John Lonski on Stock Market Risks, Inflation, and Fed Policy

Economic Data and Fed Policy

• 📊 The latest PCE data showed a moderate containment of inflation, not going "through the roof," which is a key factor for the Fed.
• 💡 Upcoming labor market reports, specifically job creation numbers, are crucial for shaping Fed policy, with market expectations for August job growth at 75,000 or less.
• 📉 If job creation remains low, it increases the likelihood of the Fed cutting rates by at least a quarter percentage point in September.

Inflation and Tariffs

• ⚠️ While the Fed views current price inflation as transitory, tariffs are expected to cause a one-time boost to prices, peaking by early 2026.
• 💰 A slowing labor market is anticipated to help contain price inflation and potentially slow consumer spending growth, making it harder for companies to raise prices.

Stock Market Outlook

• 📈 The stock market has performed strongly, reaching new records, but this success presents its own risk.
• ⚠️ Stocks are richly priced, indicating above-average valuation risk for new investors.
• 💰 The market value of US common equity is currently about 205% of GDP, a historically high level.
• ⚠️ Investors are advised to take a cautious approach, avoiding rushing to put significant new money into the market.
• 🚫 While not advising to sell, the current market conditions suggest avoiding aggressive new investments.