Wall Street Sounds the Alarm… It would not surprise me to see the market give back 10–15% over the coming weeks and months. Valuations are very full and the economic data is weakening. But something to watch is the bull-steepening of the 10-yr / 3-mth yield curve from inversions. Whilst not a great timing too - generally its 'vector' is correct. That's a warning - despite the Fed cutting rates.
S&P 500 Faces a Litmus TestThe labor market is clearly slowing. The "stag" in stagflation is here - what's less clear is the "flation" component. With respect to growth - we see slowing in housing, consumer spending and now job creation. The payrolls data was nothing shy of a disaster. And whilst the headlines will report on the dismal 73,000 jobs added (well below the ~140K job additions expected) - the massive 258,000 negative revisions over May and June is cause for concern.
Powell in No Hurry to Cut RatesYou have to feel for Jay Powell. He's in a tough spot - facing pressure from the market and the President to cut rates. However, to his credit - he can separate the noise from the signal. The Fed Chairman reiterated his narrative - signaling the need for a more cautious stance amid ongoing economic uncertainty. In addition, he emphasized the Fed needs to maintain credibility and independence. However, there was some dissent within the ranks...
15%+ Tariffs Are Not Reason to CheerThe market is cheering the "better than feared" trade deals with the likes of Europe and Japan. Yes, 15% is better than 30%. But 30% would be an embargo - not a tariff. 15% will not be good for global trade. Growth will slow; consumption will fall; resulting in fewer jobs. Trump's terrible tariffs will be at least ~12% more than what we had at the beginning of the year. This consumption tax will need to be paid by someone... just a question of who. The market is not pricing this in....
A Very Complacent Market… Recent developments in Trump's draconian trade policies — marked by steep tariffs, fluctuating commodity markets and geopolitical maneuvers — present a highly complex and uncertain landscape. Despite dramatic announcements and headline-grabbing tariff threats, markets have remained oddly resilient, while underlying forces quietly shift. For e.g., Trump's imposition of steep tariffs—such as 200% on pharmaceuticals and 50% on copper—has less to do with traditional economic rationale and more with political leverage
S&P 500 Hits Stall SpeedAnother week comes to close - as we draw near the end of the second quarter. For the past two weeks or so - investors are reluctant to push prices much higher. From mine, the index is not only expensive - trading near a forward price-to-earnings (PE) ratio of 22x - the downside risks don't handily offset the (possible) upside reward. For eg, it would not surprise me to see the S&P 500 trade up to a zone of 6,200 (adding another 5% or so). However, equally I see a possibility for a 10% to 20% move lower given the risks to earnings growth, inflation (from tariffs), employment and geopolitical tensions.
Powell’s Limited OptionsNot for the first time, the Fed is in a very difficult spot. Whilst always a dominant force in global markets, for now, Powell's team is not in the front seat. We learned this week the direction of U.S. monetary policy (over the coming months) depends heavily on developments well beyond the Fed's control. And unfortunately for investors - it could be a long (US) summer. In its latest decision, the Fed held rates steady, as expected, citing strong economic activity, low unemployment, and persistent—but slightly elevated—inflation.
Patience Alone Doesn’t Get it DoneOver the past ~40+ years - the S&P 500 Index has returned an average of ~9.3% annually exc. dividends (i.e., 171.6 Jan 1985 to 5,979.5 Jan 2025). If we limit that to the past decade (from 2015) - that avg annual return increases to 11.4% (excluding dividends). But what matters most is (a) the price you pay; and (b) when you get out. Sitting tight for 10 years does not guarantee a 10% return...
Breaking Up is Hard to DoBreaking up is always hard to do. Your dog looks at you dazed and confused... your Netflix account is no longer shared. And who gets the air fryer? The whirlwind bromance between Elon Musk and Donald Trump appears to be over. It's not a clash of gigantic egos. And like most breakups - things seemed to have moved to the second of five (breakup) phases.. anger
Don’t Choke On Your TACOsThe market is betting Trump is all bluster and no action. The acronym "Trump Always Chickens Out" (TACO) is sure to piss the President off. Now, if the TACO trade is right, then Trump's threats will lose their power as a negotiating tactic. Therefore, on the assumption Trump believes in protectionism - he may have to follow through on some of his rhetoric. Markets seem to think that won't happen...
