August kept investors on their toes, balancing familiar narratives from the year: resilient growth, sticky inflation, a Federal Reserve unwilling to commit to a direction and a Middle East conflict that refuses to settle. The Federal Reserve’s tone grew more hawkish as the month progressed. At the annual Jackson Hole Economic Policy Symposium late in the month, Fed Chair Kevin Warsh aimed to build credibility with markets, warning that the summer's softer inflation readings did not indicate that “underlying trends have meaningfully improved,"[1] signaling that rates could move higher. Markets repriced quickly. The odds of a September rate hike jumped from roughly 1/3 to over 50%[2], as the 10-year Treasury yield climbed above 4.7%, and the 30-year reached its highest level since 2007. Late in the month, renewed U.S. and Iran hostilities around the Strait of Hormuz pushed oil higher and added a fresh layer of volatility.
U.S. equities advanced despite the hawkish backdrop. The S&P 500 gained 2.7% as investors looked past rising yields and leaned into energy and materials, bringing the year-to-date performance to 13.1%. Beneath the surface, leadership stayed broad, though smaller companies felt the drag of higher borrowing costs. The Russell 2000 rose a more modest 1.0%, as higher rates tempered enthusiasm for more rate-sensitive small caps even as the index held a commanding 20.0% year-to-date gain.
International markets participated in the rally. The MSCI EAFE Index returned 2.0% in August and is currently up 13.8% for the year. Growth in this asset class has been helped by a modestly weaker U.S. dollar and is further supported by firmer economic activity in parts of Europe and the United Kingdom. Emerging markets led the developed world once again. Throughout August the MSCI Emerging Markets Index gained 3.4%, powered by strength in technology-heavy Asian markets, alongside a firm bid for materials tied to rising commodity prices. The asset class is now up 24.1% year-to-date.
Fixed income proved resilient even as yields pushed modestly higher on the front end of the curve. The Bloomberg U.S. Aggregate Bond Index returned 0.4% during the month, as attractive starting yields cushioned the impact. Commodities were the month's standout, with the Bloomberg Commodity Index climbing 7.4% throughout August and up to 32.1% on the year. Energy led the charge as U.S. strikes on Iranian positions near the Strait of Hormuz and Tehran's retaliation drove Brent crude above $90 per barrel late in the month, while precious metals surged as investors sought protection against geopolitical risk and mounting fiscal concerns.
The Bond Market's Long Summer
Over the past three months, the U.S. bond market navigated an oil shock, a new Federal Reserve chair and the national debt approaching $40 trillion. Since mid-July, the market has witnessed the highest long-term yields since 2007, an unscheduled Treasury intervention, and a Jackson Hole speech that reopened the door to rate hikes leading to further uncertainty for bond investors.
One of the closely watched events for investors this summer was the July 29 FOMC meeting that held the funds rate at 3.50–3.75% with three dissents in favor of tightening. Chair Warsh declined to provide forward guidance, describing it as a crisis-era practice that "overstayed its welcome," and noted that tighter financial conditions were doing some of the Fed's work. Markets read the lack of guidance as concerning, leading the 30-year Treasury yield to rise approximately 10 basis points to 5.2% that afternoon and the Dow posted its worst day in more than a year.[3] Later, Warsh's Jackson Hole remarks on August 28 then delivered the clarity July lacked: "We must be confident that underlying inflation is moving to our objective, clearly and at sufficient speed. Otherwise, we have work to do."[4] He reaffirmed 2% Personal Consumption Expenditures (PCE) as a "firm, fixed target" and named the policy rate as the Fed's predominant tool, and the front end quickly repriced.4
Twenty-Five Years of Context
Investors reading this have lived through one of the most important regime shifts in fixed income markets in decades. In 2000, the 10-year yielded roughly 6.5%. Following the Global Financial Crisis, however, we had several years of zero rates, multiple rounds of quantitative easing, and a 40-year fixed income bull market that culminated in August 2020 with the 10-year near 0.5%. For two decades bonds were both income and insurance, paying a coupon and generally rallying when equities fell. That relationship started to break in 2022. The Bloomberg U.S. Aggregate lost roughly 13%, its worst calendar year on record, and stocks and bonds fell together. One of the key culprits has been what Warsh himself pointed out in Jackson Hole: inflation has been above target for 65 consecutive months.
The challenge for fixed income today is not that yields are low. It is that the assumptions embedded in 2000–2020 portfolio construction no longer hold together: that duration diversifies equities, that the Fed's reaction function is knowable, and that Treasury supply is a policy afterthought. Three observations about today’s environment follow:
For portfolios, the practical implication is that today’s elevated fixed income yields allow clients to harvest attractive income without assuming the full uncertainty associated with longer-dated bonds.
Outlook
August reinforced that investors continue to navigate a market shaped by resilient growth, elevated rates, persistent inflation concerns and unresolved geopolitical risks. While equities have broadened and select risk assets have continued to participate in the rally, the bond market’s recent volatility underscores that the path forward may remain uneven as markets reassess the balance between income, duration risk and policy uncertainty. We continue to favor balanced portfolios that can participate in a broader opportunity set while emphasizing diversification, quality and thoughtful fixed income positioning, as higher yields once again provide meaningful income but require greater selectivity.
Sources
[1] Fed Chair Kevin Warsh at “Financial Innovation: Implications for Payments and Policy,” an economic policy symposium sponsored by the Federal Reserve Bank of Kansas City, Jackson Hole, Wyoming. August 28, 2026.
[2] CME FedWatch. As of August 31, 2026.
[3] FactSet. As of August 31, 2026.
[4] Fed Chair Kevin Warsh at “Financial Innovation: Implications for Payments and Policy,” an economic policy symposium sponsored by the Federal Reserve Bank of Kansas City, Jackson Hole, Wyoming. August 28, 2026.
Disclosures
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Diversification does not ensure a profit or guarantee against loss. Asset Allocation may be used in an effort to manage risk and enhance returns. It does not, however, guarantee a profit or protect against loss. Index returns are unmanaged and do not reflect the deduction of any fees or expenses.
Comparisons to any indices referenced herein are for illustrative purposes only and are not meant to imply that actual returns or volatility will be similar to the indices. Index returns reflect all items of income, gain and loss and the reinvestment of dividends and other income. You cannot invest directly in an Index.
• S&P 500 is a capitalization-weighted index designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.
• Russell 2000 consists of the 2,000 smallest U.S. companies in the Russell 3000 index.
• MSCI EAFE is an equity index which captures large and mid-cap representation across Developed Markets countries around the world, excluding the U.S. and Canada. The index covers approximately 85% of the free float-adjusted market capitalization in each country.
• MSCI Emerging Markets captures large and mid-cap representation across Emerging Markets countries. The index covers approximately 85% of the free-float adjusted market capitalization in each country.
• Bloomberg U.S. Aggregate Index covers the U.S. investment grade fixed rate bond market, with index components for government and corporate securities, mortgage pass-through securities, and asset-backed securities.
• Bloomberg U.S. Corporate High Yield Index covers the universe of fixed rate, non-investment grade debt. Eurobonds and debt issues from countries designated as emerging markets (sovereign rating of Baa1/BBB+/BBB+ and below using the middle of Moody’s, S&P, and Fitch) are excluded, but Canadian and global bonds (SEC registered) of issuers in non-EMG countries are included.
• FTSE NAREIT Equity REITs Index contains all Equity REITs not designed as Timber REITs or Infrastructure REITs.
• Bloomberg Commodity Index is calculated on an excess return basis and reflects commodity futures price movements. The index rebalances annually weighted 2/3 by trading volume and 1/3 by world production and weight-caps are applied at the commodity, sector and group level for diversification.
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