3 Things You Need to Know This Week | Fed Meeting, Central Banks, Defense Spending

Transcript

Alexander Leiken:

Hello, and welcome to 3 Things You Need to Know This Week, our regular series designed to help you sift through the noise across financial media and understand what really matters for markets. To stay up-to-date with our latest market insights, subscribe to our YouTube channel, or visit fisherinvestments.com. And with that, here are the 3 things you need to know this week.

First, the Federal Reserve meets this week.

On Wednesday, the US Federal Reserve will hold its second monetary policy meeting of the year. Members will decide whether to cut the federal funds rate, currently set at three and a half, to 3.75%. With mortgage rates still well above levels seen in the 2010s, some believe more rate cuts are necessary to ease housing affordability and support the economy. The escalation in the Middle East might also factor into the Fed's conversations. The oil price spikes of the 1970s coincided with relatively high money supply growth and inflation, but many economists now view the Fed's rate hikes in response to the oil supply shock as a policy mistake today. If the Fed views high energy prices as likely to pass through to higher inflation, it may feel compelled to act. In such a scenario, monetary policy errors are possible and worth watching. A rate move at this particular meeting isn't expected, but investors will be watching closely for clues about future actions. Officials on the Federal Reserve Board remain divided. Some prefer more cuts, while others prefer a "wait and see" approach. This is the Fed's eternal dilemma, caught between trying to contain inflation and support the labor market and the economy more broadly. To the casual observer, this might seem like uncertainty. But for more disciplined investors, it's just policy signaling. Remember, monetary policy is just one of many factors influencing the market. Rate moves grab attention, but they're rarely make-or-break for stocks.

Next, an update on central banks outside the US.

This week, several central banks will make monetary policy announcements. The Bank of Japan or, BOJ, will speak on Wednesday, while the European Central Bank, or ECB, and the Bank of England, also known as the BOE, follow on Thursday. Rate cuts by the ECB and BOE in 2024 and 2025 helped steepen Europe's yield curve, boosting economic growth and bank profitability. This trend helped European stocks, particularly the yield curve sensitive financial sector, outperform the broader market in 2025. Meanwhile, Japan's 10-year government bond yields have risen to two decade highs. Despite renewed concerns about Japan's debt, rising yields boosted bank lending and stock performance in 2025.

Finally, defense spending.

Prime Minister Takaichi will travel to the US to meet President Donald Trump on Thursday to discuss strengthening the US-Japan alliance, likely focusing on defense spending. Some may ask whether the meeting and recent events in the Middle East signal now is a good time to buy defense stocks. Here's what you should keep in mind: Defense stocks are not just military contractors, but more of a specialized corner of the broader industrial sector. Many of these companies are what we would classify as value stocks. They can be sensitive to the economic cycle and trends in bank lending, and we think the re-steepening of the yield curve and stronger-than-expected economic growth could give these companies a boost. However, it's important to keep the big picture in mind. The entire industrial sector only makes up about 11% of the global stock market, and defense is just one slice of that 11%. Concentrating too much of your money in one small niche can expose investors to unnecessary risk. One more thing to consider: A Japanese commitment to ramp up military spending should not be mistaken for an immediate economic jolt. The actual economic impact of defense spending often unfolds in slow motion. In our view, government spending is rarely the primary engine of a bull market or a country's economy. The outlook for Japanese stocks and its economy doesn't hinge on massive defense spending. Business activity is rising and its yield curve is the most positive it's been in years, which encourages bank lending. Unless the meeting sparks a truly radical and immediate shift in Japan's fiscal policy, we believe Japan's economy will likely continue its steady course, driven by corporate earnings and global trends. For investors, while the outlook for defense might look bright, we'd caution against betting too heavily on such a small segment of the global market.

And that's it for this episode of 3 Things You Need to Know This Week.

For more of our thoughts on markets, check out This Week in Review, released every Friday. You can also visit FisherInvestments.com. Thanks for tuning in, and don't forget to hit "Like" and "Subscribe!"