Weekly Webcasts
Join us every Monday for expert market commentary and analysis. Our weekly webcasts cover key market developments, economic indicators, and investment strategies.
Still Roaring
Sunshine during my tour of the West Coast and in the stock market last week. But everyone’s on the lookout for signs of an AI bubble. Jeff Bezos has a positive take on bubbles that makes sense to us: They accelerate funding and hasten AI’s tremendous benefits. Revisiting the BRAIN Revolution and our long-standing confidence in technology and its positive impact on the economy.
Meet Bonnie
Our Roaring 2020s outlook has been on target since the beginning of the decade. Over the past two quarters, GDP growth and consumer spending have been robust, and the recession widely anticipated for three years and as recently as April never showed. The Fed’s September interest-rate cut—made proactively in response to weak payroll stats—was probably a mistake that could stoke price inflation and financial speculation. While unemployment is low, AI is disrupting some areas of the labor market. The Fed’s rate cut won’t help former tech workers now driving for Uber. … The good news: Consumer spending should remain strong as Baby Boomers work down substantial nest eggs and support the spending of their adult progeny.
Is The Fed’s Policy Restrictive?
The Fed’s 25-basis-point cut in the federal funds rate last week doesn’t change our S&P 500 price targets or our subjective probabilities of a meltup (25% odds) or correction (20%) by year-end. Today, Dr Ed explores the reactions to the rate cut in the markets for stocks, bonds, the dollar, and gold as well as the significant takeaways from the FOMC’s September 17 meeting. Notably, the post-meeting Dot Plot and press conference revealed less dovishness than many investors had expected.
Dear Scott
A recent article by Treasury Secretary Scott Bessent takes aim at the Fed for its use of unconventional monetary tools and its mission creep. Today, Dr Ed addresses the Treasury secretary in an open letter, detailing where they agree and diverge on the Fed’s role and what monetary and fiscal policies are needed to sustain the Roaring 2020s scenario that both support. While an original aim of the Fed was to promote financial system stability, Bessent’s push for lower interest rates risks a stock market meltup and upward pressure on inflation and bond yields. … Also potentially destabilizing: The administration’s highly unconventional Genius Act, which would use stablecoins backed by US Treasury bills to increase demand for Treasuries and fund the federal debt.
The Good, The (Not So) Bad & The (Relatively) Ugly
Our Roaring 2020s economic scenario and expectations for inflation and the labor market suggest that the Fed probably shouldn’t cut interest rates this year, although one cut might be warranted if upcoming inflation reports are more subdued than we expect. Yet a rate cut next week, after the FOMC meets Wednesday, is practically a foregone conclusion. Stimulating an economy that doesn’t need stimulation won’t create more workers to address the undersupply that’s constraining the demand for labor, Dr Ed explains. Plus, cutting rates when it’s not necessary could cause stock prices to melt up and destabilize the broader financial system. … Plus, a look at the debt crises attracting Bond Vigilantes’ attention in the UK, France, and Japan.
What Could Possibly Go Wrong (with special guest Jim Lucier of Capital Alpha)
September has a long history of being a tough month for the stock market. This has been particularly true over the past decade, based on the average year-to-date percentage change in the S&P 500 during Septembers (chart). But when September was weak in the past, it often provided buying opportunities for year-end rallies.
The Chair Has Spoken
Fed Chair Powell’s eagerly awaited speech at the Fed’s Jackson Hole Symposium on Friday fanned stock investors’ hope that the FOMC would lower the federal funds rate in September—despite Powell’s hedges and the fact that upcoming data releases will figure into the decision. Notably absent in his speech was mention of the Fed’s need to maintain financial system stability if it is to achieve either goal of its dual mandate. Easing in September could test that stability, test the Fed’s commitment to its 2.0% inflation target, and test the Bond Vigilantes’ patience. But it would be good for the stock market. We’re maintaining our targets for the S&P 500 price index of 6600 by year-end 2025 and 7700 by year-end 2026.
Another Candidate For Fed Chair
Dr Ed is sticking to his guns: He has contended since early last year that the US economy is too resilient and inflation is not close enough to 2.0% for Fed officials to muck around with easing. The widespread expectation that they will ease anyway in September is lifting stocks, and the actual event may cause a stock market meltup. The bond market’s reaction to unwarranted easing is tougher to gauge. If it causes the Bond Vigilantes to drive up yields, the Fed’s reputation as inflation fighters could be shot. Recent inflation data suggest inflation could use some fighting, as Trump’s tariffs may be keeping it elevated above the Fed’s target 2.0% and services inflation remains hot.
Relax, Folks: Jobs Report Was OK
Yes, payroll employment rose less than expected in July, and, yes, revisions pegged it lower than initially thought during May and June. That doesn’t mean demand for labor has slacked off, as the extreme reactions of the financial markets suggested. The payroll weakness says more about the supply of labor than demand for it. Indeed, the two are in balance, which Fed Chief Powell even said last week. Other labor market barometers indicate strength: Hours worked are at a record high; so are wages—even adjusted for inflation. Companies aren’t firing more, though they are hesitating to hire so the duration of unemployment is up. The uncertainties related to Trump’s Tariff Turmoil might account for that.
Update On The Roaring 2020s
Halfway through the decade, our Roaring 2020s investment theme remains on track. The US economy continues to prove remarkably resilient, supported by the robust spending of businesses and consumers, especially Baby Boomers. So far this year, it has been acing the stress tests of Trump’s trade policies. If the final years of the decade pan out as expected, Dr Ed reckons that the S&P 500 price index may be around 10,000 as the 2030s begin. And there’s no reason to expect the roaring to stop then.
Foreigners LOVE American Securities
Like Blanche DuBois, the US Treasury has been dependent on the kindness of strangers, particularly foreign investors. Doomsters warn that foreign investors are losing their confidence in US Treasuries and in the US dollar. Yet, the Treasury’s latest TICS data show that they remain strong buyers of US debt. In addition, they’ve bought a record amount of US equities over the past 12 months. Dr Ed reviews the latest data and discusses the implications.
Trump’s Reign Of Tariffs Ain’t Over
We had expected that Trump’s Tariff Turmoil would have subsided by now, and investors probably assumed the same since the financial markets have been so okay with it all in recent weeks. But the resilience of the economy, the moderation of inflation, and the calmness of the markets seem to have emboldened the President: He has not relented on his tariff war with the world as expected by now but seems to be escalating it again. That’s even though high tariffs are bound to hurt US corporate profit margins, the US economy, and the GOP’s slim majority in Congress after the midterm elections. What now? Dr Ed shares his thoughts and maintains his yearend price target for the S&P 500.
Trump & Bessent Versus Powell & The Bond Vigilantes
President Trump is determined to lower the interest paid on government debt one way or the other. One way is replacing Fed Chair Powell with a Trump loyalist who tries to convince the rest of the FOMC that the federal funds rate must fall, the data be damned. Another involves replacing maturing long-term Treasury bonds with short-term Treasury bills until long-term bond yields fall enough to refinance advantageously. Such “Yield Curve Control” requires the cooperation of US Treasury Secretary Bessent (which Trump has) and the Bond Vigilantes (which he doesn’t). Is it a clever way to lower the federal government’s net interest outlays or is it a catalyst to capital markets turmoil?
Heatwaves
Saturday night, American bombers obliterated three key nuclear sites in Iran. We think Iran won’t retaliate and will sue for peace. … Meanwhile in the US, foreign tourists might not be crowding the airports as usual. If Trump’s America First blustering is keeping them away, don’t worry about the impact on US GDP—it would be too small to drag down the overall economy. … Dr Ed reviews the recent economic data releases, concluding that the resilient US economy is running neither too hot nor too cold. … The Fed made the right decision last week not to ease interest rates, in our opinion. But one FOMC participant and apparent Trump loyalist begs to differ.
Americans Are Still Working For A Living
Over the past three and a half years, the US economy has defied the recession expectations of many, remaining uncommonly resilient in the face of stress tests including Fed tightening, an oil price spike, and most recently Trump’s Tariff Turmoil. The economy’s strength despite these formidable challenges supports our base-case Roaring 2020s scenario (to which we assign 75% odds) and our still bullish S&P 500 targets. … A big reason for the economy’s impressive resilience is that the labor market has remained impressively resilient. Americans are working, secure in their prospects to keep working, so their spending hasn’t been slowed by tariff-related uncertainties.
China’s Currency & Japan’s Stocks
Trump’s Tariff Turmoil has undermined the US’s credit worthiness and unsteadied the dollar. For countries harboring currency-dominance aspirations, that’s been a blessing in disguise. Today, William explains why China’s aspirations for the yuan won’t bear fruit anytime soon.
Japan’s Brawl With The Bond Vigilantes
After last week’s portentous Japanese government bond auction, in which demand was so weak as to be off the charts, William explains what went wrong and why. Contributing factors included the BOJ’s halted tightening owing to “tariff haze,” the Prime Minister’s unfortunate remark likening the nation’s fiscal situation to that of Greece, and vestiges of Japan’s economic past. But having Japan-specific causes doesn’t detract from investors’ fear that this auction was a canary in a coal mine, portending more upheaval for global financial markets and more difficulty for global policymakers amid Trump’s Tariff Turmoil.
Meltup In Stocks Or Meltdown In Bonds?
Two scenarios to put on your radar: Bond prices might melt down if the Bond Vigilantes are roused by the downgrading of the US’s sovereign debt rating and/or the prospect that Trump’s tax-cut bill worsens the federal budget deficit outlook and/or tariff-related inflation. But a bond market meltdown could force Washington to set the US onto a more sustainable fiscal path—a positive end result for bonds and stocks. … The stock market might already be melting up again.
Earnings & Valuation Under Trump 2.0 So Far
Even though Q1 earnings were fabulous, most economists, industry analysts, and corporate managements have low hopes that Trump’s Tariff Turmoil won’t dunk the US economy into a recession this year. Not us: We’re counting on the economy’s resilience. Today, Dr Ed discusses why the widely expected recession, like others in recent years, will be a no-show. Hard-to-ignore reasons include record-high forward earnings, strong economic indicators, and a forward P/E that hasn’t plunged as happens when a recession is imminent. Stock investors seem to be in our camp. Moreover, Trump’s tariff overreach is bound to be tempered by the courts and mid-term election realities if nothing else.
Is The Recession Over Already?
We believe in the resilience of the US economy. Recent years’ monetary tightening didn’t bring on a recession; this year’s tariff turmoil isn’t likely to either. We’re lowering the odds we see of a recession back to 35%, where it had been in early March. One reason is that China and the US appear ready to start negotiating a trade deal. Trump needs to get past trade issues for the Republicans to keep their majorities in Congress after the midterms.
Anatomy Of A Correction
A dovish faction has been forming within the Federal Reserve Board, dissenting from Chief Powell’s hawkish party line. Rather than wait and see whether tariffs deliver greater blows to the economic or the inflation outlook before changing monetary-policy course, the doves claim that the economy is more vulnerable and espouse lowering the federal funds rate sooner rather than later. Dr Ed sides with Powell & Co. So does the data: So far, there’s more evidence of tariff-induced inflationary pressures than economic weakness.
On Edge For 90 Days
Trump’s Tariff Turmoil has put the world on edge. A new world order may be the ultimate result, but for now we’ve got the New World Disorder, leaving everyone scrambling to adjust to Trump’s unpredictable policy pivots. The economic fallout is uncertain. The uncertainty is keeping Wall Street on edge. It’s keeping US trading partner nations on edge. It’s keeping YRI on edge. Today, Dr Ed reviews the timeline of Trump’s tariff proclamations; Trump’s frustrations with a Fed chair who won’t be cowed and can’t be fired; the mid-turmoil expectations for GDP, inflation, corporate earnings, and stock valuations; and the economic impacts of Trump’s tariffs on China and Europe.
Bonds Away!?
Long-term Treasury bond yields surged last week despite news that March inflation was subdued and consumer sentiment is falling fast. That’s partly because the federal budget deficit is too d@mn high! In the past, recessions and lower long-term bond yields were associated with higher deficits; but the budget deficit has been widening since Covid despite a growing economy. Supply of long-term bonds also affects yields, but less so since the Treasury Department started issuing more short-term debt in 2023. Observers have been perplexed by the rise in long-term yields, but the reason for it may simply be that global demand for US Treasury bonds has shriveled, as Trump’s Tariff Turmoil is raising inflationary expectations.
Annihilation Days
Trump’s Liberation Day last Wednesday triggered Annihilation Days on Thursday and Friday, with the Stock Market Vigilantes giving a costly thumbs-down to Trump’s Reign of Tariffs. Trump officials say they aim to make Main Street wealthy again even if that’s bad for Wall Street. The problem is that Main Street owns lots of equities traded on Wall Street, so the two streets prosper and suffer together. Congress can’t do much to stop Trump given his veto power, but he might get the message that hurting Main Street’s stock portfolios can cause a recession and jeopardize the GOP majority in Congress. If so, he might postpone the reciprocal tariffs, giving trade negotiations time to work. Also, the courts might block Trump’s tariffs. An early end to Trump’s tariff nightmare would result in a V-shaped stock-market bottom. We’re counting on that; the alternative is just plain ugly.