{"type":"video","version":"1.0","html":"<iframe src=\"https://www.loom.com/embed/4bb7a93a506f4234827f2ab52892d533\" frameborder=\"0\" width=\"640\" height=\"480\" webkitallowfullscreen mozallowfullscreen allowfullscreen></iframe>","height":480,"width":640,"provider_name":"Loom","provider_url":"https://www.loom.com","thumbnail_height":480,"thumbnail_width":640,"thumbnail_url":"https://cdn.loom.com/sessions/thumbnails/4bb7a93a506f4234827f2ab52892d533-5db484ca76933099.gif","duration":263.12,"title":"Investment Outlook, September 2026","description":"0:01 After months of constrained oil supplies, rising inflation, and higher global long-term interest rates, investors widely anticipated Federal Reserve Chair Warsh’s first rate hike under his tenure this past month.\n\n0:15 But tighter monetary policy may be an ineffective tool in this economic environment. Large government deficits and elevated AI investment debt issuance will likely be unresponsive to higher interest rates.\n\n0:27 If the Fed continues down this path, it will increase the risk in the broader equity market rather than reduce it.\n\n0:34 Higher interest rates normally work by making borrowing more expensive. Companies and people consume and invest less in projects, and the economy slows, easing price pressures.\n\n0:45 Yet the largest borrowers today are not very sensitive to the cost of credit. Government policymakers have not signaled any tilt in spending decisions despite higher Treasury yields.\n\n0:55 And companies building out AI infrastructure expect such a high return on investment that they are not concerned about higher yields either.\n\n1:02 Together, these two forces will continue to fuel both borrowing and economic activity, regardless of higher rates. Traditional rate-sensitive sectors, such as auto manufacturing, commercial real estate, and housing, are already strained, and they will bear the brunt of today’s tighter monetary policy.\n\n1:19 Even as rates fell 1.75% over the past two years, activity in these sectors has continued to stagnate because the rate decline was not sufficient to spur renewed activity.\n\n1:31 These sectors can usually swing the economy’s overall growth, but their smaller-than-normal contribution this cycle makes it less likely that higher rates will meaningfully slow their aggregate contribution.\n\n1:44 As the Fed continues to try to slow activity with additional rate hikes through this year and potentially next, equity markets may be entering an atypical environment.\n\n1:54 Normally, in a rising-rate regime, companies with longer-dated cash flows underperform, as those distant cash flows are worth less when discounted back to the present.\n\n2:04 This would include growth-oriented equities and the broader tech sector, especially AI-related stocks, since their earnings are farther into the future.\n\n2:13 Sectors with nearer-term cash flows, like consumer staples, energy, financials, and healthcare, tend to be the relative beneficiaries. However, that has not happened during the latest rise in rates.\n\n2:25 Investors have the most confidence in the AI theme and its earnings potential, so they have crowded into the small subset of stocks most associated with it and shunned the rest of the market.\n\n2:35 This has created a recent market dynamic of an unusual whipsaw effect between AI and non-AI stocks. On days when investors care most about rising rates, a narrow set of AI and speculative growth stocks outperforms.\n\n2:48 On days when it seems long-term rates and inflation pressures are easing, the broader basket of non-AI stocks outperforms. This volatility has defined this past quarter, with the average S&P 500 stock outperforming the index through the end of August, before declining an additional 5% in September while the index stayed flat.\n\n3:05 We have been navigating this risk for some time, and we believe keeping your equity exposure broadly diversified between the two scenarios is prudent risk management, regardless of which pattern wins out over the near term.\n\n3:21 Portfolios continue to participate in the upside of AI beneficiaries, including the hyperscalers, semiconductors, cybersecurity, energy, and power companies involved in computing infrastructure.\n\n3:34 At the same time, we have continued to build positions in uncorrelated and defensive stocks that should cushion portfolios if there is a large rotation away from AI winners. Rising real rates are also creating attractive fixed-income opportunities to lock in yields from high-grade issuers.\n\n3:51 In a market increasingly concentrated and volatile under the surface, diversification and a long-term focus remain the best tools for keeping portfolios on track toward your goals in this rising-rate environment.\n\n4:06 Please reach out with any questions or concerns, and enjoy a happy start to your fall."}