Welcome to my latest video presentation. The article below is a condensed transcript; see my video for additional details and several charts.

Data last week revealed a U.S. economy that’s still growing, with services numbers that belie concerns about an imminent recession.

The outperformance in recent months of cyclical stocks underscores the long-term bull case. But as I’ll explain, we face short-term hurdles.

September is historically a poor month for the stock market. In addition to this seasonal trend, the Federal Reserve is once again a source of anxiety. The Fed’s policy-making Federal Open Market Committee (FOMC) meets September 19-20 and its decision on interest rates will drive the market’s near-term direction.

This week, we’ll get the latest numbers for the consumer price and producer price indices (CPI and PPI), for the month of August. Both reports are likely to provide yet more evidence that inflation is substantially cooling, but we may get some unpleasant surprises concerning certain underlying components.

Notably, crude oil prices have been surging, providing fresh worries that it’s too soon to declare victory in the war against inflation. These uncertainties will continue to generate sharp swings in the equity markets, as we saw last week.

After a dismal performance in August and a weak start to September, the main U.S. stock market indices continued their downward trajectory last week (see my video for charts).

Crude oil prices have been on a tear, largely due to tighter supplies, and rose 2.0% last week to settle at nearly $88 per barrel. Investment money continues to pour into the energy sector, a sign that economic expectations are sanguine.

The Catch-22, though, is that higher energy prices are inflationary, and if inflation picks up steam, the Fed will tighten and the economy will take a hit, which in turn would erode energy demand.

The S&P 500 currently hovers above its 200-day moving average, but recently dipped below its 50-day moving average. A rising moving average indicates that the security or index is in an uptrend, while a declining moving average indicates a downtrend. The shorter the moving average, the sooner you’ll see an actual change in the market.

And yet, despite worries about inflation and interest rates, and the seasonal downdraft, much of the economic news has been surprisingly good and stocks remain in positive territory year to date.

The Institute for Supply Management (ISM) reported September 7 that economic activity in the services sector expanded in August for the eighth consecutive month. The Services PMI registered 54.5%, 1.8 percentage points higher than July’s reading of 52.7%.

Optimism over economic growth has helped drive oil prices higher; it also has fueled the outperformance of cyclicals.

Cyclical investments started to rebound in the middle of 2023, after the banking crisis abated, and that outperformance has continued. Despite concerns over monetary policy, economic and earnings growth have proven unexpectedly resilient.

The S&P 500 has gained 7% since the beginning of May, with cyclicals in the lead. This leadership reflects a positive outlook for growth. Cyclical sectors include energy, financials, materials, industrials, and consumer discretionary. Defensive sectors include utilities, health care, and consumer staples.

The recent slump in stocks doesn’t reflect the deterioration of market fundamentals. Investor appetite for cyclicals is a sign that better days are ahead. However, we must get through September’s rough patch first.

Another fly in the ointment is China. The world’s second-largest economy is sputtering, with soaring youth unemployment and a real estate sector that’s in crisis. Beijing’s prescriptions for the ailing economy have been ineffectual so far. The government has modestly cut interest rates, but also doubled down on political repression.

The Chinese government’s authoritarianism has been exacerbating the country’s poor economic performance, by putting handcuffs on entrepreneurs and the private sector. There’s no indication that the Chinese government will loosen his grip. If China’s woes worsen, we’ll see ripple effects throughout the global economy.

The week ahead…

Key economic reports scheduled for release in the coming days include: consumer price index (Wednesday); initial jobless claims, producer price index, U.S. retail sales (Thursday); industrial production and consumer sentiment (Friday).

The big news will be the two inflation reports, which arrive just ahead of the FOMC’s meeting next week. Wall Street will remain on edge, until we get further clarity from the Fed.

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John Persinos is the editorial director of Investing Daily.

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This article originally appeared on Investing Daily.