As shared with those on my Personal Portfolio / Stock Watch tier over the weekend, I’ve been thinking a lot about the Fed’s 50 bps cut, the US fiscal spending situation, and market pricing of late.
And my updated views are that the Feds may have made a mistake with the 50 bps rate cut – that may result in the return of inflation in 2025.
So I wanted to expand on that in today’s article, and the implications to my portfolio positioning.
Quite a few of you have been asking whether to take profits on REITs as well, so we will discuss REITs in tomorrow’s article (as the interest rate outlook discussed here has big implications for REITs).
Why I think inflation may return in 2025?
The high level thinking is as follows:
The US government is running a huge budget deficit (this is unlikely to change regardless of whether Harris or Trump wins in 3 weeks) The Fed’s 50 bps rate cut has led to investors overwhelmingly pricing in a soft landing – this has the potential to become self-fulfilling in loosening financial conditions across the markets (especially with lower credit spreads – making it cheaper for companies to borrow). Meanwhile bank lending standings have loosened. This has led to easier credit for companies, and expanding money supply. For as long as the US stock market continues to power to all time highs, this is a key messaging signal and wealth effect for the US consumer (which has a lot of wealth tied to US stocks)
If you play this out to the logical extreme, how this could play out is:
Short term
A resilient US economy coupled with Fed easing and a large fiscal deficit could send asset prices