Notes on the Week Ahead

On August 7th, with little fanfare, the IRS announced that, as part of its phased implementation of the OBBBA, it would not be adjusting W2 or 1099 forms for the current calendar year but would provide guidance and new forms, in due course, for calendar 2026. This seemingly innocuous statement confirms that we will see in an even larger crop of personal income tax refunds early in 2026 than was anticipated when the OBBBA was passed. These higher income tax refunds should work much like a new round of stimulus checks, adding to consumer demand and inflation pressures early next year.

Modern life is a whirlwind of distractions that obscure our understanding of the economy. The discussion highlights how today's financial landscape demands a new focus, particularly regarding the money supply. It delves into the historical shifts in monetary policy and their economic implications. There’s also a look at how innovations like electronic payments have transformed monetary transactions, significantly affecting economic forecasting. Overall, it’s a striking examination of the distractions that can lead us astray in investment strategies.

Get ready for a possible rise in inflation! Tariffs may send prices up, but low energy costs and declining shelter inflation could temper the heat. The dollar's weakness and labor shortages add to the inflation puzzle, while fiscal stimulus looms ahead of the mid-terms. Plus, the discussion dives into how interest rates and CPI trends might shape the economy. Investors are urged to diversify as these factors may impact asset prices.

The podcast tackles the ramifications of a declining labor supply on the economy, emphasizing the disconnect between labor demand and supply. It scrutinizes the complexities in estimating payroll data, highlighting drastic fluctuations in employment statistics. The discussion covers shrinking job openings and demographic shifts that are exacerbating labor shortages. Lastly, it examines the Federal Reserve's struggle to adjust interest rates amid inflation concerns, urging investors to reconsider their strategies in light of these challenges.

Investors are bracing for key decisions from the Fed regarding interest rates. The discussion dives into the implications of these choices on the economy, particularly around employment and inflation. Attention also shifts to forecasts for GDP growth across sectors, emphasizing how tariffs and immigration policies could shape economic dynamics. The podcast highlights the delicate balance between the Fed's independence and external pressures, making it a crucial week for market watchers.

The discussion dives into the contrasting resilience of U.S. financial markets versus the volatility of the UK gilt market during policy shifts. It highlights how American markets remain steady despite turmoil, while the U.K. reacts drastically to minor shocks. The podcast also delves into the economic repercussions of recent immigration and employment policies, spotlighting workforce challenges and potential job cuts that could spark further instability. Amidst these changes, it questions whether calmness under pressure is truly attainable.

Despite very significant shifts in U.S. economic policy and major geopolitical events, investors can look back at the first half of 2025 with some satisfaction. Through July 3rd, the S&P500 provided a total return of 7.5% for the year, despite being on the brink of a bear market just three months ago. Fixed income has also done well, with 10-year Treasury yields falling by 23 basis points, generating a 4.2% return year-to-date while high-yield bonds have delivered 4.8% on the back of a further narrowing of already tight spreads.

On Tuesday, we will release our third quarter 2025 Guide to the Markets.  On Wednesday, we will host conference calls with financial professionals to discuss the outlook.  It’s an outlook dominated by the impact of dramatic policy changes on a relatively slow-growing U.S. economy.  The result, in the short run, may resemble a wave, as the economy cools down in the second half of this year, heats up in early 2026 and then cool down again.  However, in the long run, the net effect of these policy changes could result in an economy with slightly slower growth and higher interest rates than seemed likely at the start of the year.  This being the case, it is hard to justify this spring’s rebound in U.S. stocks to new record highs less than three months after teetering on the brink of a bear market.  Consequently, investors would still be well-advised to seek broader diversification in areas such as international equities, value equities and alternative assets.

This week highlights the geopolitical fallout from the U.S. attack on Iranian nuclear facilities. The discussion centers on Iran's potential closure of the Strait of Hormuz and how that would impact global oil markets. With 20% of the world’s oil passing through this crucial channel, the stakes are incredibly high. Additionally, the conversation navigates the connections between tariffs and inflation, exploring how such policies can have delayed economic effects while shaping market predictions.

When we bought our first home, the builder neglected to mention that it was built upon a river. Of course a river at the bottom of a garden is a charming sight. Something that seeps up through the cellar is less attractive, and so, in due course, the builder was called back to install a sump pump. Our young sons were fascinated by the hole in the basement floor and the coppery water that flowed at the bottom and wondered whether, with the help of makeshift fishing poles, it could yield some fish.