Economic thunderclaps — a much-rattled bond market, gnawing fear that inflation could explode again, Trump's escalating trade war with Canada, just to name a few — give some who save money in 401(k) plans reason to think about running for cover.
So far, we've not seen anything close to a wild selloff in the stock market as summer draws near a close. It may be tough for many folks to get riled up, after all, about a sharp selloff in the U.S. Treasury market in August when we just watched the Dow Jones industrial average break an all-time record close of 54,085.88 points on Aug. 4.
Yet that doesn't mean some experts aren't sensing a need to take a step back here and prepare for a what my husband calls a "welcome to reality" moment. It may be time
for many to consider whether they're too confident taking on too much risk. It's hard to know when we might see a shift ahead here for stocks. But some warn of potential trouble.
Why some see warning signs ahead for stocks
"I do believe that the current troubles in the bond market do not bode well for stocks for a variety of reasons," said Paolo Pasquariello, professor of finance at the University of Michigan.
Interest rates, no doubt in his view, are heading higher. Pasquariello told the Detroit Free Press on Tuesday, Aug. 25, that interest rates are likely to go up in light of what he calls "the never-ending war in Iran" that started Feb. 28, mounting inflation resulting tariffs, and the artificial intelligence infrastructure boom that fuels competition in debt markets as new data centers will need to rely on bonds and private credit to finance the build out.
Uncertainties about President Donald Trump's tariff policy and the seeming reluctance of some Federal Reserve governors to raise rates only make matters worse in the long run, Pasquariello said, especially when the U.S government needs to borrow to refinance existing debt and issue increasing amounts of new government debt.
Pasquariello said it could be a double whammy for stocks: Interest rates going up, as business cash flow goes down.
"Smart money therefore will probably stay quite liquid for a while, waiting for the storm to pass while earning high interest rates on deposits or quasi-cash alternatives," Pasquariello said
He maintains that cryptocurrencies may not be the haven some expect, given that they're subject to speculative bubbles and offer no protection during times of turmoil.
The national debt hits $40 trillion and counting
Sung Won Sohn, a professor of finance and economics at Loyola Marymount University in Los Angeles, noted that the national debt first crossed $1 trillion on October 23, 1981. It exceeded $40 trillion in August 2026, and debt is growing by roughly $2 trillion a year.
"Heavy Treasury issuance, budget battles and no credible fiscal plan lead investors to demand higher yields," wrote Sohn in a commentary on rising bond yields.
Sohn warns that stocks compete directly with bonds for investor dollars. When investors look at nearly risk-free U.S. Treasury yields of 5% or more, he said, investors demand more expected return from investments in stocks to accept stock-market risk.
"If Treasury yields rise while expected profits do not, the premium narrows and stocks become less attractive," Sohn wrote in. In general, he said, stock prices could fall as a result.
Consumers and businesses, of course, both feel the squeeze of higher rates and inflation.
What to expect at Fed meeting in September
The Federal Open Market Committee, the monetary policy body of the Federal Reserve System, next meets Sept. 15 and Sept. 16. The Fed's action directly impacts short-term rates.
Long term rates are influenced by Fed action and bond markets and investor expectations for inflation, but long term rates do not automatically change when the Fed raises or cuts rates.
Sohn does not see the Fed raising short-term rates as early as the September meeting. "While inflation is higher than the Fed's 2% target, the job market is soft," he said.
He added that economic growth is trending down, too. The economy would slow down further as rates edged up. "The Fed will stand pat, and not raise interest rates, because of uncertainties," Sohn said.
Others still expect rate hikes ahead.
The expectation is that the Fed will hike short-term interest rates two times by year-end due to repeated tariff shocks and higher oil prices, wrote Yelena Maleyev, senior economist for KPMG Economics. KMPG expects a quarter-point rate hike at the September meeting and another quarter-point hike at the Fed meeting Dec. 8 and Dec. 9.
"Efforts by the Fed to rein in inflation would likely be welcome news for the bond market; it needs proof not just promises that inflation will recede to lower the compensation investors are now demanding for inflation and payback risks," Maleyev wrote.
Why inflation matters to investors
Federal Reserve Chairman Kevin Warsh gave plenty of hints in his much-watched Jackson Hole speech Friday, Aug. 28, that rate hikes could likely be ahead. He didn't say when or how high short-term rates would go.
He told investors that this summer's inflation readings, while better than expectations, do not indicate that underlying inflation trends have meaningfully improved.
"It is the Fed's job to deliver stable prices," Warsh said.
"High inflation itself is very harmful to economic prosperity," Warsh stated.
He reiterated that the Fed's 2% inflation target, as measured by the personal consumption expenditures price index, is a "firm, fixed target."
"If the Fed gets inflation wrong and judges the economy wrong, who gets the worst of it?" Warsh asked.
"Not the financial high-fliers. Hard-working Americans are the ones left to deal with inflation that is too high or jobs that suddenly appear less secure."
Analysts speculated after the speech that the Fed seems more likely to raise short-term interest rates as early as the September meeting, given that the personal consumption expenditures price index was 3.7% in June and July, down from 4.1% in May.
Those reading the tea leaves even focused on how Warsh kicked off his speech at the economic policy symposium sponsored by the Federal Reserve Bank of Kansas City in Jackson Hole, Wyoming.
He began with a rather odd rambling of the kind of hikes one can take on the trails around Jackson Hole, including a reference to Chairman Ben Bernanke who apparently went at "a much more leisurely pace, an easy stroll along the wandering trails at the Rockefeller Preserve."
While Warsh did not offer specific forward guidance, he said he was offering a "trail map."
So, no, we did not get Warsh's recipe for trail mix — or any idea of how many rate hikes could be in the Fed's blend for a healthier outlook for the price stability.
David Sowerby, managing director and portfolio manager for Ancora Advisors in Bloomfield Hills, said investors overall would benefit from the Fed's efforts toward paving a path that leads to lower inflation and greater price stability.
The economy is generally stronger, he said, when inflation is closer to the Fed's goal of 2% than an inflation rate of 4%, or higher.
High inflation erodes purchasing power, drives up borrowing costs, and triggers more uncertainty for companies and consumers, Sowerby said.
After the Jackson Hole speech, Sowerby put the odds of a Fed rate hike at the September meeting at 50-50 and he put the odds of a rate hike at the December meeting slightly higher at 60-40.
The U.S. stock market has seen above-average returns in the past 60 years at times when inflation rates are 2% or less, Sowerby said. Yet, stock market returns are below average or even in negative territory when adjusted for inflation at times when inflation rates are above 5%.
In 2022, Sowerby noted, then-Federal Reserve Chair Jerome Power gave a powerful speed at Jackson Hole that stressed that inflation was unacceptably high. The stock market did not embrace the prospects for higher interest rates then, Sowerby said. Over the long run, though, key measures of the U.S. stock market delivered above-average returns in the last four years as the Fed found some success battling inflation by raising rates.
What to do when managing money in 401(k) plans
What should those investing for retirement or other longer term goals do?
Christine Benz, author of "How to Retire: 20 Lessons for a Happy, Successful, and Wealthy Retirement," says there's no one-size-fits-all answer. Much, she said, depends on one's age, when you plan to retire and when you'll need the money you've invested.
Benz, director of personal finance and retirement planning for Chicago-based Morningstar, said age 50 is a very rough cutoff.
If you're under age 50, she said, you should have ample exposure in general to the stock market and some fixed income in a retirement portfolio. And you need an emergency fund outside of your retirement accounts to buffer you in case of some unexpected shock to your income or major expenses.
If someone is over 50, she said, you should think about having a significant allocation to fixed income. "Fixed income assets have tended to be pretty good ballasts for big equity market shocks," Benz said.
Someone who is a few years away from retirement would want a more significant fixed income allocation, Benz said. You'd want a 10-year buffer to cushion any downturn in the stock market that could ensure that you would not need to sell stocks at rock bottom prices to cover your expenses.
The objective is to mitigate the risk of an extended stock market downturn. The risk for retirees is that you could face a "lost decade" or what some experts call the downturn from 2000 to 2009 when the dot-com bubble burst early in the decade and later was followed by a dramatic downturn during the global financial crisis between mid-2007 and early 2009.
An investor who bought $10,000 in U.S. stocks at the beginning of 2000could have been left with less than $9,900 by the end of 2009, according to a Morningstar calculation.
Lost decades are not the norm. Since 1925, according to a Morningstar analysis, there have been only two major periods when rolling 10-year returns were below zero: during the Great Depression and during the 2000s.
Over the full period from 1926 through May 2026, the analysis noted, rolling 10-year returns for stocks were negative only about 4.6% of the time.
Using a "bucket strategy," the Morningstar report noted, would involve typically allocating cash to cover one to two years of spending, allocating money for an additional five to eight years of expenses to high-quality bonds, and putting the remainder in stocks.
"If stocks hit an extended downdraft, you can pull withdrawals from the cash or bond buckets, thereby avoiding the need to sell stocks while they’re declining," wrote Amy C. Arnott, a portfolio strategist for Morningstar.
"Trying to avoid a lost decade by stashing your entire portfolio in cash is likely to be counterproductive," Arnott said.
At the same time, Benz noted, retirees don't want a mainly stock-heavy portfolio that would mean your only option would be to sell stocks during a longer downturn.
Many 401(k) savers, of course, could have been lulled by relatively calm markets — and a pretty quick recovery after a 2022 stock market downturn. And Benz suggests that some savers need to rebalance their portfolios to add more fixed-income and bonds — even as we're seeing some bond market scares here.
She suggests high-quality, short-term and intermediate-term bonds, not high-yield or emerging markets bond funds, to offer some cushion for major market shifts.
Another strategy: Treasury Inflation Protected Securities, known as TIPS.
Benz said TIPS protect against inflation as the principal value adjusts upward with the consumer price index.
Robert Bilkie, CEO of Sigma Investment Counselors in Northville, agreed that investors would likely do well today to purchase short term Treasury TIPS.
"They hedge against future inflation, and, of course, have the full faith and credit of the U.S. government backing them," Bilkie said.
Benz said she wouldn't rule out the possibility for continued volatility in the bond market, as inflation remains an "unsolved problem."
Benz does not see a repeat of the global financial crisis of 2007-2009.
"That was a major recession," she said, "and I don't know that there are any storm clouds along those lines along the horizon."
Even so, she said, one cannot rule out the possibility of some weakness in the stock market ahead after a long-running rally.
And there's another possible risk. Stagflation — where the economy is sluggish and inflation remains high — could hurt the performance of both stocks and bonds, Benz said.
Contact personal finance columnist Susan Tompor: stompor@freepress.com. Follow her on X @tompor.
This article originally appeared on Detroit Free Press: Uncertainty builds around inflation, stock market. What could be next.
