Wall Street closed the final trading session of August in negative territory Monday as renewed fighting between the United States and Iran pushed oil prices higher, lifted longer-term Treasury yields and added another layer of uncertainty for investors already reconsidering the direction of Federal Reserve policy.
The Dow Jones Industrial Average, S&P 500 and Nasdaq Composite opened lower and remained in the red through the closing bell after the United States carried out its first military action against Iran in roughly a month.
American forces struck Iranian rocket launchers near the Strait of Hormuz on Sunday after U.S. Central Command said forces affiliated with Iran’s Revolutionary Guard were preparing rockets equipped with sea mines. The military described the operation as a limited action intended to protect civilian shipping and international commerce.
Iran responded by launching missiles toward U.S. sites in Jordan. Jordanian forces said eight missiles that entered the country’s airspace were intercepted. The United Arab Emirates also reported intercepting an Iranian drone over its territorial waters Monday.
The renewed attacks interrupted a period of reduced fighting in a conflict that has continued for more than six months.
The Strait of Hormuz remains especially important to investors because approximately 20% of the world’s oil normally moves through the waterway. Traffic has been significantly disrupted during the conflict, making developments surrounding the strait an immediate concern for global energy markets.
Oil prices climbed as traders reacted to the possibility that the confrontation could again threaten energy supplies.
Front-month West Texas Intermediate crude futures advanced approximately 3% Monday to $85.92 per barrel.
Brent crude, the international oil benchmark, climbed 2.7% and settled at $90.49 a barrel. Brent had fallen below $80 earlier in August before moving higher again as hopes for an imminent conclusion to the war diminished.
Energy costs have already been affecting American consumers. The national average price of gasoline remained above $4 per gallon throughout August, making it the most expensive August at the pump on record and surpassing even the elevated prices associated with pandemic-era supply disruptions.
Higher oil prices are also creating a difficult situation for monetary policymakers because more expensive energy can contribute to broader inflation.
That concern became particularly important following Federal Reserve Chairman Kevin Warsh’s recent address at the Jackson Hole Economic Policy Symposium.
Warsh used the speech to reaffirm the central bank’s commitment to restoring inflation to its 2% objective. He indicated that policymakers would need to respond if inflation does not move toward that target with sufficient clarity and speed.
Those comments changed expectations in financial markets.
By Monday, futures markets were assigning a 66.1% probability that the Federal Reserve would raise its benchmark interest rate by 25 basis points at the September 15-16 Federal Open Market Committee meeting. That probability had stood at 57% on Friday.
Investors are therefore facing the possibility that the renewed rise in oil prices could make the Fed’s inflation challenge even more difficult.
Attention is now turning toward the August employment report, which is scheduled to be released Friday.
Chris Larkin, managing director at E*TRADE from Morgan Stanley, said unexpectedly strong employment numbers could actually be interpreted negatively by markets because they might strengthen the argument for another interest-rate increase.
The market is also entering a historically volatile period. Investors are weighing whether the strength that allowed the S&P 500 to finish last week with an overall gain can continue or whether the weakness that followed Warsh’s Jackson Hole remarks will become the more important trend.
Bond markets were already reflecting those concerns Monday.
The yield on the benchmark 10-year U.S. Treasury climbed to 4.744%, up from 4.722% Friday. During the session it reached 4.768%, its highest intraday level in approximately 19 months.
The 30-year Treasury yield increased by 4.1 basis points to 5.249%.
Shorter-term debt behaved differently. The two-year Treasury yield slipped by approximately 0.1 basis point to 4.339%.
Higher long-term yields can create additional pressure on equities because rising Treasury returns give investors a more attractive alternative to stocks while simultaneously increasing borrowing costs throughout the economy.
Despite Monday’s losses, the major indexes still finished August with gains.
The Dow Jones Industrial Average declined 0.7% during Monday’s session to close at 53,185. For August as a whole, however, the blue-chip index gained 1.3%.
The S&P 500 fell approximately 0.3% Monday and closed at 7,686. It nevertheless recorded a 2.6% increase for the month.
The Nasdaq Composite slipped roughly 0.1% during the session to 26,370 but finished August with the strongest monthly performance of the three major benchmarks, rising 3.9%.
Nearly every major sector within the S&P 500 declined Monday, although energy stocks benefited from higher crude prices. The broader weakness underscored how quickly renewed geopolitical tensions and changing interest-rate expectations can influence investor sentiment.
Apple was another major focus for investors as the company prepared for one of the most consequential leadership transitions in its history.
Apple shares declined 0.9% Monday and were not among the relatively small number of Dow components that finished the day higher.
The decline came immediately before Tim Cook’s departure as chief executive.
Cook is stepping down as Apple CEO effective September 1 while remaining with the company as executive chairman. Longtime Apple hardware executive John Ternus is taking over the chief executive position.
Cook assumed control of Apple from co-founder Steve Jobs on August 24, 2011.
Over the roughly 15 years since that transition, Apple’s stock has risen approximately 2,740%, illustrating the extraordinary increase in shareholder value generated during Cook’s tenure.
Jay Woods, chief market strategist at Freedom Capital Markets, described Cook’s leadership through the trajectory of Apple’s share price, noting that despite inevitable declines along the way, the stock maintained a powerful long-term upward trend.
Apple also underwent two significant stock splits under Cook.
The company completed a 7-for-1 split in 2014 and later conducted a 4-for-1 split in 2020.
Apple joined the Dow Jones Industrial Average during Cook’s tenure and became the largest individual holding in Warren Buffett’s Berkshire Hathaway equity portfolio for a period of time.
Berkshire Hathaway Class B shares themselves declined approximately 0.2% during Monday’s session.
Apple also spent lengthy periods as the world’s largest publicly traded company by market capitalization.
Ternus now inherits the challenge of extending that record.
At 50 years old, he is approximately the same age Cook was when Cook replaced Jobs. His professional background differs considerably from Cook’s operations-focused reputation, however.
Ternus comes from Apple’s engineering and product-development organization, giving the company a hardware-oriented leader at a time when it is searching for its next major product category and attempting to improve its competitive position in artificial intelligence.
Cook demonstrated that Apple could successfully replace a legendary founder without losing its dominance. Ternus now faces the similarly difficult responsibility of succeeding the executive who transformed Apple into one of the most valuable companies ever created.
His first major public test will come quickly. Apple has scheduled a product event for September 9, where the company is expected to introduce its next generation of iPhones and potentially other major products.
Two California utility companies experienced far more dramatic stock declines Monday.
Edison International plunged 22.9%, while PG&E dropped approximately 20%, making them the two worst-performing companies in the S&P 500 for the session.
The sell-off followed developments surrounding proposed California wildfire legislation.
California lawmakers had been negotiating a broad package dealing with the financial responsibilities utilities face when their electrical equipment is responsible for destructive wildfires.
Gov. Gavin Newsom had sought several provisions designed to reduce certain liabilities facing utility companies.
Among his proposals were limits affecting payments to insurance companies, wildfire survivors, businesses and local governments pursuing compensation after fires linked to electrical infrastructure.
Newsom’s administration argued that rapidly growing wildfire liabilities could threaten investor confidence in California utilities, weaken their financial condition and ultimately lead to higher electricity costs for customers.
However, lawmakers resisted several of the governor’s most controversial proposals.
The final legislative agreement omitted the broad liability protections Newsom had sought.
One major disagreement involved subrogation, the legal process that allows insurance companies to seek reimbursement from utilities after insurers pay policyholders for losses caused by a utility-related wildfire.
Newsom wanted to restrict those claims.
Insurance companies and several lawmakers argued that eliminating or substantially reducing subrogation could instead increase costs for insurers and eventually result in higher insurance premiums for California residents.
Lawmakers also pushed back against proposals that would have reduced what local governments could recover when public infrastructure is destroyed.
Another controversial component would have placed limits on certain compensation available to wildfire survivors for pain and suffering.
The final legislation left out Newsom’s key proposals for reducing those liabilities, disappointing investors who had expected stronger financial protections for utility companies.
The reaction was immediate in the stock market, with Edison International and PG&E losing roughly one-fifth or more of their market values during Monday’s trading session.
The utility declines added company-specific pressure to a market already struggling with a much broader collection of concerns.
Investors are now entering September with several major forces pulling on markets simultaneously.
The renewed confrontation between Washington and Tehran has once again increased the risk surrounding the Strait of Hormuz and global energy supplies. Higher crude prices could keep gasoline costs elevated and complicate progress on U.S. inflation.
At the same time, Warsh’s tougher monetary-policy message has significantly increased expectations that the Federal Reserve could raise interest rates this month.
Friday’s employment report could therefore carry unusual importance.
A weaker labor market might reduce pressure on the Fed to tighten policy, while unexpectedly strong hiring could reinforce expectations for a rate increase.
For Wall Street, that creates an unusual situation in which positive economic data may not automatically be positive for stocks.
Meanwhile, investors must also digest major corporate developments, including the beginning of a new leadership era at Apple and the severe sell-off in California utilities following changes to wildfire legislation.
August ultimately remained profitable for all three major U.S. stock indexes, but its final session delivered a reminder of the risks confronting markets as September begins.
Geopolitical instability, rising energy prices, climbing bond yields and the possibility of tighter Federal Reserve policy are all converging at the same time.
Whether August’s broader market strength carries into September may now depend heavily on what happens next in the Middle East, what Friday’s employment numbers reveal about the U.S. economy and whether the Federal Reserve concludes that inflation remains serious enough to justify another interest-rate increase.