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<\/a> What To Watch Today <\/p>\nEarnings<\/p>\n
Economy<\/p>\n Yesterday<\/a>, we discussed that the latest employment report shows that the weakness in the economic dynamics is starting to feed into bonds. Most importantly, today, we will see the annual revisions to the employment data, which could potentially paint a much weaker outlook. As Sentimentrader.com<\/a> noted yesterday, bonds are now significantly outperforming cash, which could act as a vacuum as investors shift from money markets to longer-duration bonds to capture both appreciation and higher yield. <\/p>\n \u201cThe chart below shows that when all bond systems remained on a buy signal versus cash, the iShares Aggregate Bond ETF (AGG) delivered an annualized return of 3.6%, notably outperforming periods when fewer systems were aligned.\u201d<\/p>\n This makes sense, given that money market rates are tied to the Fed funds rate. When the Fed cuts rates, money market balances tend to decline and stabilize. While money market fund balances rise over the long term as corporations, institutions, and pensions hold cash for needs, some of that balance will switch from money markets to bonds for higher yields.<\/p>\n Furthermore, as the Fed cuts rates, longer-duration bond yields will fall, particularly as economic growth slows. However, one area to watch closely is high-yield\u00a0(aka Junk bonds), which are susceptible to slowing economic growth. Regarding the stock market, it is worth paying attention to junk bonds as they are often an early warning indicator. As Sentimentrader.com noted:<\/p>\n \u201cOn Friday, the spread between 52-week highs and lows for high-yield bonds surged to its 4th-highest level on record. While employment trends remain a concern, junk bond traders show little sign of worry. Historically, the S&P 500 has never peaked when this spread was as elevated as it is now. Furthermore, the IBOX High-Yield Index closed at a record high to end the week.\u201d<\/p>\n Junk bonds are a \u201crisk-on\u201d\u00a0proxy, which shows that investors currently have little fear of a market correction. However, as noted, junk bonds are very susceptible to a weakening economic environment, and if default risks begin to rise, the risk to the market will increase. <\/p>\n The current bond backdrop is becoming more constructive, and the recent breakouts above long-term moving averages bode well for continued gains. However, with bonds overbought in the short-term, look for corrections to add holdings to portfolios. <\/p>\n Lumber prices have slumped to year-to-date lows, weighed down by an inventory glut built ahead of tariffs. As the WSJ noted<\/a>, \u201cProducers were so confident, they overlooked one glaring obvious hurdle while piling up lumber in the U.S.: demand or lack thereof.\u201d With warehouses full and construction permits slipping to their lowest levels since 2020, lumber mills are now cutting back production.<\/p>\n The sharp decline in lumber prices raises concerns about a potential slowdown in housing-related activity and the broader economy when paired with August\u2019s weak employment report. Historically, lumber has been a leading indicator for both, reflecting shifts in building demand and consumer sentiment.<\/p>\n Yet the signal isn\u2019t conclusive. Often viewed as the more reliable economic barometer, copper prices remain in a longer-term uptrend. That divergence poses the key question: Are lumber prices flashing a broader economic slowdown? Or are they simply reflecting elevated mortgage rates and uncertainty around trade policy? With the Fed expected to cut rates later this month, a rebound in construction and lumber demand is possible. However, if lumber prices fail to recover given further rate cuts, it may suggest that deeper cyclical forces are at play.<\/p>\n Passive investing has grown from a niche strategy into the dominant force in equity markets. Index funds and ETFs now account for over half of U.S. equity ownership. These vehicles allocate capital based on market capitalization, not valuation, fundamentals, or business quality. As more money flows into these funds, the largest companies receive the lion\u2019s share of new capital. That\u2019s created a powerful feedback loop, where price drives flows, and flows drive price.<\/p>\n This shift has radically changed the effectiveness of diversification. Investors who think they\u2019re diversified across multiple ETFs often have overlapping exposure to the same few mega-cap names. For example, Apple, Microsoft, and Nvidia are top holdings in technology ETFs, dividend funds, and large-cap growth portfolios. In the U.S., there are roughly 4000 ETFs, and 771, approximately 20%, own Apple.<\/p>\n READ MORE\u2026<\/a><\/p>\n \u201cWant to achieve better long-term success in managing your portfolio? Here are our 15-trading rules for managing market risks.\u201d<\/a><\/p>\n<\/a> <\/p>\n<\/a> Market Trading Update <\/p>\n<\/a> <\/p>\n<\/a> <\/p>\n<\/a> <\/p>\n<\/a> Are Lumber Prices Warning of an Economic Slowdown? <\/p>\n<\/a> Why Diversification Is Failing In The Age of Passive Investing <\/p>\n<\/a> Tweet of the Day <\/a> <\/p>\n