Investors’ Outlook: Of carrots and sticks

Of carrots and sticks

As July melted into August, markets found themselves faced with carrots and sticks as each headline either dangled relief or swung a blow. Tariffs and geopolitical posturing tested markets, while strong company earnings and hopes for interest-rate cuts dangled optimism.

Investors found their own carrots in the meantime and shrugged off the trade-policy blitz, with the mood having turned risk-on. Market participants justified it with expectations of upcoming rate cuts by the US Federal Reserve. And those hopes were only reinforced when Chair Jerome Powell, speaking at the annual Jackson Hole symposium in Wyoming, cautiously signaled that the first cut in nine months could indeed be on the table as soon as September. We believe policymakers have a tough call to make as they weigh stubborn inflation against growing risks to the labor market – while trying to time the cuts right. The Fed’s dot plot¹ points to a total of 50 basis points in cuts by year-end, but we believe inflation doesn’t make it easy to simply open the floodgates. It complicates the picture and limits the Fed’s room to maneuver.

As reciprocal tariffs took effect, US President Donald Trump turned up the heat on India, doubling tariffs to 50 percent over its Russian oil purchases. He imposed the same levy on Brazil, citing the trial of former President Jair Bolsonaro. Elsewhere, the US-China trade truce was extended to November, temporarily easing tensions between the world’s two largest economies. Still, Chinese growth showed a general downward trajectory, weighed down by a struggling property market and softer loan demand. Additional stimulus from Beijing now appears more likely to us in the foreseeable future.

Strong earnings results helped lift US equities to record highs even amid tariffs, consumers seem to be pretty resilient, we’ve seen stimulus ranging from European spending to NATO budgets, and even the prospect of a ceasefire in Ukraine. Trump and Vladimir Putin met in Alaska in early August, and while the talks produced no breakthroughs, the dialogue stirred hopes of cooling hostilities. It appears that as investors return from their summer holidays, they’re ready to put money back to work again.

This leaves some investors questioning whether markets have become too optimistic on equities. We think not necessarily. There appears to be plenty of capital waiting on the sidelines, which could support further gains. But we also believe selectivity matters, whether through market-capitalization-weighted indexes or regional allocations rather than allocating to broad-based indexes.

In this Investors’ Outlook, you’ll find a detailed look at a topic that has been a concern for market participants of late, namely central bank independence. You’ll also learn about what’s been screwing with US beef prices and our take on stock markets.

We aim to help our clients reach for the carrots while shielding portfolios from the sticks.