Economic Week In Review
• Six of the 11 GICS sectors posted gains, with energy (+4.7%), financials (+2.2%) and information technology (+1.0%) leading the market higher. Integrateds, E&Ps and oil services stocks helped the energy sector post its best week since June. Banks rallied as Treasury yields moved higher. Cyclical sectors (+0.9%) outperformed defensives (-0.6%) as the Treasury curve steepened. Small caps (+0.6%) outperformed large caps (+0.5%), while value (+0.7%) outperformed growth (+0.3%).

• The weekly jobless claims reading was above consensus, but remained below 400,000 for the ninth consecutive week.

Risks To Our Outlook
The near-term path of least resistance could be falling market returns due to COVID-19 headwinds, tax and regulatory risks from legislative plans, supply chain issues and corporate warnings.

Political risks regarding the debt ceiling are the highest in a decade. Although a U.S. debt default is unlikely, there will be a lot of discussion about it in the coming weeks.

Markets are beginning to assess the expected impacts of increasing the corporate tax rate and the minimum tax of U.S. companies’ foreign income.

Despite these risks, the global economy and equity market fundamentals remain strong, and we still think that equity markets will overcome the moving pieces in the macro narrative.

Best Ideas
Supportive monetary policy and the prospects for stronger relative earnings growth will be the catalyst for select stocks in cyclically oriented sectors to outperform in developed non-U.S. markets, particularly Europe. We remain bullish on select emerging markets, but continue to monitor China’s property issues and regulatory developments. Near term in the U.S., we favor high-quality reopening stocks and small caps. We continue to advocate for a long-term approach that tilts toward cyclicals and value stocks exhibiting strong earnings growth and pricing power.

In Focus: Japanese Stocks Take A Rare Turn As Global Leader
Nearly 32 years ago, the Nikkei 225 Stock Average peaked. Since then, Japanese equities have become essentially synonymous with relative underperformance versus other developed markets. However, the script has recently been flipped: The Nikkei leads U.S., European, Chinese and emerging markets indexes so far in September and Q3.

Japan’s economy has not been driving the gains, with its conspicuously weak PMI readings and subpar GDP growth projections (+2.5%) in 2021. These readings largely reflect lackluster consumer spending, as the country struggled through several lockdowns and a slow vaccine rollout.

However, the resignation of Prime Minister Suga earlier this month opens the door to well-timed elections and new leadership, with the potential to move past COVID-19 and negative consumer sentiment and refocus on growth. Political candidates are promoting fiscal and monetary stimulus, vaccination rates are now accelerating and plans are in place to reopen the country by year-end.