FINANCIAL MARKET INSIGHT

HIGHLIGHTS

• How to Explain This Market (September Update)
• Weekly Market Preview: Two Key Central Bank Decisions (Fed on Wednesday, BOJ on Thursday)
• Weekly Economic Cheat Sheet: Important Growth Updates This Week

STOCKS

✓ What is Outperforming: Defensive sector, minimum volatility, and sectors linked to higher rates have relatively outperformed recently as markets have become more volatile.

✓ What is Underperforming: Tech/growth and high valuation stocks have lagged as yields have risen.

How to Explain This Market

Over the weekend, our team was at a social function, and we were asked, "How can stocks be near all-time highs when the economic data is so clearly showing a loss of momentum?" It is a great question, and the answer is the key to understanding this market and what will likely drive it through year-end.

First, the data is showing a clear loss of momentum. But it is not showing an imminent recession. Second, and most importantly, the market is trading almost entirely on Fed expectations. And right now, the market expects the Fed to cut rates by 50 basis points next week. That is a very aggressive expectation, and it is the primary reason why stocks have been so resilient in the face of slowing growth.

Bottom line: The market is in a "bad news is good news" environment. As long as the economic data is soft enough to keep the Fed on track to cut rates, but not so soft that it sparks legitimate recession fears, stocks can continue to grind higher. However, this is a very delicate balance, and any shock to the system (either a surprisingly strong economic report or a surprisingly weak one) could cause a significant market reaction.

Economic Data (What You Need to Know in Plain English)

Last week's economic data was mixed, but the key takeaway is that the economy continues to lose momentum. The headline numbers from the retail sales and industrial production reports were both weaker than expected, and while the housing data was a bit better, it was not enough to offset the broader trend of slowing growth.

Looking ahead, this week is all about the Fed. The FOMC will release its latest policy statement on Wednesday, and while no one expects a rate cut this month, the market will be laser-focused on the updated "dot plot" and Fed Chair Powell's press conference. The key question is whether the Fed will signal a 50-basis-point cut in September, as the market currently expects. If they do, stocks will likely rally. If they do not, we could see a significant pullback.

Bottom line: The Fed is the only game in town right now. The economic data will continue to matter, but only in the context of how it might influence the Fed's decision-making process.

COMMODITIES, CURRENCIES & BONDS

Commodities were mixed last week as a stronger dollar weighed on metals while oil prices were supported by ongoing geopolitical tensions. Gold ended the week down 0.5%, while WTI crude oil rose 1.5%. The broader commodity ETF (DBC) was little changed.

Looking ahead, the outlook for commodities remains uncertain. If the global economy continues to slow, that will be a headwind for industrial metals and energy. However, if the Fed does cut rates as aggressively as the market expects, that could be a tailwind for gold and other precious metals.

Bottom line: The commodity markets are likely to remain volatile until we get more clarity on the outlook for global growth and Fed policy.