A September rate cut is all but confirmed at this point with the probability at 100% according to the CME Group FedWatch tool. Even though the latest inflation data print was slightly higher than expected, progress is progress. A question on many investors’ minds is how stocks and bonds may be impacted. JPMorgan Global Market Strategist Meera Pandit recently wrote what the 4 scenarios could be for stocks and bonds over the next 12 months. While the uncertainty markets experiences post ‘Liberation Day’ has abated, there are still unknowns a-plenty (it’s the future of the markets, of course there are unknowns!).
- Full steam ahead: Accelerating growth (stocks up, yields up) – Weakness in the labor market proves to be a head-fake, unemployment remains low, and tariff impacts prove to be manageable. With peak uncertainty behind us, consumption picks up and AI capex balloons, further aided by tax cuts enacted. The Fed delays rate cuts. Stocks, yields, and the U.S. dollar rise.
- Steady as she grows: Slow and stable growth (stocks up, yields down) – The U.S. economy is growing but slowing. Corporations pick up most of the tab on tariffs, which weighs on profits, but revenues are solid given the consumer absorbs less of the cost and inflation remains relatively contained. Markets drift higher and yields drift lower. The Fed cuts modestly and the U.S. dollar falls further.
- Rough waters: Recession (stocks down, yields down) – Cost pressures and lingering uncertainty prompt companies to pull back on hiring and capex. Labor market weakness accelerates, and unemployment rises. Consumers pull back on spending. Profits decline. The U.S. economy enters recession. Stocks tumble, but bonds protect. The Fed cuts meaningfully to support the economy. The U.S. dollar rises as investors seek refuge.
- Inflation unanchored: Stagflation (stocks down, yields up) – Inflation reaccelerates due to tariffs and rising service costs. The labor market weakens, and consumption slows. Growth sputters but avoids recession. The Fed is forced to reverse course and hike rates. This U-turn in monetary policy causes stocks to stumble and the dollar to fall, while yields spike above 5%.
Sometimes figuring out how the economy can impact markets and attempting to figure out the right action to take for different scenarios can be overwhelming. What we think today may not even be relevant tomorrow! We hope our clients can take comfort in knowing PDS is always monitoring financial plans and portfolios for any rebalancing, tax loss harvesting, or risk adjustment opportunities. As always, we are happy to answer any questions or have a discussion about planning or investments. We hope everyone has beautiful start to fall!
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