Equities struggle as oil and bond yields continue to pressure stock prices

One look at the U.S. dollar’s continued climb should tell you all you need to know about the war, inflation, bond prices, and the present gloomy sentiment of most Americans. What strikes me most is how little confidence any of us have in the U.S. economy. And yet, the S&P 500 Index hovers just below all-time highs while technology makes new highs.

As we enter the last quarter of 2026, a long calendar of market-moving events lies before us. Foremost on that pile is what, if anything, Iran will do to disrupt the midterm elections. They have already made substantial progress, if the polls are any guide. Despite the administration's best efforts, oil prices (think diesel and gasoline) remain at uncomfortable levels.

This is despite news reports that oil is now flowing at pre-war levels out of the Middle East. Between new routes, more tankers with U.S. Navy escorts passing through existing waterways, and fewer military incidents, oil flow is recovering. Why, you might ask, isn’t that good news reflected in a deeper pullback in oil prices?

One reason is that it costs more to deliver energy to its destination. Longer waterways, ship-to-ship transfers, pipelines, and trucks rather than tankers add extra costs. Pre-war, those costs were around $4/bbl. Today, the same quantity of oil costs more than $18/bbl.

In addition, global traders are maintaining a hefty war premium on energy prices between now and after the elections. Even more so since a whole parcel of Marines and carriers are heading for the Gulf. Barring some real breakthrough between the parties (signed, sealed and delivered), we can expect higher prices at least until then.

There was some good news announced on Friday, thanks to the president’s request that Europe and the G7 free up 120 million barrels of diesel fuel and oil. The G7 has agreed to release 100 million barrels of both from storage on Friday. That has sent diesel prices down, at least temporarily, and oil prices fell by 3.1% to below $90/bbl. on the news.

During the week, higher inflation expectations pushed bond yields higher. The government’s thirty-year bond was above 5.65%, and the thirty-year mortgage rates are now over 7.28%. The benchmark U.S. Ten-year Treasury had surpassed 5.30%, a level where many traders expected a “top” in yields. They were right.

Trump’s pre-election moves to lower fuel prices, combined with a weaker non-farm jobs report, created the perfect storm to force the bond vigilantes to cover their bond shorts. The last indication I saw for the yield on the ten-year Treasury was just below 5.25%. That is a big move in the bond world! You have to hand it to Trump, Bessent, and Warsh; they know how to engineer the results they want in the financial markets.

Kudos to Kevin Warsh for this week’s Personal Consumption Expenditures (PCE) Index, the Fed’s number one inflation indicator. PCE inflation dropped to 3.4%, its lowest level in 6 months. Most of the good news came from a change in how the index is calculated. Prices for software, some accessories, and money management fees were pared back to give a more “accurate” reading.

Readers may recall I wrote about these expected changes, which were instituted by Stephen Miran, former Chief of Trump’s Council of Economic Advisers, who resigned to join the Fed as a Trump appointee. My prediction that his work would be released and provide a better read on inflation before the election proved accurate.

The non-farm payroll report for September released on Friday (leaked overnight) was weaker than expected. The economy added only 29,000 jobs (88,000 expected), and August’s upside surprise of 162,000 was revised to 133,000 jobs. Weaker job numbers mean less chance the Fed hikes rates in October, which means higher stock markets.

However, I warned readers more than a month ago not to trust government-released statistical data. I expect more of the same as government data becomes more politicized. I wouldn’t be surprised if the next CPI and PPI data for September, released in the middle of this month, show an improvement. If so, discount it entirely.

As for the markets, the Nasdaq is clearly supporting the markets. Outside of the AI trade, most stocks have been falling. Readers know I had been cautious from August into September. During that time, the equal-weight S&P 500 was down 6.6%, while the S&P was flat, the small-cap Russell 2000 lost 8.9%, the Dow fell 6.6%, and the Transports fell 15%. The Nasdaq, however, was up 2.5%. Friday's bounce saved the averages from going negative this week. However, Nasdaq gained almost 1%.

I expect that the administration will take out all the stops to keep markets supported between now and the midterms. See this week’s maneuvers: hyping the president’s “Super Intelligence” conference, easing diesel and oil prices, yields ‘topping’, and economic data (PCE and jobs). Clearly, technology in general, and AI stocks in particular, will lead the charge from here.

Bill Schmick is a founding partner of Onota Partners, Inc., in the Berkshires. Bill’s forecasts and opinions are purely his own and do not necessarily represent the views of Onota Partners, Inc. None of his commentary is or should be considered investment advice. Direct your inquiries to his website at www.schmicksretiredinvestor.com. Investments in securities are not insured, protected, or guaranteed and may result in loss of income and/or principal.