Investors should brace themselves for more short-term bouts of volatility, says Kevin Mahn

Key Concepts

• PCE Inflation Report
• Volatility (VIX)
• S&P 500 Record Highs
• Price-to-Earnings Ratio (PE)
• Interest Rate Cuts (Federal Reserve)
• Inflationary Pressures (Tariffs, Immigration, Fiscal Policy)
• GDP Growth
• Labor Market

Market Overview and Volatility

• S&P 500 Performance: The S&P 500 has rebounded significantly from a poor start to the year, reaching record highs. There have been 20 record highs this year, following 57 record highs last year.
• Volatility Crash: The VIX (volatility index) has declined by 69%, marking the largest volatility crash on record over the prior 20 weeks.
• PE Ratio: The current price-to-earnings (PE) ratio is approximately 26, which is above the 5 and 10-year averages.
• Outlook: Investors should anticipate short-term volatility, but not retreat entirely from the market due to ongoing growth opportunities.
• Investment Focus: Infrastructure, aerospace, and defense sectors are highlighted as areas with significant spending and growth potential.

PCE Inflation Report and Interest Rate Cuts

• Core PCE Estimate: The core PCE (Personal Consumption Expenditures) estimate is 2.9% year-over-year. This is the Federal Reserve's preferred inflation gauge.
• Rate Cut Scenario (Below 3%): If the core PCE is below 3.0%, a 25 basis point interest rate cut in September is likely.
• Rate Cut Scenario (3% or Higher): If the core PCE is 3% or higher, the Federal Reserve may pause interest rate cuts for another month.
• Market Expectations: The market has already factored in a 25 basis point rate cut for September.
• Impact of No Rate Cut: If rate cuts are priced out, it could create short-term volatility.
• Cash on the Sidelines: There is substantial cash waiting to be invested in the stock market, which could mitigate the impact of negative news.
• Rate Cut Predictions: The speaker anticipates two rate cuts this year (September and December) and two rate cuts next year.

Federal Reserve Policy and Economic Conditions

• June Policy Error: The speaker believes the Federal Reserve should have cut interest rates in June when they raised their forecast for unemployment to 4.5% and lowered their forecast for GDP growth to 1.4%.
• GDP Growth Forecast: The Federal Reserve projects GDP growth to remain below 2% for the next two and a half years.
• Inflation Concerns: The Federal Reserve is concerned about the potential inflationary impact of tariffs, which led them to raise their inflation forecast to 3.1%.
• Labor Market Focus: The speaker believes the Federal Reserve is now more concerned with the labor market than with inflation.
• Jackson Hole Speech: Fed Chair Jay Powell's speech at Jackson Hole emphasized the conditions in the economy and the labor market relative to price stability.

Conclusion

The market's trajectory hinges significantly on the upcoming PCE inflation report. A reading below 3% likely solidifies a September rate cut, while a higher figure could delay it, causing market volatility. Despite potential short-term fluctuations, the speaker remains optimistic due to the amount of cash on the sidelines and the focus on growth sectors like infrastructure and defense. The speaker also suggests that the Fed should have already started cutting rates given the GDP and unemployment forecasts. The Fed's focus seems to be shifting towards the labor market, which supports the expectation of future rate cuts.