The opinions expressed below are my own and do not necessarily represent those of Visdom Investment Group, LLC.
It was hawkish
Warsh’s speech was hawkish. He said that the current rate is not restrictive. He mentioned price stability repeatedly and his comments about inflation suggest waiting-and-seeing is no longer appropriate. The stock market fell. Yields rose across the curve, most significantly at the 2-year. Fed Funds futures dropped and now price a 57% probability of a hike September 16. Capital flow was surprisingly light again, 82%.
OK. The Fed isn’t officially giving forward guidance but today’s speech was as subtle as a sledgehammer. Maybe miraculous data prints beforehand but if things continue as we expect, the Fed is hiking in September.
Will that be all that’s necessary? We don’t know at this point. The market is pricing 2 hikes, with rates peaking June of next year. Partial eases are priced thereafter.
Rather than get bogged down in details and minutia, let’s go big picture. The Fed thinks that it has to put the brakes on the economy to drop the inflation rate. It will take time for the next hike or two to actually work its way through the economy. The economy is already lukewarm. How much slower will it get? There is also a risk that the Fed will push the economy into a recession.
This is the bear case for stocks and the bull case for bonds.
Inflation better drop fast if equity bulls want to benefit. With the latest tariffs pushing prices the wrong way and the Iran war continuing, it is *unlikely* that inflation is going to drop fast enough to keep the Fed off the brakes.
God knows what Trump will say when the Fed hikes. And that will be charming patter compared to what will happen should we experience a recession.
The analysts on the Street currently expect these earnings numbers for the S&P 500.
2026: $328
2027: $412 (25.6% growth)
2028: $472 (14.6% growth)
How will those numbers change once the Street gets a whiff of slowing economic growth or a recession?
Predictions are tough to make, especially about the future… but stocks look like they’ve got tough sledding for the rest of the year.
See you tomorrow.
-Mike
Visdom Market Commentary
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