00:00Kevin, though, is the cut already priced in and is it all about kind of what we get in terms of the summary of economic projections and whatever commentary we might get for the new year?
00:11Well, yes, I think if you look at the word function on the terminal and then compare that to that function, yes, pricing, you know, for December, actually relative to the equity market, if you look at it over the past couple past month, both of those have been neck and neck.
00:23So, you know, I would say it's fully priced in the sense that, you know, every time the probability of a cut is increased sharply, the market's done well and vice versa.
00:30I think beyond that, you know, one of the one of the reasons I think that we're probably not going to see as many cuts next year is because the inflation backdrop and we're putting out our outlook at some point later today.
00:42But I think that the inflation backdrop is going to be a little bit trickier in the sense that there's probably some upside inflation risk from tariffs that are expected to stay high, which have already put upward pressure on goods prices.
00:52But also fiscal stimulus coming from the big, beautiful bill.
00:56And I think still a even if it's a wobbly, but still relatively resilient labor market that keeps people spending on a month to month basis.
01:03If you add all of that together and put it into an equation, I still think you have upside inflation risk.
01:07Plus, from a personnel standpoint for the Fed, you have to keep in mind that two voting members rolling onto the committee onto the voting committee are the heads of the Cleveland and the Dallas feds.
01:17And they've been leaning much more hawkish recently.
01:19It's it's Beth Hammock and it's Lori Logan.
01:21So I think that needs to be taken into consideration when you think about especially the emphasis that has been now pushed on individual member commentary.
01:29That hasn't been the case up until maybe the past couple of months where we've been paying so much attention to what each individual member has been saying.
01:36Now there's much more focus on that.
01:37So I think for those reasons, you probably don't get as many cuts next year as maybe some people have been expecting a narrative around that.
01:44What do you think?
01:44I mean, it's we're looking at with the work function getting down to a terminal rate of three percent even basically.
01:53Yeah.
01:54Right. Between three and three and a quarter right now.
01:56So that's moved up a little bit.
01:57And as we hear so much about the economic growth that we're expecting next year, as we hear so much about the stimulus we're going to get from one big, beautiful bill.
02:05I just wonder if it's going to be hard to even go that low because inflation, if you look at CPI, it's going the wrong direction and it's 50 percent over the Fed's target.
02:16Yeah, we're averaging closer to three percent.
02:17That seems to be more like the floor, even if you don't go because it's not our expectation that you go back to anything akin to 2022 or 2023.
02:26I mean, getting close to, you know, eight, nine percent on CPI, barring some major shock, is just really not in the cards.
02:31But we've been there.
02:32So this only three percent still hurts.
02:34Well, but exactly.
02:35So I think that haven't gone down.
02:37Right.
02:37And you're now four and a half years of the Fed being above its target.
02:42I think at some point that has to come into the equation and it'll matter in terms of how they set policy.
02:46So really, I mean, this is just them getting closer to neutral, what they think of as neutral.
02:50If it happens to be the case that inflation pressure is is reaccelerating and they're maybe too close to neutral, then you can maybe start talking about a hike.
02:57I think it's still a little early for that.
02:59But you just have to keep in mind that they've been now so far above their inflation target for so long.
03:04And labor has essentially been at target almost the entire time.
03:07I mean, four point four percent for an unemployment rate.
03:10Yes, it's risen over the past year, but it's been, number one, gradual and number two, consistent with a fully employed labor market.
03:16Thirty seconds.
03:16So what does this mean for the equity markets?
03:18I mean, if if there's earnings, if there's an economy that's growing, if the labor market doesn't fall apart?
03:23Well, the earnings picture just by itself.
03:25I mean, if you if you look at every sector so far, there's expectations that you're going to get pretty solid earnings growth for all 11 gig sectors in the S&P.
03:33Only three are expected to have earnings growth that is slower in 2026 relative to 25.
03:38So that in and of itself just shows you that it's not just a couple of sectors or even a couple of industries that are carrying the market higher from an earnings standpoint.
03:46It really has broadened out.
03:47So we think that from an index perspective, maybe it's not as great because if you don't have the mega caps contributing mostly to the gains, then the index game, the index performance might not look great.
03:57But you could have relatively healthy breadth under the surface and participation that could mean for maybe a better year for equal weighted relative to cap weight.
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