The New Era of Investing

A Regime Shift in Interest Rates

* The shift to higher interest rates has impacted correlations between stocks and yields, leading to a more tempered outlook for equity markets.
* Experts believe that interest rates above 4.5% can negatively affect stock performance, while rates below 4.5% could stimulate growth.
* Volatility may be introduced as markets adjust to the higher interest rate environment and the potential for multi-decade milestones in bond yields.

Tariffs and Trump

* President Trump's trade policies have created uncertainty for the economy.
* Tariffs could significantly impact inflation, with estimates ranging from a 0.2% to 3% increase in core PCE inflation.
* The wide range of tariff proposals underscores the potential impact on various sectors of the economy.

Navigating the Bull Market

* Despite concerns about valuation and geopolitical uncertainties, the bull market has continued to extend its lifespan.
* Strong economic growth, low unemployment, and resilient corporate earnings have supported market gains.
* Market breadth has narrowed in recent years, with only a few industry leaders driving the majority of growth.
* However, experts believe that broader market participation is likely to resume in 2025.

The Economic Cycle Turns

* The US business cycle has become less volatile due to factors such as automatic stabilizers and a diversified economy.
* Inverted yield curves are often seen as a precursor to recessions, but historical data suggests that recessions occur after the curve normalizes.
* Global economic growth has been uneven, with the US and Australia outperforming other developed markets.
* Disruptions in supply chains and increased consumer spending have contributed to inflationary pressures.
* Despite concerns about the depletion of excess savings, household balance sheets remain robust.

Labor Market Dynamics

* Job growth has slowed, approaching the Fed's long-run expectations.
* Wage growth has also moderated, limiting the potential for job-hopping and putting downward pressure on inflation.
* Labor productivity has increased, benefitting the long-term economic outlook.
* However, the slowdown in hiring and the quit rate may limit the reallocation of workers to more productive jobs.

Technology and the Economy

* The AI-driven tech boom is now a significant driver of the real economy.
* As a share of GDP, technology-related industries are approaching levels seen during the telecom-driven tech boom of the late 1990s.
* The convergence of technology dynamics and the business cycle is creating new investment opportunities.

Fiscal Policy and the Deficit

* Fiscal policy has become the primary driver for markets this year.
* Rising deficits and debt issuance have contributed to a rise in real yields.
* The path of the budget deficit remains uncertain, with potential risks both from additional tax cuts and cuts to spending.
* The growing current account deficit poses a long-term risk to the US economy.