A Tight Economy Might Not Be Ready For These Cuts
Four Companies That Will Perform In Any Economic Climate
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Rate cuts just might ignite a fire.
U.S. gross domestic product (“GDP”) grew 3.3% in Q2. The current unemployment rate is 4.3%. And the latest consumer price index (“CPI”) showed prices are rising at close to 3% year-over-year. All of this points to a tight economy with little slack.
And 3% inflation is nowhere near the 2% rate that the Federal Reserve has officially targeted. Further, many analysts believe the full effects of the Trump administration’s tariff policies have yet to fully feed into the CPI reports. That means inflation could potentially accelerate in the coming months. And despite all the promises about Elon Musk and the Department Of Government Efficiency (“DOGE”) cutting the federal budget, government spending continues to run completely out of control.
So, given that backdrop, of course the Federal Reserve has decided to… cut interest rates – reducing the Fed funds rate 25 basis points to around 4.25% from 4.50% – and hinting at more to come later this year. As irresponsible as this might seem, this is the current state of affairs.
Adding liquidity to financial markets in this economic environment is akin to throwing a match on a towering inferno. Gold, one of the clearest barometers of inflationary pressures, has taken another leg up in the last month to yet another all-time high at nearly $3,700 per ounce. Hard assets are sending a very clear signal that inflation is not going away.
While it might seem like party time for stocks, investors should be wary. So far, the reflexive reaction to Fed cuts has been for longer-term U.S. bond rates to fall. The 10-year yield has now dipped from around 4.3% a month ago to just above 4.0%. That is pretty close to panic lows hit immediately after Liberation Day, when on April 2, President Donald Trump announced his tariff plans, and about the lowest levels in close to a year. But the last chapter on this has yet to have been written.
It isn’t clear why financial markets will just give the U.S. a pass and allow the government to fund such recklessness at lower rates. In fact, if inflation picks up – as gold is signaling – and government spending continues unabated, it seems possible that longer-term rates will end up higher after the Fed executes its series of rate reductions, not lower. That would likely act as a shock to equity prices and force a potentially significant market correction. And that would leave the Federal Reserve with no good options.
So what is an investor to do in such an environment? Certainly continue to focus on gold and other hard assets that perform well in an inflationary backdrop. And look for equities with strong cash flow, good balance sheets, and high-quality businesses that can thrive even in a volatile economic environment
In this month’s issue of the Big Secret On Wall Street, we provide updates on four stocks that we think will continue to perform well. One is a leader in health and wellness that continues to capitalize on its loyal following. Another is an energy-drink powerhouse in the midst of a potentially transformative acquisition. There is more feedback on a company taking the industry reins in weight-loss drugs. And finally, a value story in the energy space that looks to have dodged a political bullet.
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