Why the Market Got Choppy This Week

After a strong second quarter when stocks rebounded sharply from war- and energy-driven volatility, equity and fixed income markets have settled into a more unsettled holding pattern. Selling pressure has appeared in spurts, and the day-to-day trading environment has become noticeably less comfortable.¹

The Volatility Index (VIX) has ticked higher over the past several weeks, as investors seem to be pricing in more uncertainty than they were earlier this summer.²

We know that some of the buffers that helped absorb the initial energy shock earlier this year have diminished. But even still, $100 oil itself has never been an especially useful market threshold. Between 2008 and the start of 2026, Brent closed above $100 per barrel in over 200 weeks, and equity markets rose in forward 12-month periods over 80% of the time. In other words, the bull market and the economy withstood higher oil much of the time.

In my view, the more important risk today is persistence—whether elevated energy costs last long enough to weaken consumer spending, business activity, and corporate earnings. This risk remains on our radar, but we’re not seeing signs of it yet.

Interest rates are another source of pressure. The 10-year Treasury yield briefly touched 5% this week, after starting the year near 4.15%. That’s a substantial jump, and higher yields can of course increase borrowing costs throughout the economy and place pressure on stock valuations, particularly when rates move quickly.

But here too, the market has shown an ability to absorb the move. The S&P 500 remains up more than 10% this year despite the steady rise in yields. Strong earnings and economic growth can provide support as rates move higher, and we’ve been fortunate to see record-level earnings from Corporate America. Estimates for future quarters keep moving higher as well, which is the reason I think the 10-year at 5% didn’t trigger a major equity market move.

Finally, investors are once again adjusting expectations for Federal Reserve policy. Going into Wednesday’s policy meeting, markets were assigning a roughly 85% probability to a September rate hike, following August’s CPI print of 3.4%. With the Fed raising rates a quarter point, the market got what it expected, but the choppiness leading up to the decision may have been about resetting expectations. As I’ve written many times before, a quarter-point move by itself is unlikely to determine the market’s long-term direction, but rapid changes in Fed expectations can produce meaningful short-term swings.

Taken together, there is plenty here to give markets a reason to remain choppy, which is why I implied in the title that more volatility may be coming.  

But here’s why that’s ok.

When markets rise steadily for months, normal volatility starts to feel abnormal. A 2% down day feels ominous. A 5% pullback over a few weeks can attract warnings about what could come next, and a 10% correction can suddenly feel like evidence that the entire investment thesis has changed.

But investors need to remember that volatility serves an important purpose in markets. Prices constantly adjust as investors digest new information, reassess risks, and change their expectations about future earnings. Corrections can temper excessive optimism, reset valuations, and force investors to become more discerning about what they own. In that sense, the occasional pullback is a sign that markets are functioning normally.  

‍Bottom Line for Investors ‍

A meaningful correction at some point would hardly surprise me—and by itself, it would not change my long-term view. Volatility is part of how markets reset expectations, reprice risk, and ultimately create healthier conditions for future gains.

For investors, the more important question is whether anything fundamental has changed in your financial goals, time horizon, or long-term investment thesis. If the answer is no, a period of market turbulence is usually a reason to stay disciplined—not a reason to abandon the plan.

The Fed Raises Rates in a Hawkish Turn, Following August’s Inflation Reading ‍

The Federal Reserve raised interest rates by a quarter percentage point this week, lifting the federal funds target range to 3.75% - 4.00% in its first hike since 2023. By the time the meeting was set to take place, the market was pricing in an 80+% chance of a hike, so there was effectively no surprise power in the decision—which may help explain why stocks reacted relatively modestly. The Fed’s decision followed an August inflation report that offered evidence for both sides of the Fed debate. Headline CPI held at 3.4% year-over-year and rose 0.4% for the month, with much of the pressure coming from energy. Energy prices were up 16.3% from a year earlier, including a 27.4% increase in gasoline and a 52% jump in fuel oil. Underneath that volatility, however, inflation continued to moderate. Core CPI, which excludes food and energy, eased to 2.4% year over year, its lowest rate in five years.¹

In our view, core CPI argues for leaving rates unchanged, as we’ve seen before that the energy factor can swing both ways quickly. Nevertheless, 16 of 18 Fed officials now see at least one additional rate increase this year, including 12 who project exactly one more quarter-point hike. We have argued before that one or two quarter-point hikes are unlikely to transform financial conditions on their own, and if anything will steepen the yield curve even more—which could serve as a boon to credit. ‍

Is 5% Really a Tipping Point for Treasury Yields?   ‍

The 10-year Treasury yield crossed 5% this week, briefly reaching 5.041%, its highest level since 2007. News headlines jumped on this development and signaled caution for consumers and businesses, as the 10-year yield influences borrowing costs across the economy, including mortgages, corporate debt and other long-term loans.

But we think investors should be careful about treating 5% as a meaningful threshold. At the end of the day, 5% is a round number but it isn’t an economic boundary. In fact, the 10-year Treasury yield averaged roughly 5.8% from 1990 through 2007, before the unusually low-rate environment that followed the financial crisis. In our view, it’s not the level of rates that matters as much as the rate of change. The key issue is what drives yields from here. If they keep rising because inflation expectations are deteriorating, that would be more concerning. If they remain elevated because the economy is growing and credit demand is healthy, the signal is different.³

Canada Looks to Deepen Its Economic Ties With Europe ‍

Canada and the European Union are exploring a much closer economic relationship, with European Commission President Ursula von der Leyen proposing that Canada eventually become the EU’s first “associate member.” The concept is still undefined, but officials have discussed deeper cooperation in areas including energy, critical minerals, defense manufacturing, AI, digital trade, and advanced technology. Importantly, the two sides are not starting from scratch. Their existing free-trade agreement, CETA, has been provisionally applied since 2017. Since then, bilateral goods trade has grown roughly 76%, reaching 81.5 billion euros in 2025, while services trade has risen more than 90%. That provides some useful context for the “associate membership” headlines. A new framework would likely take considerable time to define and approve, and even CETA still has not completed ratification across all EU member states. So any near-term economic impact may be limited. But the broader trade trend is interesting. Canada is already diversifying: in July, exports to countries other than the U.S. reached a record C$25.6 billion and represented 33.7% of total exports. Still, the U.S. remains by far Canada’s largest market; more than 70% of Canadian merchandise exports went there in 2025. For investors, the takeaway is that highly publicized trade disputes do not necessarily mean global commerce is becoming less connected. Canada is actively building additional trading relationships, even as its deep economic ties with the U.S. remain difficult to replicate.⁴

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REFERENCED ARTICLES

1 Wall Street Journal. September 16, 2026. “Warsh Takes Hawkish Turn With Rate Rise and Hints of More to Come.“
2 FRED Fred Economic Data. 2026.
3 Wall Street Journal. September 15, 2026. “What Comes Next, Now that the 10-Year Treasury Yield Has Crossed 5%?”
4 Wall Street Journal. September 16, 2026. “EU Chief Backs Canada’s Push to Become Bloc’s First Associate Member.”