What Could Possibly Go Wrong (with special guest Jim Lucier of Capital Alpha)
Audio Brief
Show transcript
This episode covers market seasonality, the legal challenges facing tariffs, Federal Reserve policy, and evolving labor market dynamics.
There are four key takeaways: market seasonality suggests caution in September, existing tariffs face significant legal vulnerability, a Federal Reserve rate cut is not guaranteed despite market expectations, and structural shifts are impacting the labor market.
Historically, September is the stock market's worst-performing month, a trend reflected in the weak start to this month. Analysts suggest the market may have already peaked, indicating a potentially rough period ahead.
A recent appellate court ruling declared many Trump-era tariffs unconstitutional. This creates ongoing market disruption and uncertainty, as the issue may advance to the Supreme Court. A decision against the tariffs could trigger refunds and significant policy changes.
Despite market expectations for a September rate cut, strong economic data, including GDP growth over three percent and a rebalancing labor market, suggest the Federal Reserve may hold rates steady. The Fed would need to justify a reduction given current economic strength.
The labor market shows signs of rebalancing, with low layoffs but struggles for recent college graduates. This difficulty may be partly AI-related, as employers evaluate technology's impact on staffing needs. Geopolitical factors also influence trade alliances, with US tariff policies potentially pushing India closer to China and Russia.
These insights provide a valuable perspective on the current economic landscape and its future direction.
Episode Overview
- Ed Yardeni discusses the historical weakness of the stock market in September and the potential for a recent market top.
- The episode features a conversation with guest Jim Lucier about a significant appellate court ruling that found many of President Trump's tariffs to be unconstitutional.
- Yardeni analyzes recent economic data, including GDP and labor market indicators, and considers their implications for the upcoming Federal Reserve interest rate decision.
- The discussion covers geopolitical uncertainties, such as the war in Ukraine and shifting trade alliances involving India, China, and Russia.
Key Concepts
- Market Seasonality: The episode begins by highlighting September's reputation as a historically poor-performing month for the stock market, noting that the month has started on a weak note.
- Tariff Turmoil: A central theme is the ongoing legal and economic disruption caused by tariffs. A recent appellate court ruling deemed many of Trump's tariffs unlawful, creating further uncertainty as the issue likely heads to the Supreme Court.
- Federal Reserve Policy: Yardeni questions the market's expectation of a Fed rate cut in September, pointing to strong GDP growth (over 3%) and a rebalancing labor market as factors that might lead the Fed to hold rates steady.
- Labor Market Dynamics: The discussion touches on various labor market indicators, including the JOLTS report, consumer confidence, and the declining breakeven number for payroll employment. It also notes that while layoffs are low, some groups like recent college graduates are struggling to find jobs, possibly due to employers evaluating the impact of AI.
- Geopolitical Landscape: The episode briefly covers the continuing war between Russia and Ukraine and notes that US tariff policies may be inadvertently pushing countries like India closer to China and Russia.
Quotes
- At 00:44 - "September has a reputation of not being such a great month and so far, so bad." - Setting the context for the market's weak start to the month, in line with historical trends.
- At 01:05 - "We may very well have made a top in the market last week and that September could be a rough week up ahead here." - Referencing a note he published over the weekend, suggesting a potential short-term peak for stocks.
- At 01:53 - "We've been calling this thing Trump's tariff turmoil and I think the concept still applies, it's still a mess." - Describing the ongoing legal and economic uncertainty created by President Trump's tariff policies.
- At 06:42 - "Some of that may be AI-related possibly, particularly people coming out of college. Maybe employers are not quite sure what AI is going to do for them." - Speculating on a potential reason why recent college graduates are having more difficulty finding jobs.
- At 11:09 - "3% is not 2% and the Fed will have to do some explaining why they felt the need to lower rates on September 17th." - Questioning the justification for a Fed rate cut when inflation remains stubbornly above their 2% target.
Takeaways
- Be cautious in September, as it is historically the worst-performing month for the stock market.
- The legal foundation for many existing tariffs is weak, and a Supreme Court decision could lead to their removal and a refund of duties paid, creating significant market disruption.
- Don't assume a Federal Reserve rate cut is guaranteed; strong economic data could lead the Fed to hold rates steady, potentially disappointing the market.
- The labor market is rebalancing, but structural shifts, possibly driven by AI, may be making it harder for younger, less-experienced workers to find employment.
