Weekly Insights
Weekly Webcasts
Join us every Monday for expert market commentary and analysis. Our weekly webcasts cover key market developments, economic indicators, and investment strategies.
Inflation: The Good, The Bad & The Ugly
Lots of crosscurrents are converging to determine the course of inflation in 2025. So projecting that course takes seeing where those currents are headed, predicting with the aid of historical correlations how they’ll likely impact inflation, then overlaying potential economic scenarios to see how they change the narrative. The result: Dr Ed’s three inflation scenarios—the Good, the Bad, and the Ugly. In the Good, rising productivity growth moderates inflation even as it spurs economic growth; that’s the crux of our Roaring 2020s economic scenario and is the most likely scenario to play out. The Bad is a witches’ brew of possibilities with bearish inflationary consequences. The Ugly involves a geopolitical crisis catapulting oil prices. That ’70s show seems farfetched these days.
Roaring 2020s Tour Deep In The Heart Of Texas
As Taylor Swift ends her Eras tour, Dr Ed starts his Roaring 2020s Tour to meet with our accounts. Last week in Texas, they shared their concerns about the “known unknowns,” as the new administration represents a significant policy regime change. On balance, Trump 2.0 should perpetuate our Roaring 2020s scenario. Fortunately, the US economy and financial markets are resilient and tend to outperform globally whomever occupies the White House, thanks to Americans’ indomitable entrepreneurial spirit.
Live Long & Prosper!
Today, Dr. Ed examines Baby Boomer economics. The Boomers are sitting on sizable nest eggs that continue to expand along with home prices and stock prices. They are starting to spend more of their net worth as they retire. Many Boomers are not empty nesters but have grown children living at home and are providing them with financial support. The population bulge that has had outsized effects on markets in the general economy at every life phase is now the wealthiest and healthiest generation in history—and spending like it. That’s one of the many reasons we remain bullish on the US economy and stock market.
Is Trump 2.0 Bullish Or Bearish?
With economic growth robust and the stock market at a record high, we’re living the Roaring 2020s now. The economy’s resilience has been remarkable considering the headwinds it has faced. While the outlook under Trump 2.0 involves lots of moving parts, we don’t see the net effects of his policies jeopardizing the Roaring 2020s’ continuation. In this scenario (with our 55% subjective probability), Trump 2.0 might boost productivity and economic growth, keep inflation subdued, shrink the federal government, slow the growth of government spending, and narrow the federal deficit. Among the biggest of the many challenges ahead: not inciting the Bond Vigilantes.
Trumped
The US Constitution was designed to promote gridlock. But the benefits of gridlock are undermined by lawmakers’ spending freely because the Constitution lacks a balanced budget requirement. … Gridlock is good for investing, but the stock market tends to do well no matter who is in the White House. Trump’s proposals—representing a radical change from Biden’s policies—are likely to materialize because he won a clean sweep. Today, Dr Ed examines their ramifications for financial markets. In the “cons” column: Trump’s trade policies and expansion of the federal budget deficit. In the “pros” column: his corporate tax cuts and deregulation plans. Also, we think the inflationary impacts of Trump’s policies could be offset by low energy prices. His deportations might be similar in scale to previous administrations’.
The Fed: Neutral Or Bust?
Something’s amiss with Fed Chair Powell’s explanation for lowering the federal fund rate a second time in two months despite an economy he admits is performing remarkably well. He tied the rationale for the move to the theoretical “neutral FFR,” implying that monetary policy needs to be less restrictive to reach that point, even though that point is intrinsically unknowable. Also implied was that the related risks are worth taking—including potentially overheating a strong economy, untethering inflation, and inciting a stock market meltup. Eric and Ed disagree that risking all that for an elusive goal makes sense.
Bond Vigilantes Are Fed Up
The bond market seems to be ignoring developments that usually halt rising yields in their track. Investors seem focused instead on the stimulus—both fiscal and monetary—that’s likely coming to an economy that doesn’t need it. The effective result: The bond market is tightening the economy itself. The Bond Vigilantes are back and threatening to take the 10-year Treasury bond yield up to the 5% realm. That ought to give FOMC members pause.
Valuation In A Resilient Economy
Goldman Sachs’ bold projection that the next 10 years may be a “lost decade” for stocks, with mere 3% annual returns, is unlikely in the extreme, says Dr Ed. It seems to rest on the assumption that valuations in the future will be lower than today’s. Even without expanding valuation multiples, earnings growth would likely boost the S&P 500 price index at a pace that’s at least twice Goldman’s projection, and returns would be more like 11% a year including reinvested dividends. Furthermore, in our Roaring 2020s economic scenario, earnings growth and valuation—and the index’s appreciation potential—would be even greater than that, driven by a technology-led productivity boom.
Life In The Fast Lane
The Fed’s monetary decisions are only as good as the data they’re dependent on. But economic data can be misleading for several reasons. What looks recessionary may simply be a temporary anomaly that gets revised away or followed by strong data the next month. Today, Dr. Ed makes the case that the Fed’s September decision to cut the federal funds rate by 50 basis points was too much, too soon, as subsequent data have shown. If so, inflation could halt its moderating trend and stock market valuations could inflate unduly in a meltup scenario.
Happy Second Birthday!
As the bull market turns two, Dr. Ed fondly recollects the performance of the young raging bull. At times, the bull charged and at times stomped its hooves on the ground in reaction to the monetary policy, earnings expectations, and economic outlooks waved in front of it. Yet the bull trampled even our heady expectations this year, passing our year-end S&P 500 forecast ahead of schedule. At the risk of more hoof marks, we’re maintaining our year-end targets of 5800, 6300, and 6800 for 2024-26. They reflect a bullish earnings outlook, which reflects rising profit margins in our Roaring 2020s scenario, hinging on a tech-led productivity boom. We might increase our 30% meltup odds if the bull keeps charging ahead over the remainder of this year.
A Dozen Reasons For None-And-Done
It takes a lot to kill an economic expansion, often a credit crisis during periods of Fed tightening that escalates into a credit crunch and a recession. The latest tightening has ended, and that didn’t happen. Now the latest batch of strong economic data should finally lay to rest the diehard hard-landers’ recession warnings. It should also cast doubt on whether the Fed needed to ease at all on September 18. Ed and Eric think not and predict that the Fed won’t cut the federal funds rate further this year. Dr Ed offers 12 reasons that “none-and-done” would be the Fed’s most prudent and plausible policy path for the remainder of the year.
No Hard Feelings
The permabears have fueled much negativity about the outlooks for the US economy and stock market. Their analyses often don’t hold up to scrutiny. Today, Dr Ed puts the prospects of a recession and a bear market into perspective, historically and in light of recent BEA data releases. The data show the economy to be remarkably resilient, including the goods producing sector. … With a strong economy and no recession in sight, why did the Fed ease last week? Answer: To boost demand for labor and reduce unemployment. But easing won’t rectify a mismatch between the skills employers seek and the skills job seekers offer.
Fed’s Dream Economy Versus Ours
The Fed is starting a new easing cycle to avoid a recession that we don’t see coming, based on concern about labor market deterioration that we don’t see occurring. Today, Dr. Ed compares and contrasts the world according to the Fed with the world according to our team, explaining the thinking behind both. Notably, the Fed is risking its credibility by easing without regard for election results, as both presidential candidates’ policies would raise the federal deficit in a one-party sweep, an inflationary prospect. We are rooting for gridlock.
50 Basis Points: Baked Or Half Baked?
It’s a foregone conclusion that the Federal Open Market Committee will be launching a new monetary easing cycle by cutting the federal funds rate when it meets this week. But a weighty decision faces the committee: To cut by 50 basis points or not to cut that much? Fifty is the usual amount kicking off an easing cycle, but the economic circumstances are different this time: There’s no recession clearly barreling toward us. Dr. Ed explores the pros and cons of the decision before the committee, concluding that easing by 25 bps would be the wiser course.
Retailers, Markets & AI
The latest batch of labor market indicators has caused a temporary “growth scare,” in our opinion. Concerns that economic growth is slowing have convinced the markets that the Fed will open up the easing spigots and cut the federal funds rate by more than we expect. … Previous peaks in the yield-curve spread suggest that the bond yield is close to bottoming. … There were bright spots in the employment report too: The payroll and household surveys weren’t all that bad.
Someday, There Will Be A Recession
Today, Dr. Ed puts the notion of a recession still to come into perspective. Since 1945, the US economy has been in recession 14% of the time. Most of the nine recessions stemmed from the credit-crunching effects of monetary tightening. The most recent tightening round won’t likely trigger a recession despite the “long and variable lag” often noted before the economy reacts to tightening. That’s because this tightening round is different in many respects, one being the “Immaculate Disinflation” it has achieved (moderating inflation without a recession). For multiple reasons, we think it’s wrong to expect a hard landing still to unfold from this tightening round. … Q3 is shaping up as another immaculate quarter.
Powell’s Latest Pivot Won’t Be His Last
It was an unambiguously dovish Fed Chair Powell who described the Fed’s intentions for US monetary policy at the Jackson Hole gathering of global central bankers on Friday. In our opinion, he was too dovish for this point in the economic cycle. After all, successful execution of the Fed’s dual mandate basically has been achieved: Inflation is headed on autopilot down to the 2.0% target (thanks to solid productivity gains) and unemployment remains low. Why tamper with success? Powell’s pivot to dovishness assured the financial markets that they were right to expect more easing after the widely anticipated September rate cut. But if the labor market remains resilient or inflation reheats, Powell likely will have to pivot again.
Get Ready To Short Bonds?
Last week saw unfounded US recession fears and global financial market jitters go poof as quickly as they arrived. Dr. Ed examines what the markets were overreacting to when they beat a hasty retreat and the subsequent developments that set investors straight. … Weather was the reason for much of the weakness in July’s economic indicators, suggesting that August’s data may surprise on the upside and that Fed officials might push back against expectations of numerous rate cuts ahead. We expect just one 25bps cut in September and no more for the year, especially since a greater cut could trigger another carry-trade unwind. … As for the bond market, we see three possible scenarios and lean toward the mildly bearish one.
No Recession In Earnings Or In Disinverting Yield Curve
Corporate earnings have never been higher, suggesting that employment should continue to grow as profitable companies expand their payrolls. Today, Ed and Eric put the prospect of a recession into perspective with their “Credit Crisis Cycle.” Ed notes that S&P 500 companies’ record-high forward earnings is a bullish indicator for the stock price index. The S&P 500 forward profit margin is near its record high and expected to hit new highs in the productivity growth boom we project, our Roaring 2020s scenario. … Eric explains why this time, a disinverting yield curve is not signaling an imminent recession as it has in the past. Other relied upon recession indicators are flashing false signals as well.
Rolling Into A Recession?
A weak July employment report does not a recession make. The financial markets reacted on Friday as though it does, but we believe that report was a weather-impacted anomaly and not representative of the strength of the US labor market. Eric & Ed make that case today, explaining what was going on behind the scenes to make Friday’s stock market unusually volatile, why we expect employment data to snap back in August, and why we don’t expect a hard landing of the economy. … Furthermore, the latest productivity data are consistent with our Roaring 2020s outlook.
Gold Medals
If economic performance were an Olympic sport, America would sweep up gold medals. The US economy hit record-high real GDP, real consumer spending, and real consumption per household (a barometer for standards of living) last quarter. It has achieved the feat of “immaculate disinflation”—falling inflation without recessionary fallout—as PCED inflation is fast approaching the Fed’s 2.0% target. Real capital spending by businesses also stood at a record high during Q2. The US housing market is the notable exception to the US economy’s remarkable performance, with weak housing starts and residential investment.
Dueling Views
Characterizing the investing backdrop at this juncture are big unknowns about the near-term future, such as which administration will be controlling fiscal policy six months from now and what monetary policy will be at that time. So it’s no wonder that multiple consensus viewpoints seem to be moving financial markets this way and that. Today, Dr. Ed examines what’s been driving the commodities, fixed income, currencies, and equities markets and discusses his takeaways for the economic and financial market outlooks.
Immaculate Disinflation!
In congressional testimony last week, Fed Chair Powell sounded more dovish than he has this tightening cycle. That clinched financial markets’ growing expectation that the Fed would cut the federal funds rate as early as September. We believe so too. Now that inflation is closing in on the Fed’s 2.0% target, Fed officials are increasingly focused on keeping the unemployment rate low. … From today’s vantage point, it’s clear that “immaculate disinflation”—the lowering of inflation without a recession—is possible, as we had predicted back in September 2022.
It’s Still A Bull Market Until Further Notice
Signs that the Fed might lower the federal funds rate soon have sent stocks soaring, even though those signs were weak economic data. So the Fed Put is back. We’re concerned that the Fed might ease too soon, switching its mandate focus from inflation to unemployment. That could be a wrong move given the likelihoods that the soft patch won’t grow into a recession and that trade policies next year are bound to be inflationary. … Our S&P 500 targets might be too conservative if the slow melt-up continues. Then again, the dearth of bears in the market is a contrarian bearish sign. … As for the labor market, we don’t see weakness in the data but normalization.