Weekly Newsletter: August 25, 2025
With apologies to the late Fats Domino, “I’m walking, yes indeed, and I’m talking about inflation and labor.” While not nearly as catchy, Powell walked the line between inflation and labor in his Jackson Hole speech. What Wall Street heard was that the barn door was swinging open for rate cuts at the September meeting. What Powell said was that the shifting risks between labor and inflation “may warrant adjusting our policy stance”. A cynic might argue that this does not necessarily mean that the shift is lower. The point that was being made was that, as of today, it looks like the labor market is weakening faster than inflation is rising, so the Fed should address the weakening labor market first. Others would argue that the economy is doing just fine, and the lack of immigration over the past few months may mean lower overall job growth is the “new normal”. For what it’s worth, the unemployment rate remains historically very low and has been in the low 4% range (outside of Covid) since 2017. Further, today’s unemployment rate is among the lowest going back to the 1970s. The fear is that once unemployment picks up, it does so slowly, then very quickly. It is the Fed’s intention to stop the “very quickly” part before it starts. In two weeks, the jobs report is due, and revisions will be made to the prior 18 months of data. Those revisions will go a long way in determining just how weak the labor market is and whether the Fed is/should be cutting rates in September. The Fed is walking a fine line indeed.
There was little in the economic data last week to indicate that the economy is picking up or falling apart. To be sure, much of the data was second or third-tier reports. Interesting was the release of the Fed’s minutes from their last meeting. There were two dissents from keeping rates steady, but there was plenty of discussion and concerns regarding the impact of tariffs on prices and inflation through year-end. That seemed to be confirmed by the raft of earnings releases from the retail sector. Wal-Mart, in a surprise, actually missed its quarterly estimated earnings, but more importantly, it was what they said that caught investors’ attention. The impact of tariffs has been gradual, so shoppers have not changed their habits. However, costs continue to rise as Wal-Mart and other retailers replenish inventory with now higherpriced goods. The impact will likely be a shift in buying habits, especially from lower-income shoppers, well into next year.
The bond market is supposed to be the “smarter market” when compared to the stock market. Stocks reacted strongly to Powell’s comments, as did the bond market. However, the long-term bonds (over 20 years to maturity) moved very little over the week and are slightly higher in yield than at the start of the year. It is the long-term yields that “worry” about inflation, rising in yield as inflation picks up and falling as it declines. In that regard, Powell’s comments regarding labor markets being a bigger worry than inflation may be correct. If we believe comments from retailers, there may be more inflation on the way that has not been priced into the bond market.
Maybe this time for sure! So goes the mantra for value, and small-cap investors this week. Friday’s rocketing higher missed the slow deterioration of the growth names in favor of the remaining parts of the market. On the week, large growth stocks fell nearly 1%, while value and small stocks rose by over 2%. There have been so many rallies by value vs. growth that end up with value stocks rolling over and growth once again dominating the markets. Large-cap value stocks are only cheap relative to the growth stocks. Based on their historical valuation range, even large value stocks are expensive. The only really inexpensive parts of the market are in the mid and small-cap range. The knock on these stocks is that they need lower interest rates to refinance their debt, and they tend to be more domestically focused, not global like the large-cap stocks. Are investors starting to question the financial rewards of AI for many of the tech stocks? The next few weeks may show more of an appetite for other parts of the market or a quick rotation back to the favorites of the past decade or so.
The last big vacation week on Wall Street should be sleepy outside of earnings from Nvidia. Much of the tech rally will be keyed from this last really big earnings report this season.
The opinions expressed in the Investment Newsletter are those of the author and are based upon information that is believed to be accurate and reliable but are opinions and do not constitute a guarantee of present or future financial market conditions.