- A stronger-than-expected jobs report has increased the likelihood of another Federal Reserve rate hike.
- Stocks are already near historic valuations, leaving less room for disappointment if rates rise or profits weaken.
- A Gold IRA can help protect your finances by adding physical gold to a diversified retirement portfolio.
High Valuations Meet Higher Rates
Wall Street received a surprise Friday when the August jobs report came in far stronger than expected.
The U.S. economy added 162,000 jobs, nearly three times the 56,000 economists surveyed by Reuters had forecast. Unemployment remained at 4.1%, while previous payroll numbers for June and July were revised higher by a combined 55,000 jobs.1
Under normal circumstances, strong employment can be encouraging news for the economy. Investors saw another implication immediately: a resilient labor market gives the Federal Reserve more cause to fight inflation with higher interest rates.
Stocks fell following the report as Treasury yields climbed and traders increased their expectations for a September Fed rate hike. The reaction comes at a vulnerable time for the market. Stocks are already trading near historic valuations, with prices reflecting high expectations for future earnings. If interest rates rise further, those lofty valuations could come under pressure, increasing the risk of a sharp market decline and reducing portfolio values.
Stocks Are Near Historic Valuations
One widely followed measure of stock market valuation is the Shiller CAPE ratio. CAPE compares stock prices with the previous 10 years of inflation-adjusted corporate earnings. Using a decade of earnings gives a longer-term view of how expensive stocks have become.
As of September 4, the CAPE ratio stood at 41.41. Its long-term historical average is approximately 17.4. During the height of the dot-com bubble in December 1999, CAPE reached its all-time high of 44.19. Today’s reading sits only about 6% below that record. These high prices reflect an expectation that corporate profits will remain strong.
Higher Rates Could Change the Equation
Friday’s jobs report quickly changed expectations for Federal Reserve policy. After the jobs report, markets put the odds of a September rate hike at roughly 60%, up from about 50% beforehand. UBS also changed its forecast and now expects the Fed to raise rates in both September and December.
Higher interest rates can put pressure on richly valued stocks. As rates rise, bonds can offer higher, more predictable income, giving investors an alternative to taking on the greater uncertainty of stocks. Some investors may shift money from stocks into bonds, reducing demand for stocks and putting downward pressure on share prices. Higher rates can also reduce the present value of the future earnings investors use to justify today’s stock prices. The impact can be greater when valuations are already unusually high.
Treasury markets are beginning to reflect the change in expectations. Both the 10-year Treasury yield and the 2-year yield climbed following Friday’s jobs report. Investors are now facing a market where stock prices sit near record levels while borrowing costs move higher at the same time.
Inflation Is Still Driving the Fed
The jobs report alone may not determine what the Federal Reserve does next. Inflation remains the bigger concern. July consumer prices were 3.4% higher than a year earlier. The Fed’s preferred Personal Consumption Expenditures inflation measure rose 3.7%.3
Energy costs could add more pressure, since Brent crude has climbed toward $100 per barrel while diesel prices have surged. Higher fuel costs can work their way through the economy because businesses must pay more to manufacture and transport goods.
The Market Is Pricing in Plenty of Good News
High stock valuations have some support from corporate earnings. FactSet reported that third-quarter earnings estimates increased during July and August. Analysts typically lower forecasts as a quarter progresses. Expectations for full-year 2026 earnings have also risen.4
Strong profits can support higher stock prices. But today’s valuations already price in continued strength, leaving less room for disappointment if inflation stays high, rates rise or profits fall short.
For retirement savers, the issue becomes especially important. Someone decades from retirement may have years to recover from a prolonged market decline, while someone approaching retirement may have considerably less time.
Diversification Matters When Expectations Are High
No valuation indicator can predict exactly when a market correction will happen. CAPE has remained elevated for long periods before. And strong earnings could continue supporting stock prices.
Yet, current conditions make it worth considering how much of your financial future depends on a richly valued stock market continuing to meet unusually high expectations.
Physical gold can provide diversification because its value does not depend on corporate earnings or stock market valuations. Gold can face short-term pressure when interest rates rise. But over longer periods, physical precious metals can provide retirement savers with an asset that operates differently from stocks and other traditional financial assets.
If you want to learn more about protecting your portfolio with physical precious metals in a Gold IRA, contact AHG today at 800-462-0071.
