Welcome to the monthly market update from Midland Wealth Management. I'm Nicholas Hinkebein, Senior Portfolio Manager. Today, I'll share the Investment Team's latest market and economic views.

Hard Assets and the Scarcity Trade

August's most visible market story was the surge in demand for scarce assets. Gold was up nearly 14% at its high for the month and remained one of the strongest-performing major assets even after a late pullback. Bitcoin also advanced, while exchange-traded funds tied to gold and bitcoin attracted roughly $7 billion of combined inflows over five trading sessions.

Investors did not appear to be choosing between the two. Flows moved into both at the same time, suggesting the trade was less about the individual merits of gold or bitcoin and more about the broader concern about fiscal deficits, government borrowing, and the long-term purchasing power of currencies.

Those concerns were reinforced by volatility at the long end of the Treasury market. The 30-year Treasury yield rose to its highest level since 2007 before the Treasury announced that it would at least double the size of liquidity-support buybacks for longer-dated securities. These purchases may improve market functioning, but they do not reduce the government's overall borrowing needs.

Interest Rates and the Federal Reserve

Interest rates, therefore, returned to center stage. At the Federal Reserve's annual Jackson Hole retreat, Chair Kevin Warsh emphasized that inflation remains above the Fed's 2% target and that the central bank's predominant focus should be on prices. Markets responded by sharply increasing the probability of another rate hike and moved closer to pricing in at least one increase by year-end.

The change in expectations is meaningful. Resilient economic activity and persistent inflation have forced investors to reconsider whether borrowing costs may remain higher for longer or potentially rise further.

Higher yields improve the prospective income available from high-quality bonds, but they also raise the discount rate applied to future corporate earnings. For equities, particularly growth companies, strong revenue growth must now offset a less forgiving valuation backdrop.

Equities and the AI Buildout

Even with pressure from rates, equity markets remained resilient. The S&P entered the final trading day of August with a gain of about 3%. Nvidia's earnings reinforced the strength behind the AI theme, with quarterly revenue rising 106% from a year earlier and data center revenue increasing 117%.

The benefits extended beyond U.S. technology companies. Singapore raised its 2026 growth forecast partly because of accelerating global AI-related capital spending, while Hong Kong also raised its forecast as demand for AI-related electronics supported trade.

August also exposed the gap between the capital being committed to AI and the physical ability to build the required infrastructure. Kimmeridge Energy Management warned that as many as half of proposed U.S. data centers could face delays or cancellation because of political opposition and construction complexity. Power availability, permitting, and local support are becoming nearly as important as the chips themselves.

The underlying theme remains intact, but the market is likely to become more selective. Companies that control scarce infrastructure, secure reliable power, or can translate spending into durable cash flow should be better positioned than firms valued primarily on ambitious capital spending plans.

Outlook

Looking ahead, our team remains focused on how changes in economic growth, inflation, interest rates, and investor sentiment interact across a diversified portfolio. These forces do not affect every asset class in the same way, and a more challenging environment for one area of the market can create more attractive opportunities elsewhere. That makes balance increasingly important by combining assets that can participate in long-term growth with sources of income, stability, and diversification.

We remain cautiously optimistic. Economic activity and corporate investment continue to support markets, but the combination of higher borrowing costs, fiscal uncertainty, and elevated expectations warrants a more selective approach. We favor diversified portfolios with an emphasis on high-quality businesses, dependable cash flows, strong balance sheets, and assets that can provide resilience during periods of volatility. This positioning is somewhat more defensive but still allows investors to participate in durable long-term growth.

Thank you for joining us for this month's market update. If you would like to discuss what these developments mean for your portfolio, please reach out to your wealth advisor or relationship manager.