It will be a busy week of data for investors to chew on this week. The Fed’s FOMC meeting will conclude Wednesday. Despite all the hoopla surrounding the future of Jerome Powell and President Trump’s wish to cut interest rates sharply, the odds of a rate cut are very, very small. But investors will be watching for any sense that rate cuts could come as early as September. Right now, with GDP growth still solid, unemployment barely above 4%, and core inflation readings closer to 3% than 2%, it is unlikely that Powell will set the table for rate cuts in September, although he will leave the window open for a cut. Investors will also focus on whether any voting members dissent from a decision to hold rates steady. Might there be a schism within the FOMC? If there is, markets will react.
Speaking of inflation, on Thursday the Fed’s preferred inflation data point, the PCE deflator, will be announced. Again, while there may be progress in reducing inflation, there are likely going to be few signs that anything close to the Fed’s 2% target is imminent. Also worth noting, a key difference between the CPI and the PCE is that the former weights shelter costs more heavily. These have started to trend lower meaning progress toward the 2% target will be more elusive looking at the PCE numbers.
Friday will see the monthly jobs report. Consensus is for gains of a bit over 100,000 net new jobs and a slight uptick in the unemployment rate to 4.2%, hardly a worrisome number. If one is going to look for a market reaction, look no farther than what the 10-year Treasury yield does this week.
Against this backdrop of an overload of important economic data, this week will be the heart of second quarter earnings season. Four of the Mag 7 will report, Apple#, Meta Platforms#, Microsoft#, and Amazon#. Expectations are high with the exception of Apple. How well expectations are met or exceeded will likely steer the market’s direction near term, now that the 7 leading companies comprise over 35% of total market cap. Hence, the importance attached to their earnings reports this week. Last week, markets received Alphabet’s# report well, perhaps a harbinger of what’s to come. Tesla disappointed but its economic fortunes are only loosely tied to the other six.
Of course, the other key focus of investors this week will be the self-imposed August 1 deadline for nations around the world to reach tariff treaties (or at least the outline thereof) with the United States. President Trump promises that for those who don’t reach agreement before Friday, tariffs of 15-50% are likely to be imposed. Of course, we have been through this wringer before, most notably immediately after Liberation Day at the beginning of April. So, the actual outcomes are still a big variable. Markets seem to feel that any tariff damage can be contained with little disruption to our growth. Pro tariff proponents point to the fact that consumer prices have not risen appreciably due to tariffs so far. For the most part, businesses or foreign exporters have eaten the tariffs without raising prices, in part waiting for the fallout from the August 1 tariff announcements before making changes. At the same time, we have heard from some of the biggest retailers, notably Wal-Mart and Amazon, that price increases are beginning to be implemented. All this is more reason for the Fed to stand back and wait six weeks before the next FOMC meeting to make any changes in short-term rates.
With averages reaching record highs once again, the obvious question is can it continue? In favor of more upside, the economy continues to grow, most American workers remain secure in their jobs, inflation is an issue but not out of control, the 10-year Treasury yield has remained contained within a narrow range, and earnings appear to be matching or exceeding expectations. Finally, the huge reconciliation bill, now passed into law, is stimulative to economic growth although most of that stimulus will hit in 2026 or beyond.
But there is a fly in the ointment. There almost always is. And that is speculation. Start with the meme stocks. These were “recommendations” on Internet chat sites of stocks whose sole important characteristic was the outsized short position for each. So, retail investors piled in to create a short squeeze. Does it matter that real fundamental investors presumed that Kohl’s was headed for the same retail graveyard populated by the likes of Sears, Kmart and JCPenney? Kohl’s was simply one of several reminiscent of the short squeeze that targeted names like GameStop, Bed, Bath & Beyond and AMC Theatres four years ago. The gambit worked for a while before most headed toward oblivion. Next, recollect SPACs, those blind pools sold to thirsty investors. If the SPAC made a great acquisition, investors could be big winners. If no target could be identified within a reasonable period of time, investors had the right to redeem for what they paid in (without interest, of course). Those that were subject to redemption did notably better than most that rushed to overpay for something that didn’t work.
But the real biggie is the rage over bitcoin. The GENIUS bill and associated legislation were targeted to enable cryptocurrencies to function as seamless digital forms of money across legitimate blockchains. That concept holds a lot of promise for stablecoins, etc. But it also delineates a stable digital currency from one with wildly fluctuating values. One can view bitcoin as a store of value or a vehicle of speculation. Take your pick. What it isn’t likely to be is a form of digital money. Rather, it is a form of digital gold.
I have expressed my skepticism in the past. Obviously, so far that skepticism has been misguided. But hear me out. So far this year, corporation have raised funds to buy $86 billion in bitcoins through mid-year. To put that into perspective that is twice what was raised in public markets via initial public offerings (IPOs). These purchases in almost all cases were simply bets that the value of bitcoin would continue to rise. In some cases, public companies that did little more than own bitcoins saw their shares sell at close to twice the implied value of their bitcoin holdings. As a result, they could sell additional shares at inflated values and buy more bitcoin. Seeing the success of companies like Strategy, others are attempting to mimic that success and buy more bitcoins.
The price of bitcoin will continue to rise as long as there are more buyers at any given point in time than sellers. But history says that is unlikely to happen indefinitely. When the speculative bubble of 2021 burst, stocks declined by more than 20%. Bitcoin fell by more than 50%. Don’t ask me to predict the next major move in the value of bitcoin. But what I can say is that if speculative fever is still building, the value of bitcoin is likely to keep going up. But speculative bubbles always burst. Maybe tomorrow; maybe two years from tomorrow. When is unpredictable. But there is an old saying on Wall Street that stocks take the escalator up and the elevator down.
Right now, the world looks pretty rosy. As noted, fundamentals are pretty strong. But one can’t ignore the speculative overlay that is building. Bitcoin, the return of meme stocks, SPACs. The moral of the story is don’t invest blindly. Pay attention to fundamentals and to valuation. I would rather chase strong growth and not live by the fear of missing out (FOMO). Keep your feet grounded and invest wisely.
Today, Ted Lasso star Hannah Waddingham is 51. Liz Cheney turns 59. Garfield cartoonist Jim
Davis is 80 and former Senator and New York Knicks star Bill Bradley turns 82.
James M. Meyer, CFA 610-260-2220