September Is Looming

*Analyzing the markets with Richie Naso, a Wall Street veteran of over 40 years and former member of the NYSE.

Dow Jones Industrial Average

The Dow had a relatively resilient week, gaining about 0.5% and closing Friday at 53,559.99. That was notable because Friday’s market reaction to Fed Chair Kevin Warsh’s Jackson Hole comments pushed stocks lower, but the Dow still managed to finish the week in positive territory. (Source: AP News)

The big story was interest rates — not earnings

Warsh emphasized the Fed’s commitment to bringing inflation back toward 2% and suggested that financial conditions may not be restrictive enough. The market consequently increased the probability of a September rate hike to roughly 58% from about 36%. The 2-year Treasury yield jumped to about 4.35%. (Source: MarketWatch)

The fact that the Dow finished higher for the week despite the more hawkish Fed message is encouraging. However, the Russell 2000 falling 1.33% while the Dow gained 0.5% is something I would pay attention to. Small caps are much more sensitive to financing costs, so this divergence could be an early indication that higher rates are beginning to affect the risk trade.

S&P 500

The S&P 500 had a surprisingly resilient week, gaining about 0.5% and closing Friday at 7,711.76. That came despite a late-week increase in interest-rate concerns following Fed Chair Kevin Warsh’s Jackson Hole comments. (Source: AP News)

The S&P absorbed a potentially negative Fed message and still finished higher. That’s important — the market is showing underlying strength. At the same time, the divergence with the Russell 2000 is something I would continue to watch. Small caps falling 1.33% while the S&P gained 0.5% suggests that higher interest rates are beginning to have a greater impact on the more economically sensitive areas of the market.

Nasdaq

The Nasdaq was one of the better-performing major indexes this week, gaining approximately 0.8% and finishing Friday at 26,402.42. Despite Friday’s 0.5% decline following Fed Chair Warsh’s Jackson Hole comments, the index held on to most of the week’s gains. The Nasdaq is still up approximately 13.6% for the year, so the longer-term trend remains very constructive. (Source: AP News)

Nvidia was the catalyst

Nvidia’s results were strong enough to reignite the AI trade. The company’s revenue grew 106% year over year, reinforcing the argument that AI investment remains a powerful earnings driver. (Source: Barron’s)

Richie’s bottom line: The Nasdaq remains bullish long term, but the easy money may be behind us in the near term.

Nvidia confirmed that the AI earnings story is still powerful, but Friday demonstrated that interest rates can overwhelm even very good technology news.

Russell 2000

The Russell 2000 was the clear laggard this week, falling 1.33% and closing Friday at 2,972.37. That compares with gains of 0.45% for the S&P 500, 0.49% for the Dow, and 0.83% for the Nasdaq.

What changed this week

The most important development was interest rates. Fed Chair Warsh’s Jackson Hole comments increased expectations that the Fed could raise rates, pushing Treasury yields higher. That was particularly negative for small caps because they are more sensitive to financing costs and economic conditions. (Source: MarketWatch)

Richie’s read: The Russell 2000 is giving us the clearest warning among the major indexes this week.

Above 3,000, I’m cautious but constructive. A sustained break below the 50-day average would make me more defensive.

HYG — Junk Bond Watch

HYG was one of the more encouraging parts of the market this week. It finished Friday around $79.74, essentially unchanged from the prior week, despite the weakness in small caps and renewed concerns about interest rates. BlackRock reports a NAV of $79.71 on August 28 and a closing price of $79.74. (Source: BlackRock)

What stands out

The key point is that credit did not confirm the equity-market weakness. If HYG holds $79.50 and begins moving back toward $80, that would be constructive and would support the argument that the recent equity weakness is primarily rate-driven consolidation rather than a deterioration in credit.

For me, HYG may be more important than the Dow or Nasdaq over the next few weeks. If credit stays healthy, I would view market weakness as a potential opportunity rather than evidence that the longer-term bull market has ended.

Higher Yields Are a Boon for Muni Bond Buyers

Source: Barron’s, print edition, p. 21 — Randall W. Forsyth, August 31, 2026. The bonds, funds, and analyst views referenced below are drawn from that article and are included for informational and educational purposes only. They do not constitute investment advice or a recommendation to buy or sell any security. Yields and prices are as of the article’s publication date. Past performance is not indicative of future results.

The rise in bond yields has been a good news/bad news story. For the U.S. Treasury, the increase has been disquieting and has elicited an extraordinary scheme to double its buying of long-term maturities to boost their prices and suppress their yields.

“Creating attractive opportunities for investors as municipal yields rise to some of the most compelling levels seen in recent years.” — Tom Kozlik, Head of Public Policy and Municipal Strategy, Hilltop Securities

Unlike in the Treasury market, muni investors are rewarded with higher yields by extending maturities, from the short term to the medium-to-long range centered around 20 years. Also popular are muni bonds with 5% coupon interest rates that have final maturities of 20 years or more but are callable in 10 years or less, which provide attractive current income and defensive properties in a bearish (higher yield) debt market.

These high-coupon callable bonds trade at premiums above their par value, based on the presumption that the issuer will redeem them at the earliest opportunity—analogous to homeowners who refinance their mortgages when interest rates fall. Muni investors get higher current income, albeit at a premium bond price. On the other hand, these premium bonds tend to be more defensive in a rising yield environment. That’s less relevant to buy-and-hold investors, who prefer receiving higher current income up front and care less about losing the few points of premium when the bonds are called or mature.

“Coupon income will, I believe, contribute most, if not all, total return for the foreseeable future.” — James Kochan, former Head of Fixed-Income Strategy, Wells Fargo and Merrill Lynch

Investors don’t need to take on a lot of duration or credit risk, according to Duane McAllister and Lyle Fitterer, who head Baird Advisors’ municipal team. The tax-free market offers what they call “structural opportunities” in individual securities’ unique characteristics, among them high-coupon callable bonds.

As an example, they cite a Maine Bond Bank 5% bond due in 2038, with ratings of Aa1 and AA — one notch below the top grades of Moody’s and Standard & Poor’s, respectively. The issue is callable on November 1, 2028, and is priced at a “yield to worst” (which assumes that early call) of 3.51%, a pickup of 90 basis points over a typical 2028 maturity. An early call is the worst case, since the payment of those high coupons ends and investors typically get back the par face value of the bond, for which they paid a premium. However, the longer the bond remains outstanding and isn’t called, the more of the 5% coupon bondholders receive, effectively increasing the yield.

Lawrence Gillum, chief fixed-income strategist at LPL Financial, also calls current muni valuations compelling, given the high taxable-equivalent yields available. To an investor in the 35.8% federal tax bracket (32% plus the 3.8% federal net investment income levy), that Maine bond yield would be equivalent to 5.47% on a taxable bond—or 135 basis points more than the two-year Treasury note. (Source: Barron’s)

The “sweet spot” in the muni market for Eric Kazatsky, portfolio manager at MacKay Municipal Managers, is the 17-to-20-year maturity range. For benchmark triple-A issues, those maturities yield 4.08% to 4.4%, according to Tradeweb data—a substantial pickup from the five-to-10-year range, which yields 2.85% to 3.36%. Extending further doesn’t add substantial return while adding risk: a 20-year maturity provides 93% of the yield of a 30-year bond but with 80% of the duration.

The attractiveness of the tax-exempt market hasn’t gone unnoticed this year, with muni exchange-traded funds attracting over $36.3 billion of inflows from the beginning of the year and $59.2 billion in the latest 12 months through mid-August, bringing their assets to $222.9 billion, according to ETF Action. That has helped absorb heavy new-issue volume, nearly matching last year’s record pace of $580 billion, according to Bond Buyer data.

The lion’s share of muni ETFs are index-based—a structure less well suited to the muni market, according to managers of muni portfolios. Unlike 500 large-cap U.S. equities, which are huge and trade actively, there are millions of individual municipal bonds, most of which trade rarely, each with its own coupon, maturity, structure, and redemption features. That makes the muni market less efficient than other debt and equity markets.

However accessed, the muni market’s higher yields look attractive for taxable investors, the article concludes.

What I’ll Be Focused On This Week

The items below reflect Richard Naso’s personal areas of focus for the coming week and are provided for informational and educational purposes only. They do not constitute investment advice or a recommendation to trade any security.

WATCH LIST — WEEK OF AUGUST 31, 2026

I think next week is more important than the past two weeks because the market is now caught between strong earnings and a potentially more hawkish Fed. The August employment report on Friday will be the key event, with JOLTS, ISM manufacturing/services, and other labor data leading into it.

• The Jobs Report Is the Big One — Friday’s August employment report could determine the market’s immediate direction. The Fed has made it clear that inflation remains a concern, and after Warsh’s Jackson Hole comments, the market moved the probability of a September rate hike to roughly 58% from about 36%.
• JOLTS / ISM Manufacturing and Services — Labor and activity data leading into Friday’s report.
• Treasury Yields — The 2-year jumped to about 4.35% after Jackson Hole; continued moves higher would pressure small caps further.

As we move into September, I think it is important to recognize that the market is entering a period that has historically been one of the most difficult of the year. September has consistently been the weakest month for the S&P 500 over the long term, and this year we also have an added layer of uncertainty surrounding interest rates and the Fed.

The market remains caught between two very different forces. On one side, earnings remain strong, the AI investment cycle is still intact, and the major averages continue to trade near record levels. On the other, Treasury yields have moved higher, the Fed’s tone has become more hawkish, and the Russell 2000 is beginning to show some weakness. The market will now look closely to the employment report and upcoming inflation data for clues about what the Fed will do in September.

This is why I remain cautious near term but constructive longer term. I don’t believe the evidence is there to abandon the broader bull-market thesis, but I also don’t think this is the time to become complacent. September’s historical seasonality, combined with higher yields and the possibility of a Fed rate hike, could create a more volatile environment.

The indicators I am watching most closely are HYG, the Russell 2000, the VIX, and Treasury yields. HYG’s resilience remains encouraging, while the Russell’s recent weakness is a warning that deserves attention. If credit remains firm and small caps stabilize, I would view any weakness as consolidation within the longer-term uptrend. If HYG and the Russell begin breaking down together, that would tell me the market’s risk profile is changing.

So, as we enter September, I would not be surprised to see more volatility and possibly a deeper pullback. But I would view that as a reason to be patient — not a reason to abandon the market. The longer-term opportunity remains intact; the near-term focus is simply on managing the risk and letting the market tell us how much further this consolidation needs to go.

— Richie

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