Inflation on the Rise!
Inflation in the U.S., to worry or not? What trouble was a cause and consequence of higher inflation driving market returns in the 3rd Quarter of 2026? Geopolitical tensions in the Middle East, specifically Iran and the concerns that oil would not flow freely through the Strait of Hormuz. This was enough to see prices per barrel of Crude Oil skyrocket to a high of $97.18 from a low of $70.56 at the beginning of the Quarter. This is the cause of one type of inflation in the global economies. As the price of oil increases, so does the price of goods, services, and the transportation of such goods for services around the world. Everything from your car to your pen is made from and shipped by processes that utilize petrol chemicals (oil). Thus, the increase in oil prices reduces purchasing power for the goods, services, and transportation to ship or travel anywhere around the world. Despite what historically has been a hindrance to the stock market, growth markets moved higher to end the Quarter. The consequence of higher prices led inflationary numbers in the U.S. to become uncomfortable for those who monitor inflation, and the Federal Reserve attempted to regulate it by adjusting interest rates. On September 16, 2026 the Federal Reserve voted to raise interest rates by .25% to combat economic inflationary pressures. This moved the federal (Fed) funds borrowing rate to 3.75% - 4.00%.
Why is this a factor for you and the markets?
The federal funds rate is the interest rate at which banks lend to each other overnight. This rate directly affects interest rates banks set on borrowing costs for loans, credit cards, and savings accounts. When interest rates are higher, access to money slows down and a consumer’s purchasing power diminishes. On the other hand people who save money benefit from higher interest rates by earning more income on savings accounts, money markets, CD and bond interest. This leads to fewer consumers spending and borrowing to make purchases like homes, cars, and luxury items because affordability at higher interest rate is preventative from making purchases. Thus, the economy slows, and corporate profits decrease because the consumer may not buy goods and services at higher borrowing costs. Also, corporations pass the cost of higher fuel prices for transporting goods to the consumer, increasing prices or absorbing the cost which narrows corporate profit margins. This equates to lower stock prices, reduced hiring, layoffs and slowing of research and development.
Despite these factors the S&P 500 paced forward with a 2.3% gain. Energy stocks led the advance because of higher oil prices and concerns about global supply. Technology and communication growth stock values benefited from strong earnings.
However, Mid and Small cap stocks could not shoulder off the burden of inflation, thus performance for the quarter fell sharply as a result of higher interest rates driving up costs to borrow and refinance debt. The Utilities sector was the weakest-performing this quarter. Rising bond yields decreased investors' interest in this sector’s dividend income and put strain on valuations.
The bond market suffered this quarter as the Federal Reserve raised interest rates causing bond yields to rise and prices to fall. Investors' heads slumped as fears of higher borrowing and refinancing costs accelerated.
In Europe markets declined slightly. The energy sector, like in the US, was the bright spot amid rising oil prices as the Middle East conflict deepened. Troubles in the real estate and consumer discretionary sectors placed a drag on the markets that could not be overcome.
The European Central Bank (ECB) followed the US’s lead and raised interest rates by .25%. in September, taking the deposit rate from 2.25% to 2.5%. The move came in response to above-target inflation caused by higher energy prices. Forecasters warned that inflationary pressures could continue into 2027.
Japanese equities gained in the quarter. However, volatility remained escalated due to rising US interest rates, the continuation of the Middle East conflict, and the instability of the Yen which had the US intervene.
Emerging Markets delivered negative returns, underperforming global indexes which posted mostly gains this quarter. An Artificial Intelligence rally in July was not enough to push the global asset class into the green. Higher energy prices caused by the conflict in the Middle East was the catalyst that the Emerging Markets sector’s performance could not shake free from, and weighed heavily on stock performance.
Q3 of 2026 was a mixed bag of market performance throughout the world. The greatest impact to the markets were the conflict in the Middle East which drove up energy costs, equating to higher inflation, thus causing the Federal Reserve and Central Banks around the world to raise interest rates. How are these events affecting your bottom line? Are you a conservative investor invested in bond funds and do not understand why the value of your account is decreasing? Are you happy that Savings Account, Money Market and CD interest rates are increasing, but uncertain for how long to place your money in these investments? Does inflation in the cost of goods and services have you concerned? How do you make sense of the conflict in the Middle East and how it affects your wallet? These are reasonable questions that deserve answers. We at Renew Family Wealth are available to address and answer these questions. It is our desire to provide you with peace of mind by answering the questions that matter to you most. It would be our pleasure to serve you. Do not hesitate to contact us to schedule a time to speak. For those whom we already serve, we are sincerely grateful for the opportunity.
Sincerely,
Scott Miller
