It’s Still A Bull Market Until Further Notice
Audio Brief
Show transcript
This episode features economist Dr. Ed Yardeni, who presents a bullish case for the U.S. economy and stock market, challenging recession fears.
There are four key takeaways from this discussion. First, current economic softening represents a healthy normalization, not a recessionary signal. Second, the Federal Reserve's readiness to cut rates provides a significant market backstop. Third, the bull market enjoys broad support beyond mega-cap stocks. Fourth, the absence of a major credit crunch has been critical in avoiding a recession.
Dr. Yardeni interprets recent labor market data, like declining job openings, as a healthy return to sustainable pre-pandemic levels. He notes that unit labor cost inflation is down to 0.9% year-over-year, indicating underlying inflation is well controlled and heading towards the Fed's target.
Investors are confident the Federal Reserve will cut interest rates to prevent a significant downturn. This expectation, dubbed the "Fed put," provides a safety net for the market, overriding concerns from mixed economic indicators.
The current bull market extends beyond just the Magnificent Seven mega-cap stocks. Analysis confirms broad market support, with positive momentum seen even when excluding these largest companies. The S&P 500 is outperforming forecasts and could reach 6000 well before late 2025.
Historically, credit crunches precede recessions and soaring unemployment. This cycle has largely avoided such a crisis. This critical distinction explains why the economy has not entered a recession.
While potential political headwinds from inflationary policies exist, Dr. Yardeni believes underlying economic and market conditions remain robust.
Episode Overview
- Economist Dr. Ed Yardeni presents a bullish case for the U.S. economy and stock market, arguing against recession fears.
- A central theme is that the labor market is not weakening but rather "normalizing" to a sustainable, pre-pandemic state.
- The market's resilience is attributed to the belief that the "Fed put is back," meaning the Federal Reserve will cut interest rates to prevent a significant downturn.
- The discussion explores market breadth, investor sentiment, and historical recession triggers, concluding that underlying conditions remain strong.
- Potential headwinds from the national debt and inflationary policies from both presidential candidates are considered, which could impact future Fed decisions.
Key Concepts
- Bullish Market Outlook: The S&P 500 is performing ahead of the firm's 5400 year-end forecast and could potentially reach 6000 well before the end of 2025.
- Labor Market Normalization: Recent softening in labor data, such as declining job openings and rising unemployment claims, is interpreted as a healthy normalization from unsustainable post-pandemic highs, not a sign of a looming recession.
- The "Fed Put": Investors are confident that the Federal Reserve is biased towards easing and will cut interest rates at the first sign of serious economic trouble, providing a safety net for the market.
- Absence of a Credit Crunch: Historically, recessions are preceded by credit crunches. The avoidance of a significant credit crisis in this cycle is a key reason a recession has been averted.
- Broader Market Strength: The bull market is not solely driven by the "Magnificent Seven" mega-cap stocks; the broader market also shows positive momentum.
- Investor Sentiment as a Contrarian Indicator: The Investors Intelligence Bull/Bear ratio is approaching levels that signal over-bullishness, which could set the stage for a technical market correction.
- Political Headwinds: Inflationary policies proposed by both presidential candidates, such as tariffs and increased spending, could force the Fed to keep interest rates "higher for longer."
Quotes
- At 2:44 - "The market is figuring that the Fed put is back." - This is his explanation for why the market is not being held back by recent weak economic indicators.
- At 3:30 - "The labor market isn't weakening, it's normalizing." - Yardeni offers his perspective on recent labor market data, contrasting it with more bearish interpretations.
- At 14:58 - "even if you take out the Magnificent Seven, you still get a bull market." - The speaker emphasizes that the current stock market rally has broader support beyond just the largest tech companies.
- At 16:51 - "One of the reasons that we've had recessions and soaring unemployment is because of credit crunches... that really hasn't played out so far." - He explains his view that the absence of a severe credit crunch is a key reason the economy has avoided a recession.
- At 32:31 - "Unit labor cost inflation is down to 0.9% year-over-year percent change through the first quarter, and that's a really good indicator of the underlying inflation rate." - He highlights this key data point as strong evidence that inflation is under control and heading toward the Fed's 2% target.
Takeaways
- View current economic softening not as a sign of recession but as a healthy "normalization" back to a more sustainable, pre-pandemic pace.
- The Federal Reserve's readiness to cut rates provides a significant backstop for the market, overriding concerns from mixed economic data.
- The current bull market is supported by more than just a few mega-cap stocks, indicating broader underlying strength.
- The lack of a major credit crunch is a critical factor that has allowed the economy to avoid a recession, distinguishing this cycle from historical downturns.
