Cross-currents in the market. U.S. stock indices closed August with respectable gains, propelled once again by Nvidia and the AI narrative (although even as I write, the market is giving back a portion of that after the release of PCE data - more on this later).
At the same time, tariffs re-emerged as a live issue, and the Fed found itself juggling market expectations with political pressure.
The Fed’s Pivot at Jackson Hole
For much of the year, the market has been anticipating when, and if, the Fed would begin to cut interest rates. The most significant event of the month was Fed Chair Jerome Powell’s speech at the annual Jackson Hole symposium. Powell's tone signaled a green light for a September rate cut, sending stocks and bonds rallying.
At the same time, tariffs re-emerged as a live issue, and the Fed found itself juggling market expectations with political pressure.
The Fed’s Pivot at Jackson Hole
For much of the year, the market has been anticipating when, and if, the Fed would begin to cut interest rates. The most significant event of the month was Fed Chair Jerome Powell’s speech at the annual Jackson Hole symposium. Powell's tone signaled a green light for a September rate cut, sending stocks and bonds rallying.
Yet the Fed found itself in unfamiliar territory when President Trump attempted to remove Fed Governor Lisa Cook. The effort -- on hold for now -- underscored how political pressure is shaping perceptions of the Fed’s independence. Investors are left to parse both the data and the headlines.
Economic Data: Resilient, Not Red Hot
Adding to the bullish case was a series of economic reports that painted a picture of an economy that is slowing down, but not crashing.
AI Still in the Spotlight
Nvidia once again drove headlines, its earnings and outlook reinforcing the perception that AI remains the dominant growth story in markets. Investors continue to treat the company as a bellwether for broader sentiment — with one analyst quipping that “nothing matters but rate cuts and Nvidia.” That said…
Beneath the Nvidia glow, there was a refreshing shift. Small-cap stocks, financials, and consumer cyclicals outpaced the mega-cap tech cohort, with the Russell 2000 enjoying its best stretch in years. Whether this marks a true rotation or just a pause in tech dominance is an open question, but it gave the rally a healthier look.
Looking Ahead
Key developments to watch in September:
Final Word
August was a month of cross-currents: optimism in AI, hints of healthier breadth, rising tariff risks, and Fed uncertainty. As we step into September, investors face a familiar balancing act — weighing powerful themes of growth against the realities of policy, politics, and valuation.
Bearish Case: Valuations remain stretched, and the market's reliance on a handful of tech stocks could lead to a sharp correction. Geopolitical risks, including renewed trade tensions, could resurface and disrupt global supply chains. Rockefeller Global's Cheryl Young: "I think stocks are overvalued, straight up. Technology has carried this market, and it's becoming a crowded trade."
Bullish Case: The Fed is poised to cut rates, a move that historically has been a tailwind for stocks. Corporate profits are holding up, and the economy is demonstrating a remarkable ability to withstand headwinds. The AI revolution, while volatile, is a powerful long-term growth driver. Fundstrat's Tom Lee: "No signs that the momentum trade will end anytime soon."
And For What It’s Worth…
The Military Times reports that the U.S. Air Force is looking to add two Tesla Cybertrucks to its precision munition weapons testing program at New Mexico’s White Sands Missile Range. Translation: it wants to blow them up.
The request singled out the vehicle by name among a 33-vehicle procurement list -- and they’re the only brand-specified models requested for target practice. Military planners say the trucks could realistically be used by adversaries in future conflicts — and that training must reflect those real-world possibilities.
Perfectly understandable. Be honest: the Cybertruck has “Mad Max” written all over it.
As noted before, long term, the strategies will get the trends right. Short term, there may be a miss or two as the market juggles conflicting signals. So keep allocations of strategies reasonable within your portfolio, and remember that protection* remains paramount.
--David
_____
* WHAT DOES PROTECTION LOOK LIKE?
At the extreme, it’s cash. As I mentioned last month, it’s OK to hold some cash. Cash is, in fact, a position. It means you’re prepared to act when circumstances better align with your risk tolerance.
Protection can mean an overweight position in a model built for protection. Lower volatility and lighter drawdowns often indicate that a model is more protective in nature. Bond Bulls, for example, has the lowest volatility and max drawdown of any of the models.
Check out the updated white paper Conservative vs. Aggressive Portfolios for a list of all the strategies ranked from lowest risk to highest in terms of max drawdown.
Protection can mean putting multiple strategies to work in a portfolio, especially when those models tend toward an inverse relationship with each other, or focus on different asset classes or market sectors. Think Bond Bulls and American Muscle. Or Global Trader and The 12% Solution. Or even a bit of the Zen Knuckle combined with a couple of the above.
Because each strategy uses a slightly different mechanism to identify market risks, and because each can employ different funds representing different market sectors (although there is obviously some overlap), there is beneficial diversification at work when using multiple strategies within a portfolio – helping to reduce volatility and max drawdown.
Further down the page in Conservative vs. Aggressive Portfolios you can see examples of various combinations and how they have performed over the years.
Protection can mean keeping an eye on provisional picks during the month. These can provide a heads-up on potential trends -- and breakdowns of existing trends. Look for asset class shifts (a switch from an equity fund to a safe harbor asset like cash or bonds, or the contrary).
See if such a shift holds up for a few days. Not every such move is a trading opportunity or justifies a rebalancing, but information is power.
Finally, employing stop-loss and stop-limit orders. A stop-loss order is an order placed with a broker to buy or sell a specific stock (or ETF) once that asset reaches a specific price. It's designed to limit an investor's loss on a security position. While not perfect, and you'll find my own pro-and-con thoughts on the Q&A tab in the Members Pages, stop-losses have their place in risk management.
Read more on the Investopedia page for Stop-Loss Orders.
Economic Data: Resilient, Not Red Hot
Adding to the bullish case was a series of economic reports that painted a picture of an economy that is slowing down, but not crashing.
- Upward GDP Revision: The upward revision of second-quarter GDP growth from 3.0% to 3.3% was a stronger-than-expected performance, giving investors confidence that the economy is resilient despite ongoing challenges.
- Inflation Accelerating: The Core PCE index, a key inflation measure watched by the Fed, rose to 2.9% in July. While this was in-line with expectations, it was a slight acceleration from the prior month, serving as a reminder that rising prices are still a risk.
- A Cooling Labor Market: Concurrently, reports on the labor market showed continued signs of cooling and jobless claims ticking up. Worrying, but not at panic stage.
AI Still in the Spotlight
Nvidia once again drove headlines, its earnings and outlook reinforcing the perception that AI remains the dominant growth story in markets. Investors continue to treat the company as a bellwether for broader sentiment — with one analyst quipping that “nothing matters but rate cuts and Nvidia.” That said…
Beneath the Nvidia glow, there was a refreshing shift. Small-cap stocks, financials, and consumer cyclicals outpaced the mega-cap tech cohort, with the Russell 2000 enjoying its best stretch in years. Whether this marks a true rotation or just a pause in tech dominance is an open question, but it gave the rally a healthier look.
Looking Ahead
Key developments to watch in September:
- Inflation Report (Sept 11): CPI data will test whether the Fed’s dovish lean is justified.
- Fed Meeting (Sept 17): Will the Fed deliver the first rate cut? Tone and forward guidance will matter as much as the move itself.
- Trade Fallout: Watch for evidence that new tariffs – including recent steep levies on Indian goods - are raising costs for companies and consumers.
- Seasonal Weakness: September has historically been the weakest month for equities since 1950 — a pattern not lost on cautious investors.
Final Word
August was a month of cross-currents: optimism in AI, hints of healthier breadth, rising tariff risks, and Fed uncertainty. As we step into September, investors face a familiar balancing act — weighing powerful themes of growth against the realities of policy, politics, and valuation.
Bearish Case: Valuations remain stretched, and the market's reliance on a handful of tech stocks could lead to a sharp correction. Geopolitical risks, including renewed trade tensions, could resurface and disrupt global supply chains. Rockefeller Global's Cheryl Young: "I think stocks are overvalued, straight up. Technology has carried this market, and it's becoming a crowded trade."
Bullish Case: The Fed is poised to cut rates, a move that historically has been a tailwind for stocks. Corporate profits are holding up, and the economy is demonstrating a remarkable ability to withstand headwinds. The AI revolution, while volatile, is a powerful long-term growth driver. Fundstrat's Tom Lee: "No signs that the momentum trade will end anytime soon."
And For What It’s Worth…
The Military Times reports that the U.S. Air Force is looking to add two Tesla Cybertrucks to its precision munition weapons testing program at New Mexico’s White Sands Missile Range. Translation: it wants to blow them up.
The request singled out the vehicle by name among a 33-vehicle procurement list -- and they’re the only brand-specified models requested for target practice. Military planners say the trucks could realistically be used by adversaries in future conflicts — and that training must reflect those real-world possibilities.
Perfectly understandable. Be honest: the Cybertruck has “Mad Max” written all over it.
As noted before, long term, the strategies will get the trends right. Short term, there may be a miss or two as the market juggles conflicting signals. So keep allocations of strategies reasonable within your portfolio, and remember that protection* remains paramount.
--David
_____
* WHAT DOES PROTECTION LOOK LIKE?
At the extreme, it’s cash. As I mentioned last month, it’s OK to hold some cash. Cash is, in fact, a position. It means you’re prepared to act when circumstances better align with your risk tolerance.
Protection can mean an overweight position in a model built for protection. Lower volatility and lighter drawdowns often indicate that a model is more protective in nature. Bond Bulls, for example, has the lowest volatility and max drawdown of any of the models.
Check out the updated white paper Conservative vs. Aggressive Portfolios for a list of all the strategies ranked from lowest risk to highest in terms of max drawdown.
Protection can mean putting multiple strategies to work in a portfolio, especially when those models tend toward an inverse relationship with each other, or focus on different asset classes or market sectors. Think Bond Bulls and American Muscle. Or Global Trader and The 12% Solution. Or even a bit of the Zen Knuckle combined with a couple of the above.
Because each strategy uses a slightly different mechanism to identify market risks, and because each can employ different funds representing different market sectors (although there is obviously some overlap), there is beneficial diversification at work when using multiple strategies within a portfolio – helping to reduce volatility and max drawdown.
Further down the page in Conservative vs. Aggressive Portfolios you can see examples of various combinations and how they have performed over the years.
Protection can mean keeping an eye on provisional picks during the month. These can provide a heads-up on potential trends -- and breakdowns of existing trends. Look for asset class shifts (a switch from an equity fund to a safe harbor asset like cash or bonds, or the contrary).
See if such a shift holds up for a few days. Not every such move is a trading opportunity or justifies a rebalancing, but information is power.
Finally, employing stop-loss and stop-limit orders. A stop-loss order is an order placed with a broker to buy or sell a specific stock (or ETF) once that asset reaches a specific price. It's designed to limit an investor's loss on a security position. While not perfect, and you'll find my own pro-and-con thoughts on the Q&A tab in the Members Pages, stop-losses have their place in risk management.
Read more on the Investopedia page for Stop-Loss Orders.
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