move back above 70% would re-engage the contrarian trim."

📊 Sector Model & Risk Ranges

This past week, the two leading sectors continued to lead, Energy and Technology, and are now extremely deviated above their long-term weekly means. Historically, such deviations lead to corrections or consolidations so profit-taking and rebalancing is recommended. Conversely, bonds are now extremely oversold, along with Transportation, Utilities, Real Estate and Financials. Any reversal in rates in the coming months could see a pick up in performance.

Have a great week.

Lance Roberts, CIO, RIA Advisors

The post Equity Risk Premium Has Vanished, And Stocks Aren’t Cheap. appeared first on RIA.

The Gen Z gambling epidemic is quietly moving a generation's money from the market to the house, and the bill comes due later.

Something changed this summer. Bank of America, which monitors money moving across its customers' accounts, found that roughly 5% of its customers sent cash to an online betting platform in July, with the number of bettors up 40% since January. The Gen Z gambling epidemic stopped being a headline and became a trend line. First-time bettors in June and July ran more than triple the January pace. And here is the part that should stop every parent and every advisor cold: one in five of these users now calls it "investing."

The Turning Point Nobody Voted On

By generation, Gen Z and Millennials now make up 88% of online betting activity. Gen X trails at 9%. Boomers barely register. As recently as this spring, Millennials were the bigger group. Then Gen Z passed them, and Bank of America called it a "turning point." A turning point is the moment when a behavior stops being the domain of early adopters and becomes the default for a whole cohort.

This is not a poverty story. The activity splits almost evenly across income, 37% lower, 34% middle, 29% higher. The data also cuts across everyone. However, what binds the young end together has nothing to do with income. Rather, it is a shared conviction that the old path to wealth is closed, and the "house" wins upstairs anyway. In other words, you may as well play the house down here.

To a generation raised on the "Fed put," zero-day options, and a community tab, the market is no different than betting on a football game. The sentiment is understandable after years of steadily rising markets. However, Bob Farrell's Rule #4 also warns that exponential moves run further than you expect before they break. Such isn’t new, and I have written before about the manias this cycle keeps minting.

The Oldest Vice, The Newest App

Put a number on the American toll first. Roughly 2.5 million US adults meet the clinical bar for gambling disorder in a given year, another 5 to 8 million carry milder problems, and about 20 million report at least one warning sign "many times" over the past year. Only around one in ten ever seeks help, one of the lowest rates for any addiction. And only 39% of Americans call gambling addiction "very serious," against 62% for drugs. We are underrating it in real time.

That's the modern side. Disapproval of gambling goes way back. In ancient Rome and China, the Jewish Talmud, Islam, and Buddhism, gambling was restricted or condemned. In ancient Egypt, habitual gamblers could be sentenced to hard labor. Even the soldiers at the foot of the cross cast lots for Christ's garment. Scriptures warn not specifically about dice, but about loving money and seeking shortcuts to wealth.

Even in the Bible, Proverbs puts it plainly that "wealth from get-rich-quick schemes quickly disappears." Turn to Islam, and it names the thing “maysir” and calls it Satan's handiwork. The Jewish faith, in the Talmud, waives off the dice player as a witness, on the grounds that a man who profits only when another loses, adds nothing.

Puritan Massachusetts banned gambling, and Benjamin Rush, a prominent Founding Father and signer of the Declaration of Independence, warned that gambling led to "poverty and wretchedness."

Think about this for a moment, objectively. Every society and religion throughout history that has thought deeply about money has come to the same conclusion: rewards not tied to work, “gambling,” can harm both individuals and the community.

While you may want to dismiss the historical and religious precedents, modern research also supports these old instincts. Modern research keeps proving the old instinct right. A birth cohort followed to age 45 found that disordered gambling predicted worse financial and occupational outcomes decades later. Register studies find mortality and suicide increased sharply. Most who bet never reach that point, and most who wobble recover. For the subset who do not, the damage compounds like negative interest.

Why The Machine Is Built To Win

Okay, let’s tackle this topic more directly. Let’s start with how often people bet, because it tells you what kind of product this is. One-third of respondents stated that they place wagers weekly. Nearly a quarter bet daily. Fewer than one in five are the once-a-year "Super Bowl" crowd. That is the engagement profile of a social app, not a lottery ticket

Interestingly, in 2013, the American Psychiatric Association did something quietly radical. It moved gambling out of the "impulse-control" bin and set it beside alcohol and cocaine, the first behavioral addiction medicine formally recognized. The brain does not care much whether dopamine comes from a substance or a screen, and the same ventral striatum lights up on a bet as on a drug.

Here is where things get more interesting when it comes to the psychological impacts of gambling. The "near-miss," like on a slot machine when you get two cherries and a lemon, pays out zero. However, that loss still fires the same reward circuit as a real jackpot. That’s how a “slot machine” keeps you glued to your seat. Add the "illusion of control," the sense that studying the roster buys you an edge, and the product is tuned to your neurology. Such is the design of the parlay. The bet with the worst odds for you carries the fattest margin for the house, and the app pushes it hardest.

Will most people who bet spiral into addiction? No. But the ones who develop it are NOT a rounding error. Gambling disorder carries the highest suicide rate of any addiction, and roughly one in five who develop it attempt to take their own life. That is the tail this product drags behind it.

Every Dollar Bet Is A Dollar Not Invested

The delivery system of gambling has already rewired how young people spend their attention. An increasing multitude of app developers have figured out how to deliver the “addiction.”  They ping you with "bonus bets" and "no-sweat" promos, assign "VIP hosts" to the heaviest users, and fold the odds into the broadcast so the line is on screen before kickoff. Then the athletes and influencers close the loop on your social media feed, which is the growth engine pointed at your bank account.

Underneath all of this sits the story usually called "financial nihilism." An increasingly large share of Gen Z feels priced out of the old path, and the surveys are stark. For example, Northwestern Mutual found that 73% of Americans who feel behind think speculative bets will get them there faster than saving. However, among Gen Z, that number climbs to nearly 80%. Notably, young adults now post the worst consumer sentiment of any age group.

It isn’t surprising that when the ladder looks this broken, a “swing for the fences” looks like rational behavior. But it is a carefully crafted illusion through social media, fueled by access, margin, and an engineered gambling mentality, which does more of the work than mood does. Yes, the hopelessness is certainly real because social media has fed you that narrative. However, it is the match, not the fuel.

This is where I get the most interesting pushback.

“It is my money, and it is just entertainment.”

Fair enough, on the entertainment. Here is the problem with the money. The best study we have, now in the Journal of Financial Economics, tracked household accounts through legalization and found that betting does not come out of the movie budget. It comes out of savings. Every dollar wagered cuts the net investment by roughly two dollars. Brokerage deposits fell by 14% across all bettor households and by 56% among frequent ones.

Furthermore, it is the balance sheet that gets worse on the other side. A separate UCLA study found that where online betting arrived, credit scores fell, debt in collections rose, and bankruptcies climbed. Less went into the savings account. MORE went to the collections agency. Howard Marks likes to say that risk means more things can happen than will happen. The crowd treating a bet like an "asset class" has it backward.

"In investing, the base case compounds in your favor. At the sportsbook, it grinds you down."

Then there is the win rate, which the industry would rather you not run. At standard pricing, you have to hit 52.4% of your bets simply to break even, and only about 3% of sports bettors clear that bar over the long haul. Roughly 95% lose money over time. Ask them, though, and a third will insist they come out ahead. The gap between what bettors believe and what the math pays is the entire business model.

How To Know If You Are The Product

So, how do you tell when the line has moved from fun to problem? Clinicians use a screen so short it fits in a sentence. The "Lie/Bet" tool has two questions.

1. Have you needed to bet more and more to feel the same?
2. Have you lied to people close to you about how much you bet?

A yes to either is reason enough to look harder.

Now run the same checklist one screen over, in the brokerage account. This is the "oh it's investing" delusion in practice. If your "investing" looks like the column below, it has quietly turned into betting.

If a few of those land, the good news is that this responds to treatment better than most people expect. The steps are unglamorous, and they work.

• Delete the apps.
• Turn on self-exclusion, which every legal state offers, and
• Set deposit blocks with your bank.
• Add blocking software if the pull is strong.

Unfortunately, those steps are easy. The hard part comes next.

You have to get a human involved. Every piece of research on recovery makes it clear that isolation lets the behavior grow in the dark, while connection is the one thing that reliably starves it. Cognitive behavioral therapy targets the exact distortions the machine installs, and Gamblers Anonymous has run the twelve-step version for decades.

One number is worth saving before you need it. The National Problem Gambling Helpline, 1-800-GAMBLER, is free and runs by call, text, or chat. If the darker thoughts I mentioned earlier are in the room, call or text 988. Secrecy is the oxygen here, so the most useful move is to say it out loud to one person who will not flinch. Such is the nature of this addiction. It thrives in silence.

The Case For Guardrails Is Economic, Not Moral

I am generally skeptical that Washington can solve problems it helped create, so let me make the case that persuades me. It is an economic one. To wit, from Keynes in 1936:

"When the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill-done."

Three points carry the argument. First, the losses are not only private. Problem gambling loads costs onto everyone else through treatment, lost productivity, bankruptcy, and family breakdown, none of which the operator that booked the wager ever pays. Economists call that a negative externality, the textbook reason to regulate a product. Second, the industry's revenue leans on its most damaged users. The highest-margin product, the parlay, is the one built on the "near-miss." A business whose economics depend on the people it harms most is a market failure, not a free market.

Third, the money the young feed into this is the money that builds a retirement. A generation that saves less and owes more becomes a future claim on the safety net, and their sportsbook losses become everyone's problem eventually.

We do need to acknowledge the industry’s view. Legal gambling books pulled wagering away from offshore bookies that funded criminal organizations. They also fund state budgets and carry consumer protections that the black market never offered. Furthermore, the American Gaming Association calls federal rules an overreach, and when it comes to jobs and tax receipts, they do have a valid point.

However, here is where those arguments quickly run out of road. The displacement of the illegal betting market was meant to reduce harm, not expand the customer base.  Unfortunately, what we are now seeing in both the data and the number of online applications in the marketplace is a rapidly growing customer base.

Yes, there are active measures being taken, like the "SAFE Bet Act," that would potentially set floors on advertising, require affordability checks, and stop the AI targeting that hunts the most vulnerable. For example, Britain has already taken steps to cap stakes and pare back on "bonus" inducements.

Those are certainly a start, but they don’t stop a soul from betting. They just stop the machine from being tuned to the people least able to walk away. Of course, that is the whole point of a guardrail: it does not close the road; it just keeps you from going off the cliff. However, if you hit the guardrail, it will damage your car, potentially beyond repair.

What concerns me is that this generation is enrolling in a freshman class that learns the hard way that the “house always wins.” That lesson will be taught one parlay at a time, and if access keeps expanding and no one builds a guardrail, the best growth investment left in the country may turn out to be a chain of Gamblers Anonymous meeting halls.

And football season is just getting underway.

Sources & Notes

1. Bank of America Institute and BofA Global Research analysis of online betting adoption, September 2026, drawn from the report provided. July figures reflect BofA customer transaction data and a cited CivicScience survey, and trace to a single research note not independently confirmed.
2. American Psychiatric Association, DSM-5 (2013), reclassifying gambling disorder as the first behavioral addiction.
3. Clark et al., "Gambling Near-Misses Enhance Motivation to Gamble," Neuron (2009); Murch and Clark, "Games in the Brain," The Neuroscientist (2016).
4. National Council on Problem Gambling; Lancet Regional Health Europe, Norwegian registry cohort (2024), on gambling-related suicide risk.
5. Baker, Balthrop, Johnson, Kotter and Pisciotta, "Gambling Away Stability: Sports Betting's Impact on Vulnerable Households," NBER Working Paper 33108 and Journal of Financial Economics (2026).
6. Hollenbeck, Larsen and Proserpio, "The Financial Consequences of Legalized Sports Gambling," UCLA Anderson (2024, revised 2025). Bankruptcy-risk estimates range from roughly 10% to 25 to 30% across paper versions, and the conservative online-access figures are used above.
7. Win rate: break-even at standard -110 odds requires a 52.4% success rate; industry analyses estimate only 1 to 3% of sports bettors are profitable long term, with roughly 95% losing money over time, while a Siena College Research Institute poll found about a third self-report winning more than they lose.
8. Kyla Scanlon, "Why My Generation Is Turning to Financial Nihilism," Wall Street Journal (2025); term coined by Demetri Kofinas (2020); Northwestern Mutual Planning and Progress Study (2026); University of Michigan consumer sentiment. See also "Financial Nihilism and the Trap Young Investors Are Walking Into," RealInvestmentAdvice.com.
9. SAFE Bet Act (Rep. Tonko and Sen. Blumenthal); UK Gambling Commission reforms, including online slot stake limits and restrictions on bonus and VIP inducements.
10. J.M. Keynes, The General Theory of Employment, Interest and Money (1936).
11. National Council on Problem Gambling, NGAGE 3.0 survey (2024), for US prevalence, attitudes and help-seeking; treatment-seeking is estimated near one in ten.
12. Britannica, "Gambling: History," on curtailment in ancient Rome, China, the Talmud, Islam and Buddhism, the Egyptian quarry penalty, and the casting of lots for Christ's garment; Quran 5:90 on maysir; Talmud, Sanhedrin 24b, on gamblers as witnesses; Proverbs 13:11; Benjamin Rush, via "History of Gambling in the United States."
13. Dunedin Multidisciplinary Health and Development Study, disordered gambling followed to age 45 (2023); nationwide register study on gambling disorder, elevated mortality and suicide (2018).
14. Help is available. The National Problem Gambling Helpline, 1-800-GAMBLER, is free and confidential by call, text or chat. In a crisis, call or text 988.

The post Gambling Epidemic: Gen Z Bets Against Their Future appeared first on RIA.

According to the graph on the left, Evercore counts 140 S&P 500 members with a negative beta, the highest on record. On the right side, that measure for the Russell 3000 stands at 373 stocks, more than 10x its long-term average of 36. That is 6.5 standard deviations from the mean and, statistically speaking, an event that should happen once every 99 million years!

Negative beta means a stock has moved opposite to the index over a defined trailing period. With the S&P 500 and Nasdaq trending upward and at or near record highs, the beta statistics imply many companies have been trending lower. This reflects the high concentration within the indexes. To wit, the Magnificent Seven stocks in the S&P 500 comprise about 35% of the index. Therefore, about 493 companies account for 65% of the index, or roughtly .13% each.

When a small number of stocks drive the index, most everything else can fall, and the index can still climb. To this point, since August 2, Nvidia has gained 6.8% and the Nasdaq 100 5.1%, while the Dow fell 4.6%, utilities 5.6%, and real estate 8.6%. The S&P is up about 1%. Those declining stocks and sectors moving against a rising index result in a negative beta.

The historical analogs give us pause. The S&P negative beta series spiked near 70 during 2000 and 2001, and the Russell measure ran above 200 in the mid-1990s and again around 1999. Both preceded a serious correction; however, neither graph shows anything alarming near the 2008 financial crisis.

The key takeaway is that index returns and the average stock's return have come apart to an unprecedented degree. Anyone who owns stocks and assumes they represent the major market indexes may be in for a rude awakening when they read their latest brokerage statement.

What To Watch Today

Earnings

Economy

Market Trading Update

Yesterday, we checked the breadth signals across the tape and found a record standing on very few shoulders. Today, Q3 earnings season kicks off with Delta this morning and the big banks on Tuesday. The question is whether earnings can widen that foundation.

Start with the setup. Wall Street did something unusual this quarter. It raised the bar. Per FactSet, Q3 estimates rose 1.4% between June 30 and September 30, versus an average cut of 2.2% over five years and 2.5% over ten. A record 72 companies issued positive guidance, while only 44 guided lower. Analysts now expect 29.5% growth, and their bottom-up target of 9,275 sits about 18.5% above Tuesday's record close.

Normally, the game is simple. Analysts walk estimates down, companies step over the lowered bar, and headlines cheer the "beat rate." This time, there's less room. When estimates rise as the season approaches, companies have to beat the higher number, not the sandbagged one.

Notice in the table below where the growth actually lives.

Semiconductors are expected to grow earnings by 126.7%, Energy by 118.8%, and Technology by 62.6%. Strip those out, and the picture changes. Consumer Discretionary is expected at just 1.1%, Utilities at 4.0%, Health Care at 4.3%, and Financials at 4.4%. The earnings tape looks a lot like the price tape. Narrow.

Then there's the rate of change. Index growth slides from 50.3% in Q2 to an estimated 26.8% in Q3. Consumer Discretionary drops from 82.5% to 1.1%. Deutsche Bank's forecast shows the same cooling in Financials, Energy, and Materials.

"Growth near 30% and a 19 forward multiple sounds fine to me." Fair enough. FactSet's 19.0 forward P/E is below its five-year average, so valuation is NOT the trap. Expectations are. Markets trade the change and growth that halves are slowing growth priced at a record. Such is the risk when everyone leans the same way.

We have recently rebalanced portfolios, completed tax-loss selling, and are positioned for a potential market rotation and the start of earnings season, with a bias towards value. Those names carry the season. Banks, expected to grow 15.2%, report Tuesday, and a clean read there would support the broadening case. A stumble by the leaders, though, hits the only part of the index doing the lifting. 

The bar is always at its highest right before someone trips over it.

FOMC Minutes Show A Divided Committee

The September minutes, released Wednesday, confirm the hike was broader than the 12-0 tally suggested. All 19 participants, including the seven regional presidents who don't vote, backed the quarter-point increase. Based on the minutes, the agreement ended there.

Reuters characterized the committee as "divided over the rationale." Some participants saw the hike as needed to contain energy and supply shocks. A more hawkish group viewed it as insurance against demand-driven inflation. "Many participants emphasized that a higher path for the target range would be prudent on risk-management grounds," while "several participants stated that they viewed the current policy rate as not restrictive or only mildly restrictive."

That said, Fed members believe another hike is likely. Per the minutes, "most participants assessed that another increase in the target range for the federal funds rate would likely be appropriate by year end."

Some participants warned that after more than five years of inflation above 2%, the elevated price growth "could begin to affect inflation expectations and wage- and price-setting decisions." We believe this concern, as Cleveland Fed president Beth Hammack often says, is the biggest driver of hawkish policy.

Since the meeting, inflation and employment data have deteriorated, and market odds of a Fed hike have fallen to 20%, as shown below. Last week's core PCE was 3.0% below the 3.4% consensus, September payrolls came in at 29,000 with 60,000 of downward revisions, and unemployment rose to 4.2%.

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Over the past six months, the 10-year Treasury yield rose by nearly a full percentage point, and REITs (Real Estate Investment Trusts) paid the price. XLRE, the State Street Real Estate ETF, was essentially flat, whereas the S&P 500 gained 18%. Clearly, higher yields are influencing REIT prices more than equity performance; thus, our question is: are REITS a good equity sector to buy if you think yields have peaked and will decline? To assess this, we looked at the correlations of XLRE's top holdings to 2yr, 5yr, and 10yr Treasury yields. We also considered the recent relative performance to the S&P 500 and the REITs' respective subsectors.

The broad takeaway is that while it's easy to blame the surge in bond yields for the poor performance, rate sensitivity isn't uniform across the stocks we analyzed, and other factors matter. Here are a few takeaways from the table summarizing our findings, as shown in the graphic.

• XLRE's correlation to daily yield changes was -0.39.
• The most rate-sensitive names did not have the most negative correlation to yield changes. To wit, Weyerhaeuser, Digital Realty, and Host Hotels, which are economically cyclical businesses, were among those with the highest negative correlations.
• Host Hotels tracked the S&P 500 despite its high negative correlation.
• Welltower and Ventas, the senior housing REITs that make up roughly 16% of XLRE, showed no meaningful link to yields. Healthpeak Properties was the only holding to beat SPY over six months, while Welltower and Host Hotels were close.
• Cell tower REITs and CoStar (data) also had weak correlations, yet they were among the worst performers. Their struggles appear tied to industry and company fundamentals rather than rates.
• Net lease firms, like Realty Income and VICI, had modest daily correlations but trailed SPY by 28 to 33 points. Their margins are under pressure from rising funding costs, but long-term fixed rents largely remain stable.

Rates matter for REITs, but they explain only part of the price action. With most correlations ranging between -0.2 and -0.4, which explains some of the negative performance, property type, growth, and balance sheets also drove performance divergence within the sector.

What To Watch Today

Earnings

Economy

Market Trading Update

Yesterday, we walked through the Russell 2000 short-squeeze setup, noting that small caps were the likeliest first stop for any squeeze. Today, I want to check the market breadth signals across the rest of the tape. Is the “broadening” finally reaching the beaten-down sectors of real estate, health care, financials, and utilities?

Start with the headline. The S&P 500 closed Tuesday at 7,819, its first close above 7,800 and a fresh record. Yet fewer than a third of its members trade above their 50-day moving average, depending on whose count you use. That's a record standing on very few shoulders.

Now for the improvement. In Saturday's Bull Bear Report, only technology and energy sat above their 50-day averages. Real estate was 7.1% below its line, utilities 6.7%, and financials nearly 6%. By Tuesday's close, all four laggards had narrowed that gap. Utilities did the heavy lifting, rallying 3.3% in two sessions to cut the deficit to 3.1%. Health care sits just 1% below its average, the closest to a reclaim.

Notice in the composite chart below how stretched the selling got. The equal-weight blend of the four closed below its lower 2 SD band three times in September. Its RSI fell to 22 on Oct. 1, the deepest oversold reading since the April 2025 tariff low. It's since recovered to 39.

But a bounce is NOT a trend change. The composite still sits 3.6% below a falling 50-day average and 1.1% below its 200-day average. The broader tell hasn't moved either. The ratio of equal-weight to cap-weight S&P 500 is down 4.3% since June 30 and flat since Friday. Such is the nature of a narrow market. The laggards bounced, but so did the leaders.

"So you're saying the rotation is dead money?" Not quite. Bob Farrell's Rule #7 says markets are strongest when they're broad and weakest when they narrow to a handful of names. Breadth doesn't have to be good for the rally to continue, but it has to improve for the rally to last. The swing factor remains rates. With the 10-year near 5.26%, these sectors need a move back below 5%, and today's 30-year auction is the next test.

In the ETF Sector Rotation Model, we aren't chasing the bounce. Health care is first in line on a close above its 50-day average. Utilities and financials need the composite back above its 200-day and the equal-weight ratio turning higher. Meanwhile, technology sits 7.8% above its 50-day, so trimming it back to target weight funds the rotation before it shows up. Let the laggards prove it, and keep stops where they belong.

Cheap can always get cheaper. It usually waits until you've bought.

NVDA Booms While Breadth Continues To Narrow

Nvidia set all-time highs Tuesday, and its market value is quickly approaching $6 trillion. The S&P 500 also set a record, closing above 7,800 for the first time. While both make for positive headlines for the stock market, neither says much about what's happening to the broader market

Since the start of August, Nvidia has gained nearly 7%, with the Nasdaq closely following. The S&P 500 is up slightly, balancing gains in technology stocks with weakness across many other sectors. The graph below shows stark divergences in returns since August 1, 2026, with many interest rate-sensitive sectors, like REITs, down moderately. While we led today's Commentary analysis of REITS, some of the sectors shown below and others not shown are due for a period of outperformance versus the market, but that may not occur before stability and possibly lower yields can be had in the bond market. Such may have to wait for some sort of peace agreement with Iran.

Worried Consumers Keep Spending: Here's Why

For nearly four years, economists have been predicting that consumers would fail the economy. To their point, sustained high inflation, the fastest Fed tightening cycle in decades, and more recently, surging gasoline prices and interest rates should be taking a toll on consumer spending.

In some respects, those and other factors are weighing on the consumer’s mind. As we share below, the University of Michigan Consumer Sentiment gauge sits at a 50-year low, and the less politically biased Conference Board Consumer Confidence Index is down to 2014 levels.

Yet despite many reasons for consumers to retrench, real personal consumption expenditures (PCE) grew 2.6% through September.

To better understand this resilience, we built a Consumer Health Index. The index combines income, labor, credit, spending, and price data that should explain how much consumers can afford to spend. We then compare our index to PCE, or what consumers have actually spent. The gaps between the two tell an important story about where spending power is coming from and how durable it may be.

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For nearly four years, economists have been predicting that consumers would fail the economy. To their point, sustained high inflation, the fastest Fed tightening cycle in decades, and more recently, surging gasoline prices and interest rates should be taking a toll on consumer spending.

In some respects, those and other factors are weighing on the consumer’s mind. As we share below, the University of Michigan Consumer Sentiment gauge sits at a 50-year low, and the less politically biased Conference Board Consumer Confidence Index is down to 2014 levels.

Yet despite many reasons for consumers to retrench, real personal consumption expenditures (PCE) grew 2.6% through September.

Bottom line: consumers keep worrying but keep spending.

To better understand this resilience, we built a Consumer Health Index. The index combines income, labor, credit, spending, and price data that should explain how much consumers can afford to spend. We then compare our index to PCE, or what consumers have actually spent. The gaps between the two tell an important story about where spending power is coming from and how durable it may be.

Building Our Consumer Health Index

Our index uses 19 monthly and quarterly data series going back to 2007, drawn from the BEA, BLS, Census Bureau, Federal Reserve, and EIA. The inputs fall into four broad groups:

• Income and labor: real disposable income, real income excluding government transfers, real wages, payrolls, unemployment, and jobless claims.
• Credit and balance sheets: consumer credit growth, credit card delinquencies, the household debt service ratio, and bank lending.
• Spending momentum: real retail sales, with and without autos and gasoline.
• Cost pressures: gasoline prices, used car prices, and CPI.

The components are re-weighted monthly based on how closely they tracked real PCE growth over the prior three years. Doing so allows the index weightings to adapt as spending drivers change. We excluded sentiment surveys from our index as they have had essentially no correlation with actual spending for the last ten years.

Since 2022, our index has had a statistically relevant 0.58 correlation with real PCE growth, as shown below.

The current widening gap between our index and PCE is somewhat unusual, except for the prolonged gap in 2023 and 2024.

The Gaps: 2023-2024 And Today

To better highlight the emerging gap and the 2023-2024 gap, the graph below translates the index into the real PCE growth rate it implies. The shaded areas show when consumers spent more (orange), or less (gray), than the index and thus what the economic data suggested.

Based on our model, consumers are once again spending more than their incomes, jobs, and costs would predict. The question is, what is filling the gap?

What Explains Consumer Resilience

Our index captures the typical household’s income stream. However, several sources of spending power fall outside of it:

• A declining savings rate: The personal savings rate has fallen from 7.2% in January 2024 to 4.1% today. Outside of a few months in 2022, the savings rate has not been at or below 4% since 2005-2008. When households save less, spending can outpace income.

• Wealth concentration: Household net worth rose to about $186 trillion in the second quarter of 2026, from roughly $108 trillion at the end of 2019, per the Fed. In 2025, Moody’s Analytics estimated the top 10% of earners accounted for nearly half of all spending, representing the highest share since its data began in 1989. Wealthier households tend to base consumer decisions more on asset prices and less so on factors like paychecks or gas prices. Some economists question the precision of Moody’s estimate, but regardless, the wealth effect and widening wealth gap strongly influence aggregate consumption patterns.  As an aside, in The Wealth Effect Is Not Always Virtuous, we estimated that “a $1 increase in incomes should lead to a $2.63 increase in GDP,” while “a $1 gain in equity wealth should lead to a $1.054 increase in GDP.” Asset-driven spending is real, but it is much less powerful than income-driven spending.
• Transfers and retirees: As of August, annual personal transfer receipts, largely Social Security, Medicare, and Medicaid, total $5.2 trillion, up almost 70% since 2019. Retiree spending is largely insulated from labor market conditions.
• Population growth: Strong immigration growth in 2022-2024 boosted aggregate spending. Our index measures rates, such as wage and payroll growth, not the number of consumers.
• Credit: Revolving credit grew as much as 15% year over year in 2022-2023, helping fund spending during the inflation surge. While buy-now, pay-later loans are not captured in the data, revolving credit is expanding only 3 to 4% today, so, unlike in 2023 and 2024, consumers are not taking on excessive credit to fund spending.

What Could Change

A critical factor from the spending sources is that the savings rate has little room to decline further. As we noted in Low Savings Boosts Spending Today But At A Cost Tomorrow:

Historically, low savings rates tend to revert higher.

If households can no longer save less, spending must track income more closely. With real income excluding transfers growing at less than 1%, any increase in the savings rate should reduce spending.

Several other catalysts could close the gap:

• A stock market decline: The top 10% of earners, who now drive nearly half of spending, would likely pull back if their wealth shrinks.
• A weaker labor market: Rising layoffs would hit the broad consumer base our index tracks and also raise concerns among those with jobs, likely pushing the savings rate higher.
• Persistently high gasoline prices: At over $4.00 per gallon, gasoline continues to erode real incomes and weigh on sentiment.
• Credit stress: Tighter lending standards, rising delinquencies, and higher interest rates will limit borrowing.

It's just as important to consider that the gap could also close from below. If gasoline prices retreat, interest rates fall, and real incomes recover, our index would rise to meet spending rather than spending falling to meet the index.

Ramifications For Both Scenarios

If spending converges down to the index:

• Real PCE growth would slow toward 1.0% to 2.0%, based on the index’s recent readings. With consumption at roughly two-thirds of GDP, economic growth would be meaningfully affected.
• Consumer discretionary companies, particularly companies reliant on high-income households, would face downside risk.
• The Fed would have room to stop hiking rates and potentially consider cutting them.
• The savings rate would rise. While rebuilding household cushions is healthy, it would come at the expense of near-term growth.

If the index rises to meet spending:

• The economy would sidestep a consumer slowdown and extend the expansion.
• However, more demand could keep inflation elevated, possibly resulting in more rate hikes and higher yields, which could in turn negatively impact the economy.
• Asset prices would remain a critical support, leaving the economy increasingly dependent on the wealthiest households and the stock market.

Summary

The consumer is more resilient than in past cycles, but not because the typical household is financially healthier. Resilience has come from a falling savings rate, record wealth concentrated among high earners, growing transfer income, and population gains. Our Consumer Health Index shows spending outpacing fundamentals, just as it did in 2023-2024.

The difference today is that the savings buffer that existed then is largely exhausted. The consumer’s resilience increasingly rests on the stock market and a stable labor market. Investors should closely follow the savings rate, jobs data, interest rates, and gasoline prices, as they will likely determine whether spending slows relative to the index or the index recovers relative to spending.

The post Worried Consumers Keep Spending: Here’s Why appeared first on RIA.

Dallas Fed President Lorie Logan recently said that she estimates the Fed Funds target rate needs to rise "an additional 50 basis points or more." Her reasoning is straightforward and grounded in the Fed's Congressional mandates. Inflation is falling as transitory factors fade but trending "toward the mid-2's, not all the way to the FOMC's 2 percent goal." Unemployment at 4.2% sits close to most estimates of the lowest sustainable level. Taken together, she argued:

A balanced labor market and inflation trending above target mean the stance of policy has been offsides.

Full labor and stable prices, as she alludes, is the dual mandate applied to the current environment. Thus, while we may agree or disagree with her view on where rates should be set, Congressional mandates are driving that decision. So far so good, but then Logan introduced a third input.

Logan distinguished between two reasons long-term yields have risen. First, she said if yields are rising because the market anticipates further rate hikes, the Fed should follow the markets and boost rates accordingly. However, if yields are rising because the term premium is rising, the market is doing the Fed's work, and further rate hikes may not be required.

Interestingly, and to her credit, she flagged the problem with relying on the term premium as your policy compass. To wit:

These decompositions depend on models and subjective judgments, and conditions can change.

Using the term premium for policy decisions raises a big concern. Logan and likely other Fed members are relying on an unquantifiable number, the term premium, instead of hard inflation and labor market data? The term premium is a model that can be calculated in many different ways, with many different results. Even the Fed's own models disagree sharply on what it is. The graphic below compares three Fed term premium models. It shows there is a 79-basis-point difference on the same bond, over the same time period, across Fed models. Further, two of the three disagree on whether the term premium rose or fell this year. See today's Tweet of the Day below, which shows this stark divergence.

Congress mandated the Fed set policy according to prices and employment. Both are observable. Anchoring policy to estimates of market narratives and investor sentiment can lead to significant policy errors.

What To Watch Today

Earnings

• No earnings releases today

Economy

Market Trading Update

Yesterday, we discussed the “upside pain trade,” noting that any squeeze would more likely run through small caps than through crowded mega-caps. Today, let’s take a closer look at the Russell 2000 short squeeze setup, because the fuel is already in the tank.

Start with the trigger. The 10-year Treasury yield hit 5.35% on Monday, the highest level since April 2002. Yet it eased to roughly 5.26% on Tuesday, about where it traded five sessions ago. Rates haven’t reversed. They’ve stalled. That alone was enough for small caps to catch a bid.

Notice in the chart above how closely the Russell has tracked the inverted 10-year real yield since July. As real yields climbed from 2.41% in mid-August to 2.95%, small caps sank. Now look at the right edge. Real yields edged higher again last week, yet the Russell bounced 1.8% off its Sept. 30 low. That’s what short covering looks like. Such is the nature of a crowded trade.

The technical picture is improving, too. The Russell closed Monday at 2,847, about 2% above its 200-day moving average at 2,783 and 7% below the Aug. 14 record close of 3,068. It’s now pressing against the top of the downtrend channel off that peak, which sits near 2,852. Meanwhile, the long-term trend line from the April 2025 low, now near 2,761, held on the pullback. This is the first constructive technical setup in small caps in two months.

Here’s where it gets interesting. Goldman notes that systematic exposure to the Russell sits at just the 7th percentile, while CFTC data show leveraged funds holding a record short of roughly $26 billion. Over the last several sessions, IWM gained about 2% versus 1.5% for the S&P 500. It’s a small gap. But it’s the first time in three months the relative trend has bent.

Yes, we have seen this movie before: small caps have repeatedly teased breakouts, only to roll over. It's a fair point, and right now everyone agrees small caps are “dead money” while rates rise, which has been our case as well. However, yields don’t need to collapse for that consensus to crack. A drift back toward the 21-day average near 5.08% would likely send shorts scrambling. A test of the 50-day near 4.86% is a different story entirely.

Of course, the risk cuts both ways. Today’s 10-year auction and the FOMC minutes are the test. A sloppy auction pushes yields back to the highs, and the channel break fails.

Just remember this: "Crowded shorts rarely exit quietly, and neither do the ones who arrive late."

Gold Is Not Living Up To Its Narrative

Deficits are out of control. Inflation rages. Rising Treasury yields will bankrupt the nation.

The negative narratives above and others haunt the bond market. Yet what should be bad news for Uncle Sam should be good for gold. Gold has fallen by about 6% over the past month and is almost 25% below January's record of $5,608. If gold were primarily an inflation and fiscal-malfeasance hedge, it should be at record highs.

As we have shown in the past, gold prices are much more tethered to real yields than to inflation or deficits. This is logical for two reasons. First, high real rates reflect restrictive monetary policy, which runs counter to the rationale for holding gold to hedge against overly easy Fed policies. Second, gold doesn't pay a yield or dividend. As real yields rise, investors may be more comfortable hedging inflation with TIPS and earning a decent yield. With the 30-year TIPS real yield near 3% and nominal yields at 24-year highs, that opportunity cost of holding gold over bonds has rarely been higher in the past two decades.

Gold does well when real rates fall, which often coincides with inflation rising faster than the Fed is responding. When the Fed is ahead of inflation, as it is attempting to be now, gold struggles regardless of the price level and the many bearish fiscal-but-bullish-gold narratives.

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Since early September, the dollar Index has risen nearly 4%, reaching its highest level in over a year. The continued rally over the last few days is strange, since October rate-hike odds collapsed from above 60% to roughly 25% on a weak payroll number and less-than-expected PCE price data. Softer policy expectations normally weaken a currency.

Dollar strength has been a reliable headwind across asset classes. Over the past ten years of monthly returns, every major category has moved inversely to the dollar as the table below shows.

Across the last ten years, the S&P 500 averaged a slight loss in months the dollar rose and gained 2.74% in months it fell. Bear in mind roughly 40% of S&P 500 revenue comes from abroad, and a stronger dollar shrinks the revenues on translation regardless of changes to demand. Foreign equities show much more sensitivity to the dollar, which makes sense, as dollar-based investors in foreign ETFs like EFA or EEM absorb the currency gains or losses.

Long bonds (TLT) give us pause. TLT averaged a 1.18% monthly loss when the dollar strengthened. Often, a strong dollar reflects safe-haven demand and therefore supports Treasuries. While it doesn't hold in this sample, it is largely because of the large 2022 moves when the dollar surged and bond prices collapsed.

What To Watch Today

Earnings

Economy

Market Trading Update

Yesterday, we walked through the technical backdrop, with the S&P 500 stuck between 7,560 and the record zone at 7,800. Today, let's discuss the "upside pain trade." Everyone is asking what breaks next. The better question is what happens if nothing breaks at all.

Start with how investors view policy. Goldman's Monetary Policy Optimism gauge sits near negative 8, close to the bottom of its 30-year range. Hedge fund net US equity positioning ranks in the 0th percentile. Investors aren't bracing for bad news. They've already priced it.

The selling has been real, too. Non-dealers dumped $63.7 billion of S&P futures over six weeks, selling in five of them. Asset managers alone sold $11.7 billion last week. Here's the detail that matters. More than 70% of that move came from long liquidation, not new shorts. Add Citadel's estimate that CTA positioning swung from +2.35 to -0.80 standard deviations in a month. The sellers have mostly sold, yet the index still closed Friday at 7,722.72.

So what flips it? Rates. Goldman notes that asset-manager longs have closely tracked 10-year real yields, and the latest 25-basis-point jump was accompanied by another $5.5 billion in liquidation. Notice in the chart below that real yields have climbed roughly 115 basis points since late February, to about 2.91%. Yet the S&P 500 is still up 12% over that stretch. Now the MOVE index, at 107.29, shows early signs of stabilizing. If bond volatility cools, the main reason to cut equity exposure starts running in reverse. Then layer in buyback windows reopening in mid-October, with Citadel counting a record $1.3 trillion in authorizations.

A doubter in the back row will say bulls always talk this way near the top. Fair enough. But the pain isn't evenly spread. Tech allocations still sit in the 96th percentile of the past five years, even after last week's selling. Russell 2000 systematic exposure is at the 7th percentile, and leveraged funds hold record shorts. Such is the asymmetry. A squeeze would be more likely to run through small caps and rate-sensitive laggards than through crowded mega-caps.

That shapes our positioning. In the ETF Sector Rotation Model, we're rebalancing the weightings more towards the value side and taking profits in the growth factors. We are positioning for a potential squeeze before rates confirm it. Wednesday's 10-year auction and FOMC minutes are the test, and the 7,560 floor remains our stop.

Markets rarely punish the crowd that has already run for the exits. They punish the ones who never came back.

Time To Rotate? First, Connect The Dots

The table on the right side below shows that technology is very overbought, energy is at fair value, and every other sector is either moderately or very oversold. The interest-rate-sensitive sectors appear most oversold, while the more economically sensitive sectors tend to be a little less oversold. The graph on the left side of the screenshot plots how the technology and REIT sectors have diverged over the last 6 weeks. As it shows, they are nearly mirror images of each other.

The second graphic shows the mirror image is not a mirage. It compares the correlations between the excess returns of every sector. As we highlight in green, negative correlations are extremely high for most sectors versus the technology sector. As we have noted, this extreme negative correlation and dispersion will not last; however, it may take lower yields to force a rotation in the stock market.

It's time to connect the dots. Essentially, active traders' returns over the next few months may depend heavily on the bond market. Furthermore, given the record-high correlations between bond yields and oil, oil prices and events in Iran will drive yields, and in turn, impact relative sector returns.

Sequence Of Returns Risk: The Math That Breaks Retirements

Let’s start with an easy example. Two people retire on the same day with the same million dollars. They have the same portfolio and the same 30-year average return. They should both live comfortably, right? However, while one does die comfortably, the other runs out of money.

Nothing separates them except the ORDER in which their returns arrived. That is the “sequence of return risk,” and probably the single most underappreciated threat to anyone who has stopped saving and started spending. While you were accumulating, the order of your returns barely mattered. Once you are withdrawing, it becomes the entire ball game.

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Last month, the BLS reported a stunning gain of 162k jobs in August. Accordingly, economists began to think the job market malaise may finally be thawing. The latest BLS report makes the August data seem like a one-off blip versus a trend change. Last Friday's report showed a pick-up of only 29k jobs, about a third of the consensus, and the unemployment rate climbed to 4.2% from 4.1%. Further pointing to weakness, average hourly earnings edged up five cents to $37.81, a 0.1% gain, which equates to a decline in wages on an inflation-adjusted basis.

The revisions to prior data were also poor. August's reported gain of 162,000 was cut to 133,000. July, already revised down twice, flipped from a gain to a 10,000 loss. Together, the two months are 60,000 lower than previously reported.

There were some positives. For instance, labor force participation rose to 61.8% from 61.4%, and the employment-population ratio improved to 59.2%. The higher unemployment rate reflects people entering the workforce, not a wave of job losses.

For the Fed, this complicates the case for those members arguing for more. Lorie Logan told an audience last Tuesday she estimates another "50 basis points or more" is needed, citing a labor market "close to most estimates of the lowest sustainable level." A twelve-month average of 10,000 jobs a month makes that harder to sustain. The market case for more tightening thinned considerably in a few days. As shown below, the odds of the Fed holding rates steady at its next meeting rose from 18% to over 80%.

What To Watch Today

Earnings

Economy

Market Trading Update

The S&P 500 closed Friday at 7,722.72, down 0.3% for the week. It's still trapped inside the range that has held since early August. That range runs from the September 16 closing low near 7,560 up to the August 13 record of 7,798.99. The index sits 0.9% above its 50-DMA at 7,658 and 6.9% above its 200-DMA at 7,224. The 14-day RSI reads 55, squarely neutral. MACD is still positive at about 10 index points, but slipped just below its signal line this week. That's a mild loss of momentum rather than a breakdown.

The Bollinger Bands tell the same story. Price sits about one standard deviation above its 20-day mean of 7,672. The upper 2 SD band is at 7,778, just under the record. Such is the problem with this range. The upper band and the record converge at the points where sellers stepped in on August 13, September 3, and September 21. Until the index can close above that zone, rallies toward 7,800 are places to trim rather than chase.

The technical support and resistance levels remain key this week as the Q3 earnings season gears up. All-time highs remain within reach, and support sits immediately below market prices.

The bigger issue is underneath the index. Only two of the 11 S&P 500 sectors, technology and energy, closed above their own 50-day moving averages on Friday. Technology sits 7.2% above its average. Real estate (−7.1%), utilities (−6.7%), and financials (−5.8%) sit deep below theirs. The ratio of equal-weight to cap-weight has dropped 4.4% since June 30. That's a narrow tape. When one sector carries the market while nine others trade below their averages, the index can hold up for a while, but it grows more vulnerable to a stumble in the handful of mega-cap technology names doing the lifting.

Technology sits 7.2% above its 50-DMA, and energy 1.3% above. The other nine sectors trade below theirs, led by real estate at −7.1%.

Dispersion cuts both ways, though. The skeptics will tell you a market this narrow has to break, and eventually they may be right. However, deeply oversold sectors are exactly where a "broadening" rally would come from. Real estate, utilities, and financials are the groups most hurt by rising yields. They also have the most room to snap back if Friday's pullback in rates continues. A retreat in the 10-year below 5% would likely do more for market breadth than any earnings report.

This week, patience pays at the top of the range. We continue to recommend trimming positions that have run toward the record and rebalancing back to target weights. Pullbacks that hold the 50-DMA near 7,658 are buyable. A close above 7,800 on strong volume would confirm a breakout and open a path toward 8,000. A close below 7,560 would break the range. That's where we'd raise hedges and tighten stops, with the 200-DMA near 7,224 as the next support.

The single level to watch next week is 7,800. Clear it, and the summer consolidation resolves higher. Fail there again, and the range is likely to continue, with the risk tilted toward the 7,560 floor.

The Week Ahead

Next week is thin on data, but we will get the September FOMC minutes on Wednesday afternoon to better understand the rationale for the Fed's rate hike. That meeting produced a 12-0 vote, a hike to 3.75-4.00%, and a dot plot that erased the 2027 cut path entirely. It will be interesting to see how many participants shared Lorie Logan's view that another 50 basis points or more is needed, and how many leaned toward Christopher Waller, who said last month he would lean toward holding. Since that meeting, Core PCE came in at 3.0% against a 3.4% consensus, and September payrolls were weak, as we discussed above.

Earnings start in earnest next week, with the banks beginning on October 13.

Price Of Happiness: Missing The Things That Matter

The “price of happiness” chart came around again recently, and the number attached to it was as confident as ever. One widely shared version, built from a Remitly analysis, ranked 50 countries. The measure: how close the average wage gets to the income where happiness supposedly “plateaus.” Slovenia was the only country where wages cleared the bar.

In the U.S., the figure landed at 55.8%, with a “price of happiness” pegged at $134,827, precise to the dollar. The trouble is that the figure doesn’t measure happiness at all, and I can show you that using the exact study the chart is built on.

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The sequence of return risk is the quiet reason two retirees with identical average returns can end up in very different places.

Let’s start with an easy example. Two people retire on the same day with the same million dollars. They have the same portfolio and the same 30-year average return. They should both live comfortably, right? However, while one does die comfortably, the other runs out of money.

Nothing separates them except the ORDER in which their returns arrived. That is the “sequence of return risk,” and probably the single most underappreciated threat to anyone who has stopped saving and started spending. While you were accumulating, the order of your returns barely mattered. Once you are withdrawing, it becomes the entire ball game.

What Sequence Of Return Risk Actually Is

The 4% rule originated with financial advisor William Bengen in 1994 and was later stress-tested by three professors in what became known as the Trinity Study. Notably, Bengen wasn't hunting for an average; rather, he wanted the worst starting year in history that a retiree could still have survived. The answer had little to do with typical market returns. What it came down to was the retiree unlucky enough to begin in 1966, right before a long grind of bear markets and inflation that hollowed out the first half of retirement.

Before we go further, it is important to understand the problem with averages. When it comes to market returns, a portfolio that no one touches can absorb a bad decade and allow a good decade to balance the books. However, a portfolio in which withdrawals are taken cannot wait. When you sell shares during a decline, those shares are gone, and they never join the recovery. Wade Pfau estimated that roughly 77% of a retiree's final outcome is set by the first ten years alone. In other words, the average across 30 years can look perfectly "fine" while the sequence quietly destroys you.

This is the cruel arithmetic of the withdrawal phase for retirees. When you are a 35-year-old saving for retirement, market volatility is a boon. However, that same volatility becomes a genuine hazard for a 68-year-old. One is "buying the dip" with every paycheck, while the other is being a “forced seller” to survive. Same market, opposite outcomes.

Why Starting Valuations Load The Dice

If sequence is the risk, valuation is your best early read on it, and this is the part of the retirement conversation that usually gets skipped. The 4% rule was calibrated across all of history, cheap starting points and expensive ones blended into one number. The market, though, doesn't offer every retiree the same deal on their first day. Your exposure to sequence-of-returns risk is partly a function of the price you pay to walk in the door.

Research by both Wade Pfau and Michael Kitces showed that the "safe" withdrawal rate moves with valuation at the moment you retire. An individual who retires when valuations are cheap has had history be generous. Retire when they are "expensive" and the first decade, the one that decides most of your outcome, tends to disappoint. The chart below rebuilds that relationship from Robert Shiller's stock market data back to the 1880s, and I've walked through it before using a five-year version of the CAPE.

Cheap Starts Win, Expensive Starts Lose

Pay close attention to what happens across the valuation buckets. When the cyclically adjusted price-to-earnings ratio started below 15, the next ten years delivered close to 9% real returns. When it started at 25 or higher, that forward decade shrank to barely 2%. This isn’t a coincidence. History has repeatedly shown us that lower forward returns are the high-probability outcome from rich valuations. Same asset, wildly different opening hands, and the retiree has no vote on which one they draw.

This is the point at which I most often receive reasonable pushback: “Nobody can time valuations.” Yes, that is a fair point. We are not discussing market timing, and valuations are a terrible indicator for that. However, valuations calibrate how much risk you take relative to what the market is offering, because in the long run, valuation is the best measure of returns we have. A rich valuation doesn't guarantee a bad sequence. It just stacks the deck in favor of one.

The Loss Math That Makes Recovery So Hard

Before you get lost in the debate, take a moment and focus on the mechanism that makes this so unforgiving. Market, and ultimately portfolio, losses and gains are not symmetric, and most people misjudge the gap. A 10% loss needs an 11% gain to recover, which feels "manageable." A 30% loss requires a 43% gain, and a 50% loss requires the market to double. The deeper the hole, the steeper the climb, and it steepens at an accelerating rate.

For a retiree, however, the math becomes far more brutal. As you are climbing out of that hole, you are effectively cutting the rope above you by pulling money out, and every dollar withdrawn during the recovery is one that never rebounds.

To make this a bit clearer, let’s build a simplistic example and walk through a single year. For argument's sake, we will assume a retiree starts with $1 million, and the market falls 10%. Simultaneously, they also withdraw the 4% needed for living expenses across the twelve months. This is simple math, right?

However, at the end of the year, the portfolio didn’t go down just 10%. It ended down almost 14% because those withdrawals came from a shrinking base. For that retiree to climb back to a million, over the next year, while they keep spending, the market can't just return 14%; it has to return 21%. The sequence of return risk turns an ordinary 10% decline into a 21% problem.

Now Add The Tax Collector

Wait, it gets worse. For most of the “free advice” that is given, most overlook the one person everyone hates: the “tax collector.”  The "4% rule" is a pre-tax number, since Bengen assumed a tax-free account to keep the math clean. Real retirees rarely have that luxury. Need $40,000 to live on and pull it from a traditional IRA, and every dollar is ordinary income, so the gross withdrawal must be larger to net the same spendable amount. A 4% lifestyle funded from an IRA is really a 5% draw on the portfolio once you account for a 20% effective tax rate. Even if you are drawing from a taxable account, your capital gains, dividends, and income are all taxed as well. That bigger draw is what the portfolio feels, pulling the depletion date forward by years.

Of course, income tax brackets, state taxes, Social Security taxes, and Medicare surcharges will all impact outcomes. Such is why account types become an important factor in retirement planning. While a Roth IRA changes nothing, a taxable account is gentler as only the gains, dividends, and interest income are taxed. However, a traditional IRA, or retirement plan, taxes every withdrawal at the individual's tax bracket. While the overall point survives the details, the headline rate understates what the portfolio must fund, and sequence risk feeds on the difference.

Here is the takeaway from this discussion.

"You can't control when the bad years arrive. You can control whether they find you fully exposed and dependent on selling into them."

"Markets Always Recover" Misses The Point For Retirees

Over long time horizons, the U.S. market has always recovered from declines and bear markets. For individuals who bolted into cash in a panic, they missed the sharpest rebound days. Unfortunately, those 10 best days tend to cluster within the market's worst stretches. Therefore, for a 35-year-old with decades of contributions still ahead, "just ride it out" is close to the correct prescription. For a 65-year-old, it is a different story.

While the general belief is that markets "always recover," there is an unrealized impact in the “waiting.” The market took roughly 13 years to reclaim its 2000 peak in real (inflation-adjusted) terms. For a 35-year-old who was dollar-cost-averaging, the 13-year wait proved beneficial, as it allowed accumulation of shares at lower prices. However, for that 65-year-old drawing income, the effect was the opposite. Every withdrawal during that was capital that never healed. "Ride it out" quietly assumes you aren't spending the portfolio while you ride.

Okay, let’s put some real numbers to it. According to the life expectancy table, a 65-year-old lives about 19 more years, to roughly 84. The portfolio has to survive whatever sequence the market hands you. Below, a retiree takes a severe early loss and draws the standard 4% through it, against the same market left fully invested.

Here is the truth: “the market does exactly what the optimists promise.” It drops, recovers, and climbs to new highs in a repeatable cycle. However, the retiree who drew income through the early losses never gets back to where he started. Their principal hits zero at 83, the year before the average 65-year-old is expected to die, on the same market that made a patient buy-and-hold investor wealthy. And this is the disciplined case, the celebrated 4%, and not a penny more. Same market, same 4% rule, and one of them still ran out of money. That is the gap "just ride it out" refuses to see.

This is usually where I get a fair objection to this analysis:

"But, if you sell, you'll miss the recovery."

True, if you're still a saver. However, it is a very different calculation once you're living off the balance. I've written before about when a retiree should actually reduce exposure, and the point isn't calling the top. It's that sequence of return risk breaks the "ride it out" script for anyone in the withdrawal phase.

Rules Of Engagement For The Sequence Of Return Risk

So, all of this analysis brings us to the most important facet of managing your portfolio: the core discipline and financial planning practice at RIA Advisors.

We understand that you can't forecast the sequence of returns, but we CAN build a plan that survives a bad one. As Howard Marks puts it, you can't predict, but you can prepare. These are the rules of engagement once you've crossed from saving into spending.

1) Hold one to two years of spending in cash or short-term bonds. Most bear markets are short, with the average one lasting under a year, compared with bull markets that run for years. A cash reserve means that WHEN the market drops, you spend from cash instead of selling stocks at the bottom. You refill once prices recover. The cost is a little cash drag in a roaring bull, a price worth paying to never be a forced seller.

2) Manage the drawdown itself. The process of avoiding a deep loss matters more in the withdrawal phase than catching the last leg of a rally. Maintaining a risk management process that trims exposure as risk increases keeps a 20% decline from growing into a 40% one. I've discussed previously that keeping losses small is the majority of the job.

3) Set your starting withdrawal rate to the conditions at the start. If you are retiring into an expensive market, start with a withdrawal rate closer to 3%-3.5% than 4%. That is Pfau's direct prescription, where a slightly leaner start costs far less than running out of money at 84.

4) Mind the tax drag. The gap between after-tax income needs and pre-tax withdrawals determines whether a plan survives. Consider spreading withdrawals across taxable, tax-deferred, and Roth accounts, and opt for Roth IRA conversions in low-income years. Taking steps to lower the effective rate the portfolio must fund is one of the few levers you control.

5) Stay flexible on spending. The "guardrails" approach from Jonathan Guyton and William Klinger trims withdrawals after bad years and lifts them after good ones. (This is why we recommend having a security cushion.) Implementing a small, temporary spending cut early in a downturn does enormous work by halting the depletion spiral before it builds momentum. Research suggests flexibility alone can support a higher starting rate than a rigid plan.

6) Implement a rising equity glide path, or "bond tent." This process suggests carrying more bonds in the portfolio during the early stages of retirement when the sequence-of-returns risk is highest. Over time, let overall equity exposure drift higher as the danger fades. Pfau and Kitces showed that this defuses the first decade, the one that matters most.

7) Separate your essentials from the market. Consider covering basic living needs with reliable income sources, such as Social Security and, if you have one, a pension. If there is still a gap between that income and spending needs, an annuity may be an option. Crucially, that reliable income stream allows the portfolio to fund only the discretionary layer, where spending can be more flexible. When your groceries don't depend on the S&P 500, a bad sequence becomes a mild discomfort, not a catastrophe.

Sequence Of Return Risk: Frequently Asked Questions

What is the sequence of return risk?

Sequence of return risk is the risk that weak returns occur early in retirement, while you are withdrawing income. Selling shares into a decline locks in losses that those shares never recover from, so two retirees with the same average return can end up in very different places based solely on the order in which the returns arrived.

Why does the sequence of return risk only matter once you retire?

While you are saving, you are adding money and effectively buying the dips. In that environment, the order of returns matters much less. However, once the cycle shifts from accumulation to withdrawals, a bad early stretch forces you to sell into weakness. Wade Pfau has estimated that the first ten years drive roughly 77% of the final outcome.

Does the 4% rule protect against sequence-of-returns risk?

While the 4% is widely accepted, in reality, it is only part of the solution. The 4% rule survived history's worst 30-year sequences, but that withdrawal rate has two flaws: 1) it is a pre-tax number, and 2) it provides no guarantees. High starting valuations, a severe early loss, or taxes that turn a 4% lifestyle into a 5% draw from an IRA can still empty a portfolio.

How much cash should a retiree keep for sequence risk?

For most people, holding one to two years of spending in cash or short-term bonds is a reasonable buffer. Most bear markets are shorter than that, so you can spend from cash instead of selling stocks at the bottom, then refill the reserve once prices recover.

How do starting valuations change a safe withdrawal rate?

Higher valuations have historically meant weaker returns over the following decade, which is exactly when a new retiree is most exposed. Pfau and Kitces found that the safe rate moves with the CAPE ratio at retirement. When valuations are rich, starting nearer 3% to 3.5% buys a margin of safety.

Sources & Notes

1. Bengen, William P. "Determining Withdrawal Rates Using Historical Data." Journal of Financial Planning, 1994. Origin of the 4% rule and the SAFEMAX concept.
2. Cooley, Hubbard, and Walz. "Retirement Savings: Choosing a Withdrawal Rate That Is Sustainable." AAII Journal, 1998 (the Trinity Study).
3. Pfau, Wade D. "Can We Predict the Sustainable Withdrawal Rate for New Retirees?" Journal of Financial Planning, 2011, and related work on valuation-based withdrawal rates. retirementresearcher.com.
4. Kitces, Michael. Analysis of sequence-of-returns risk and risk-based spending guardrails. kitces.com.
5. Guyton, Jonathan, and William Klinger. "Decision Rules and Maximum Initial Withdrawal Rates." Journal of Financial Planning, 2006 (the guardrails framework).
6. CAPE and forward-return figures computed by RIA Advisors from the Robert J. Shiller monthly dataset, S&P Composite, start months 1881 to 2013. shillerdata.com. Shiller prices are monthly averages, so computed returns run modestly off exact figures, but the valuation-to-return relationship holds up well.
7. Bear and bull market duration data: Hartford Funds, S&P 500 since 1928. Average figures vary by source and definition, with Yardeni Research reporting roughly 11 months for the average bear. All of them agree that bears are far shorter than bulls.
8. Life expectancy at 65: Social Security Administration Period Life Table, 2023, as used in the 2026 Trustees Report. A 65-year-old man averages about 17.5 more years, and a 65-year-old woman about 20.1 more years. The retiree-versus-market chart is hypothetical, assuming a $1,000,000 starting balance, a 4% initial withdrawal rate adjusted to 3.5% annually for inflation, and a severe early-loss sequence.
9. Tax figures are illustrative. They assume a $40,000 net lifestyle drawn from a traditional IRA on a $1,000,000 balance, grossed up at the stated effective tax rate, using the same hypothetical return sequence as the chart. Effective rates vary by bracket, state, Social Security taxation, and Medicare (IRMAA) surcharges. Roth and taxable accounts are taxed differently and generally have lighter tax burdens.

Further Reading

1. Lance Roberts, "Risk Management For Retirees: When To Reduce Exposure."
2. Lance Roberts, "Portfolio Risk Management: Accepting The Hard Truth."
3. Lance Roberts, "CAPE-5: A Different Measure Of Valuation."
4. Lance Roberts, "Lower Forward Returns Are A High Probability Event."
5. Lance Roberts, "The Best Measure Of Future Stock Market Returns."

The post Sequence Of Return Risk: The Math That Breaks Retirements appeared first on RIA.

🔎 At a Glance

• Q4 Market Outlook: Strong Years Usually Finish Strong
• Market Brief & Technical Review
• From Lance's Desk: Price Of Happiness: Missing The Things That Matter - RIA
• Market stats, screens, and risk indicators

🏛️ Market Brief -Bond Yields Hit A 24-Year High

The bond market ran the show this week. On Thursday, the 10-year Treasury yield touched 5.34%, its highest level since April 2002. It eased back to roughly 5.28% by Friday. The 30-year yield pushed toward 5.67%. Stocks absorbed the shock better than you might expect. The S&P 500 slipped 0.3% to 7,722.72. Meanwhile, the Nasdaq-100 gained 0.7% as Nvidia set a record, topping $5.7 trillion in market value. The Dow lagged, with banks and other rate-sensitive names taking the brunt.

Two weeks ago in "The Fed Rate Hike Won't Fix The Inflation It Targets," I argued that rate hikes can't cure a supply shock. This week's data made that case for me. The ISM manufacturing index held steady at 54.5, but its prices component jumped 6.8 points to 77.9. That's the highest reading since the Iran war began, and not a single commodity reported a price decline. Brent crude finished near $103 a barrel on reports of more U.S. military deployments to the Middle East, even after the G7 agreed to release strategic reserves.

Then Friday's jobs report flipped the script. The economy added just 29,000 jobs in September against expectations closer to 85,000. Revisions erased another 60,000 jobs from the July and August totals. Unemployment rose to 4.2%, while wage growth slowed to 3.0%. Bad news became GOOD news as traders cut the odds of an October rate hike to roughly 18%. Subsequently, yields backed off their highs, and the S&P 500 rallied 0.7% on Friday on the bet that a cooling labor market will force the Fed to stop tightening, even as pipeline inflation keeps climbing.

Make no mistake, that combination has a name. Weaker hiring and hotter input prices are two ingredients of "stagflation," the third is weak economic growth, which is not happening at the moment, with Q3 estimates north of 4%. That's the risk of the Fed hiking into an oil shock, stalling economic growth. The yield itself is also a problem for stocks. At more than 5%, the 10-year Treasury offers investors a risk-free return that equities haven't offered since 2002. That's the "there is no alternative" trade running in reverse.

Leadership stayed narrow. Technology gained 1.8% and energy 1.5%. Health care (−2.7%), financials (−2.5%), and communication services (−2.3%) led the decline. The equal-weight S&P 500 fell 0.7%, trailing the cap-weighted index again. Gold dropped 3.4% as the dollar firmed.

The macro thread for next week is simple. If the 10-year holds above 5% through Wednesday's auction and minutes, rate-sensitive stocks stay under pressure. A slide back below 5% would give the rest of the market room to breathe.

📈Technical Backdrop -  Range Holds, Breadth Keeps Cracking

The S&P 500 closed Friday at 7,722.72, down 0.3% for the week. It's still trapped inside the range that has held since early August. That range runs from the September 16 closing low near 7,560 up to the August 13 record of 7,798.99. The index sits 0.9% above its 50-DMA at 7,658 and 6.9% above its 200-DMA at 7,224. The 14-day RSI reads 55, squarely neutral. MACD is still positive at about 10 index points, but slipped just below its signal line this week. That's a mild loss of momentum rather than a breakdown.

The Bollinger Bands tell the same story. Price sits about one standard deviation above its 20-day mean of 7,672. The upper 2 SD band is at 7,778, just under the record. Such is the problem with this range. The upper band and the record converge at the points where sellers stepped in on August 13, September 3, and September 21. Until the index can close above that zone, rallies toward 7,800 are places to trim rather than chase.

The technical support and resistance levels remain key this week as the Q3 earnings season gears up. All-time highs remain within reach, and support sits immediately below market prices.

The bigger issue is underneath the index. Only two of the 11 S&P 500 sectors, technology and energy, closed above their own 50-day moving averages on Friday. Technology sits 7.2% above its average. Real estate (−7.1%), utilities (−6.7%), and financials (−5.8%) sit deep below theirs. The ratio of equal-weight to cap-weight has dropped 4.4% since June 30. That's a narrow tape. When one sector carries the market while nine others trade below their averages, the index can hold up for a while, but it grows more vulnerable to a stumble in the handful of mega-cap technology names doing the lifting.

Dispersion cuts both ways, though. The skeptics will tell you a market this narrow has to break, and eventually they may be right. However, deeply oversold sectors are exactly where a "broadening" rally would come from. Real estate, utilities, and financials are the groups most hurt by rising yields. They also have the most room to snap back if Friday's pullback in rates continues. A retreat in the 10-year below 5% would likely do more for market breadth than any earnings report.

For the coming week, patience pays at the top of the range. We continue to recommend trimming positions that have run toward the record and rebalancing back to target weights. Pullbacks that hold the 50-DMA near 7,658 are buyable. A close above 7,800 on strong volume would confirm a breakout and open a path toward 8,000. A close below 7,560 would break the range. That's where we'd raise hedges and tighten stops, with the 200-DMA near 7,224 as the next support.

The single level to watch next week is 7,800. Clear it, and the summer consolidation resolves higher. Fail there again, and the range is likely to continue, with the risk tilted toward the 7,560 floor.

🔑 Key Catalysts Next Week

Next week comes down to one question: can the bond market find a ceiling? Wednesday's FOMC minutes will show how many officials wanted more tightening after September's unanimous quarter-point hike. Friday's jobs data cut the odds of an October hike to about 18%. The minutes will tell us whether the committee shares the market's newfound calm.

The auction calendar matters more than usual. Treasury sells 3-year notes on Tuesday, 10-year notes on Wednesday, and 30-year bonds on Thursday, all with yields sitting at or near multi-decade highs. A weak 10-year auction on the same afternoon as the minutes could push yields back toward this week's 5.34% peak.

Monday's ISM services index (consensus: 55.7) will show whether price pressures are spreading beyond factories. August's services price index already sat at 72.6. Tuesday brings the August trade balance, and Wednesday brings consumer credit. Jobless claims matter more now. After a 29,000 payroll print and 60,000 in downward revisions, a jump in Thursday's claims above the 195,000 consensus would confirm that the labor market is cracking faster than the Fed's projections assume. Friday's preliminary University of Michigan sentiment reading, expected near 48, closes the week.

Fed speakers fill the calendar. New York Fed President John Williams speaks Tuesday and Wednesday, and Governor Michelle Bowman speaks on Tuesday. Dallas Fed President Lorie Logan follows on Wednesday, St. Louis Fed President Alberto Musalem on Thursday, and Boston Fed President Susan Collins on Friday.

Third-quarter earnings season gets its unofficial start. PepsiCo reports Thursday before the open, giving a read on how consumers are handling higher prices. Delta follows Friday morning. Bank earnings kick off in earnest the week after.

The most market-moving stretch is Wednesday afternoon. The 10-year auction and the FOMC minutes land within an hour of each other. Strong demand and a less hawkish tone would pull yields back below 5% and give the oversold rate-sensitive sectors room to rally. A sloppy auction paired with hawkish minutes is the asymmetric risk, putting 5.5% on the 10-year in play.

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💰 Q4 Market Outlook: Strong Years Usually Finish Strong

Since early August, the S&P 500 has gone nowhere in a hurry. The index has chopped between roughly 7,550 and 7,800 on a closing basis. It never reclaimed the August 13 record of 7,798.99, nor did it break down. As we warned in "September Market Weakness: The Setup Has Teeth," the buyers who carried August were leaving the table. That's exactly what happened. Last week, we looked at why Jefferies' 9,000 target needs everything to go right over the next fifteen months.

But what about the Q4 market outlook? A recent note by Jason Zwieg from the WSJ made a great point:

"It’s almost October. In the northern hemisphere, October has long been a time for reaping—but also for sowing.
 
Yes, in 1987 the stock market crashed on Oct. 19, falling more than 20% in a single day. Over the five days ended Oct. 10, 2008, as the global financial crisis intensified, U.S. stocks lost 18%, the worst week then on record. The panic of 1907, which devastated the U.S. banking system, also erupted in October. Some researchers have even argued for a “Halloween indicator,” which steers clear of stocks until after Oct. 31.
 
And many investors, in my experience, worry that October is cursed by the market gods.

Well, then, so is January, when the horrific bear market of 1973-74 began, initiating a 48% wipeout. So is February, when the 22% swoon of 1966 started—and the pandemic panic of 2020. So is March, which kicked off the beginning of the disastrous bear market of 2000-02, when tech stocks fell by about 80%—and the second-worst market downdraft on record, from 1937 to 1942, when the stock market lost 60%. So is April, which in 2011 was the start of a 19% drop that ended at the beginning of October."

Jason concluded with a famous quote:

OCTOBER: This is one of the peculiarly dangerous months to speculate in stocks. The others are July, January, September, April, November, May, March, June, December, August, and February. - Mark Twain

Yes, the market could crash this month, such is always a possibility in any given month, as Jason notes above. However, the market won't crash just because it's October, and this year, there are a surprising number of things lining up in the bulls' favor.

Q4 Market Outlook: History Rewards A Strong First Nine Months

Start with the statistic that matters most. Ryan Detrick at Carson Investment Research screened every year since 1950 when the S&P 500 entered Q4 up 10% to 20%. There are 21 of them. The fourth quarter finished higher in 18, an 85.7% hit rate. The average gain was 5.3%, with a median of 5.5%. For all years since 1950, Q4 averaged 4.2% and rose 80.3% of the time.

Q4 gained in 18 of the 21 "sweet spot" years. Only 1979, 1983, and 2012 finished lower, and none lost more than 1.3%.

As of September 27, the S&P 500 was up 13.1% with three trading days left, which puts 2026 squarely in that group. The losing years are worth a look. They were shallow. Across 21 observations, the worst fourth quarter was a 1.3% decline in 1979, while the best was an 11.6% gain in 2003, and eight of the 21 years delivered 7.5% or more. The asymmetry in this sample is the real story, because the misses were small and the hits were large. I rebuilt the table using Carson's figures and got an average of 5.24% rather than 5.3%. That rounding difference changes nothing.

The Midterm Calendar Adds A Second Tailwind

The second layer is political. As I noted in Tuesday's Daily Market Commentary, October is the best month of midterm years since 1950. It averages a 3.0% gain and finishes higher 73.7% of the time. November isn't far behind at 2.7%, and it's the most consistent month on the midterm calendar, closing higher 78.9% of the time. Add the three fourth-quarter averages together, and you get roughly 6.5%.

October (3.0%) and November (2.7%) are the two best months of the midterm calendar. June's 2.1% average decline is the worst.

Such is the typical rhythm of a midterm year. Markets dislike uncertainty, and the months before a midterm vote are full of it. Once the ballots are counted, even a gridlocked result removes a variable, and money that sat out the summer tends to come back. One more detail makes this more useful than it looks. Only one year, 1950, appears in both the strong-year and midterm samples. These are two largely independent tailwinds, not one signal counted twice. Seasonality is a tailwind, NOT a guarantee.

Earnings Estimates Are Rising, Which Rarely Happens

The fundamental case is where this quarter gets interesting. According to FactSet's September 18 Earnings Insight, analysts expect Q3 earnings growth of 28.9% on revenue growth of 11.9%. On June 30, that estimate was 26.7%. Over the past five years, estimates have fallen by an average of 2.2% per quarter. This time, they climbed, and 72 companies issued positive guidance against 43 negative.

The track record argues for upside surprises. Q1 earnings grew 20% against an 11% consensus, and Q2 delivered 32% against 22%. The forward multiple has also compressed to 19x, roughly 15% below its 2026 high, as earnings outran price.

Q3 growth expectations rose from 26.7% to 28.9% during the quarter. Analysts see 26.5% growth in Q4.

We discussed the scale of this earnings run in our look at earnings and price breaking 90-year trends. The upshot for Q4 is simple. Rising estimates into the reporting season give companies room to beat, and beats are what restart the buyback machine. The trade-off is that the bar is higher, not lower. Rising expectations leave less room for the usual "beat by a penny" rally. Guidance will matter more than the headline print.

Buybacks, Liquidity, and Sentiment Are Turning Together

One thing missing over the last month has been corporate buybacks, which are the largest single buyers of U.S. stocks. Our prior analysis found the blackout period cuts corporate purchases by roughly 35%. That window reopens company by company as each one reports, starting with the banks in mid-October. The dry powder is there, too. According to Citadel Securities, U.S. companies authorized $1.3 trillion in buybacks through September 29, the most on record at this point in the year. Windows reopen around October 15, and execution has historically picked up into November.

Last week, an astute reader wrote to ask how I can remain constructive as the Fed hikes rates. It's a perfectly logical question. To answer that question, let’s analyze the most crucial thing to markets: liquidity.

This past month, the Fed raised the Fed funds rate on September 16. This was the first increase since 2023, which increased the cost of money. Crucially, while the “cost” of money went up, the “quantity” of money isn't shrinking. The Fed ended quantitative tightening on December 1, 2025. Then, the Fed bought roughly $160 billion in Treasury bills for reserve management in the first half of 2026, and bank reserves stood near $3 trillion in August. In other words, the price of liquidity rose while its supply held steady.

Then there's sentiment, and it may be the most powerful fuel of all. In the week of September 18, AAII bears hit 53.3% with bulls at just 28.8%, the weakest reading in 16 months, even with the index only 2% from its high. One week later, bears slipped to 48.1%.

Professional money de-risked even faster. Citadel Securities estimates CTA equity positioning swung from +2.35 standard deviations at the end of August to −0.80 today, a three-sigma reversal in one month. Retail cash trading also fell to its lowest level of 2026 in September.

Meanwhile, as noted in Tuesday's commentary, inflows to money-market ETFs reached levels that have coincided with market lows since 2018. Bob Farrell's Rule #9 reminds us that when all the experts and forecasts agree, something else is going to happen. Right now, the consensus is bearish. Bearish investors hold cash, and that cash becomes a buyer when the mood turns.

The best setups for a strong fourth quarter are the ones nobody believes in. This looks like one of them.

Capex Is Carrying The Economy, And The ISM Shows It

The economy is also doing better than the summer's gloom implied. And the growth is coming from business investment rather than a stretched consumer. The August ISM manufacturing index printed 54.6, with production at 58.3. Employment expanded for a second month after nearly three years of contraction. The report credited AI-related capital investment, reshoring, and defense procurement. On the services side, business activity hit 61.7 and new orders 60.9, both three-year highs.

Seven of eight ISM readings sat above 50 in August, led by services activity at 61.7. Only services employment contracted, at 47.8.

The hard data agrees. Core capital goods shipments rose 11.4% from a year earlier in August. Computer and electronics orders are up 16.5% on data center spending. If shipments hold flat in September, business equipment investment will have grown at a 14.5% annualized pace in the third quarter. That's a real growth engine. The catch is prices: the ISM price indexes are at 71.1 for manufacturing and 72.6 for services, which is why the Fed hiked. Strong growth with sticky prices is good for earnings and bad for anyone waiting on rate cuts. Expect the rate-sensitive corners of the market to keep lagging.

What Should Investors Do Now

While September has been very sloppy and range-bound, the weight of evidence favors a positive fourth quarter. Notably, timing will matter as much as direction. Citadel found that in 14 of 24 midterm years since 1930, the fourth-quarter low came in October. The median rally from that low into year-end was 10%. In other words, October weakness has historically rewarded investors who planned for it.

Seasonality, earnings, buybacks, and sentiment all lean the same way. But this is a narrow market. Only 25% of S&P 500 stocks trade above their 50-day moving average. In Q3, the index gained 2.1% while the equal-weight version fell 2.2%. Per Citadel, Nvidia alone now carries more index weight than the combined weight of the smallest 256 companies.

As is always the case, market statistics, averages, and historical trends don’t always prove accurate. This remains a narrow market, and as I showed this past Tuesday, Goldman Sachs' breadth gauge sits near its weakest reading since 2000. However, one thing worth noting is that when previous breadth readings were this poor, it was just before a market reversal. One thing I have learned over the years is that when data registers more extreme bullish or bearish readings, it tends to be a better contrarian indicator.

With the Fed's own projections showing no rate cuts until 2028, there seems to be no rescue coming if growth stumbles. Of course, given the Fed’s terrible track record of forecasts, the unanimous agreement among Fed members that there will be no economic weakness throughout next year is also likely a contrarian indicator in itself.  

Nonetheless, given the current market backdrop, we suggest remaining invested. The most important thing for investors is to manage risk around levels that would indicate the summer range is breaking lower.

The calendar is on the Bulls' side for the next three months, and the fundamentals are finally cooperating with it. Just remember that the calendar has missed three times in 21 tries, and it doesn't manage your risk. You do.

🖊️ From Lance’s Desk

This week's #MacroView blog explores a viral stat claiming credit card delinquencies have just hit their worst level since 2008. However, the New York Fed’s own data shows the opposite, and the real consumer credit stress is hiding exactly where the headlines aren’t looking.

Also Posted This Week:

• From TINA To TIGA: Diversification Pays Again - RIA - by Michael Lebowitz
• Investor Optimism Wins As An Investment Strategy - RIA- by Lance Roberts

📹 Watch & Listen

Treasury yields have spiked, with the 10-Year Treasury around 5.29%, but the technical picture suggests rates may be getting stretched. Historically, extreme deviations from longer-term trends have often been followed by a retracement in yields, potentially creating a short-term trading opportunity in longer-duration bonds.

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📊 Market Statistics & Analysis

Weekly technical overview across key sectors, risk indicators, and market internals

💸 Market & Sector X-Ray: Market Gains Ground

As we kick off Q4, Technology and Energy remain the key market drivers and are overbought relative to most other markets and sectors. This setup continues to suggest, as noted in the Factor Model below, that a market rotation from growth to value is becoming more likely heading into year-end.

📐 Technical Composite: 75.55 - Decreased Slightly, Still Overbought

The technical condition decreased slightly this past week. However, overall, the market remains technically overbought, and sentiment remains mostly bullish for now with no significant technical breaks. The indicator does suggest more struggles for the market next week.

🤑 Fear/Greed Index: 54.05 – Investor Bearishness Increases

Even though the market rose a bit last week, the underlying market allocation and sentiment remains more bearish. There was a continued drop in the Commitment of Traders equity allocations, and investor sentiment turned slightly more bearish last week. If the market can continue to hold up amid increasing bearishness, it could present a good buying opportunity over the next month or so.

🔁 Relative Factor Performance

Factor performance has diverged over the last couple of weeks, with Growth, Speculative Technology, and Megacaps now extremely overbought, while Value, Low Beta and Dividend Yield (interest rate sensitive sectors) now the most oversold. A risk-off rotation from seems highly probable. As noted below, this is a "risk aware" market currently and increasing controls seems logical.

📊 MFBR Index (Money Flow/Breadth Ratio Indicator)

The Money Flow Breadth Ratio (MFBR) model is a rules-based equity allocation framework that uses weekly S&P 500 money flow data to generate buy, sell, and neutral signals. The MFBR systematically adjusts portfolio equity exposure in response to the direction and persistence of institutional capital flows. It aims to reduce drawdowns while capturing the majority of market upside.

"As of October 2, 2026, with the S&P 500 at 7,722.72, the Money Flow Breadth Ratio (MFBR) stands at 60%, down from a peak of 80% set 7 weeks ago and falling versus 65% the prior week. The trailing four-week change is still -15 percentage points, but the near-term trend has rolled over. This places the indicator in BUY territory (60-70%). The raw zone signal reads NEUTRAL, but the model still flags a TOP REVERSAL, with 20 points now off the peak. Read that NEUTRAL as a zone label, not as fresh confirmation - the model reached this band by falling out of overbought, not by building up from below.

Bottom line: hold the target weight. The roll-over off the 80% peak is real and worth watching, but it has carried the gauge into the band that has historically been the best place to own equities. This is neither a chase nor a de-risk. A sustained break below 60% would move the grid to an underweight; a move back above 70% would re-engage the contrarian trim."

📊 Sector Model & Risk Ranges

The Risk-Ranges for each sector and market reset on the 1st of the month, so there are not readings for this week. However, next week we will get updated numbers. For now, there are two important takeaways. First, the number of markets and sectors with bearish crossovers continues to expand to 10 this past week. Historically, this expansion of bearish crossovers precedes more difficult markets in the future. Secondly, Energy and Technology remain the most grossly extended sectors in the market, and a rotation to more "defensive" sectors continues to increase.

Have a great week.

Lance Roberts, CIO, RIA Advisors

The post Q4 Market Outlook: Strong Years Usually Finish Strong appeared first on RIA.

Anthropic's leaked IPO prospectus, as reported by Reuters and the Financial Times, shows the company is growing faster than ever while committing to obligations that dwarf its earnings. To wit, annual revenue rose roughly 12x in 2025 to $4.6 billion, from about $400 million in 2024. Its first-quarter 2026 revenue was $4.73 billion, and its second-quarter revenue reached $11.5 billion. Annualized, that is roughly $46 billion or about 10 times its 2025 revenues. As revenues surge, so does spending.

Anthropic lost $8.06 billion on an operating basis in 2025, widening from $2.98 billion the year before, on $12.65 billion of operating expenses, including $7.33 billion for computing and infrastructure. The headlines tout a $42 billion non-operating net loss, mostly a $34 billion non-cash charge tied to the revaluation of convertible financing.

The number that may matter most is Anthropic’s firm commitment to spend $518 billion on cloud, computing, and infrastructure over the next decade. That compares against $20.28 billion of cash and short-term investments at year-end.

Compounding the dilemma for potential IPO investors, about 25% of 2025 revenue came from two customers, and the prospectus filing warns that many of its largest clients are not bound by long-term contracts and could cut spending.

The ultimate bet is that surging revenue growth eventually outruns its fixed commitments. The prospectus does not say what happens if it does not.

What To Watch Today

Earnings

• No notable earnings releases today.

Fed speakers: Dallas Fed President Lorie Logan (a 2026 FOMC voter) speaks at around 10:00 a.m. ET. The pre-FOMC blackout begins October 17 ahead of the October 27–28 meeting.

Economy

Market Trading Update

Yesterday, we ran Goldman's "wall of worry" checklist against the tape and flagged real yields at their highest level since 2008. Today, let's look at where that pressure is landing. The interest rate-sensitive sectors are now the most oversold they have been in five years.

To measure it, I built an equal-weight composite of Financials (XLF), Staples (XLP), Utilities (XLU), and Real Estate (XLRE). As of Wednesday's close, the composite sits 6.5% below its 50-day moving average and 5% below its 200-day. Its 14-day RSI fell to 20, the lowest reading in five years. The index closed below its lower 2-standard-deviation band five times in September alone. Since August 31, each of the four sectors has dropped between 5% and 7.5%, while the S&P 500 barely moved.

The cause isn't a mystery. The 10-year Treasury yield closed Wednesday at 5.29%, the highest since 2007. On a weekly basis, that's roughly 2.5 standard deviations above its 20-week mean of 4.70%, with the 3-standard-deviation band near 5.41%. Yields have jumped 51 basis points in four weeks, and the weekly RSI sits at 79.

Bob Farrell's Rule #1 says markets return to the mean over time. Yields at these extremes tend to correct themselves because borrowing costs this high eventually choke off the demand that pushed them up. Housing, credit, and capex all reprice at 5% or more. Lacy Hunt has long argued that heavily indebted economies can't carry high rates for long. When demand cracks, yields fall, and the sectors punished most by rising rates usually lead the rebound.

The skeptic in the room will ask the obvious question. "Can't oversold, just get more oversold?" It can. I ran the history. Since 1990, the 10-year yield has broken above its upper weekly band in 27 separate episodes. Yields were lower six months later in 17 of them, but the median decline was only 13 basis points. In 2022, yields rose to a band higher for most of the year. A deviation tells you the move is stretched, NOT that it's over.

The reversal also won't be even. Utilities and REITs benefit most directly from falling yields. Financials are trickier. A rally driven by "demand destruction" brings credit losses along for the ride, and we recently discussed CMBS losses reaching the AAA tranche.

So don't try to catch the bottom. Build the watch list now, favor Utilities and Real Estate over Financials, and add in tranches only when the composite reclaims its 20-day mean near 124 or yields close back inside the upper band near 5.18%. Size positions so that being early doesn't hurt. Such is the price of buying what everyone else is selling.

Mortgage Rates Make Buying Homes Even Harder

If many people's ability to buy a home was limited six months ago, it has gotten even worse. Bankrate's daily mortgage rate quotes are running between 7.33% and 7.50%, a full percentage point higher than they were six months ago.

To show the financial impacts, let's take a $400,000 loan. At 6.38%, principal and interest run $2,497 a month. At 7.50%, the same loan costs $2,797 a month. That's about $300 more every month, $3,600 a year, and between $91,000 and $108,000 in additional interest over the life of the loan.

The more useful framing bases the analysis on a constant payment rate, because most buyers think in terms of what payment they can afford. A household that budgeted at $2,497 a month could borrow $400,000 in March. At 7.50%, that same monthly payment supports a house value of $357,085. A 1% higher mortgage rate erased $43,000, or over 10% of purchasing power.

The graph below shows how mortgage rates and housing affordability have changed since the February low.

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The post Can Anthropic Outearn Its Obligations? appeared first on RIA.