Economy & Markets
Overview
Federal Reserve Chairman Powell finally gave the markets what they wanted during his annual comments from Jackson Hole on August 23 – that is, he implied a rate cut is coming at the September meeting.
Needless to say, U.S. equity markets rallied almost 2% following his speech. In his doveish comments, Powell noted that the economy remains resilient, but the labor market is slowing while inflation is trending in the wrong direction in part because of the effects of tariffs on prices. “Over the course of this year, the U.S. economy has shown resilience in a context of sweeping changes in economic policy. In terms of the Fed’s dual-mandate goals, the labor market remains near maximum employment, and inflation, though still somewhat elevated, has come down a great deal from its post-pandemic highs. At the same time, the balance of risks appears to be shifting.”
Note that without the tariffs in place, the Fed would likely have already begun cutting rates. Powell acknowledged the tariffs and the “Big Beautiful Bill” have made forecasting more difficult with additional uncertainty regarding government revenue, labor markets and inflation. “This year, the economy has faced new challenges. Significantly higher tariffs across our trading partners are remaking the global trading system. Tighter immigration policy has led to an abrupt slowdown in labor force growth. Over the longer run, changes in tax, spending, and regulatory policies may also have important implications for economic growth and productivity. There is significant uncertainty about where all of these policies will eventually settle and what their lasting effects on the economy will be.”
The Fed’s main near-term concern appears to be the labor market, and they would like to avoid being behind the curve and reacting to a sharp downturn in the market and economy. According to Powell, “Overall, while the labor market appears to be in balance, it is a curious kind of balance that results from a marked slowing in both the supply of and demand for workers. This unusual situation suggests that downside risks to employment are rising. And if those risks materialize, they can do so quickly in the form of sharply higher layoffs and rising unemployment. At the same time, GDP growth has slowed notably in the first half of this year to a pace of 1.2 percent, roughly half the 2.5 percent pace in 2024. The decline in growth has largely reflected a slowdown in consumer spending. As with the labor market, some of the slowing in GDP likely reflects slower growth of supply or potential output.”
The September Fed meeting is likely to bring a 0.25% cut to the Fed Funds Rate based on where things stand as of today. As discussed previously, the Fed Funds Rate drives short-term rates but has little control over long-term rates. The Administration hopes a rate cut will bring down borrowing rates across the curve, especially for the mortgage market and the government’s interest cost for issuing treasuries. This did not happen last September when the Fed began cutting, and it is unknown if this time will be any different. Falling long-term rates may be a negative signal for the market if it is a result of investors’ concern for the U.S. economy.
It is also possible that if the Fed cuts too fast, too soon that it could be another catalyst for inflation. If inflation continues its rising trend alongside a weakening labor market, it is likely that the term stagflation will begin popping up in the mainstream media. Stagflation is a period of high inflation, an elevated unemployment rate and slow or negative economic growth. The Fed will use the monetary policy tools in its toolbox to avoid this outcome. Stagflation is not SFG’s base case expectation at this time. [See SFG’s FAQs for more on stagflation.]
Tariffs
Important Update: A divided US appeals court ruled last week that most of the Administration’s tariffs are illegal. The court allowed the tariffs to remain in place through October 14 to give the Administration a chance to file an appeal with the U.S. Supreme Court. As we reported in previous Compass updates, President Trump has a plan B to reinstate tariffs in case the Supreme Court rules against his tariffs.
Last month we discussed trade deals made during July with the European Union (EU), Japan, South Korea and Vietnam. August was a quieter month on the deal front, but various new tariff rates went into effect for certain countries with other rates threatened. India ended up in the crosshairs as a result of its purchases of oil from Russia at attractive prices given sanctions on Russia from most of the developed world. The Administration threatened and then implemented a 50% tariff on India. The Administration is attempting to use its leverage over India as a major trading partner to encourage it to purchase less oil from Russia, thereby reducing the cash available for Russia to spend on its war with Ukraine. One interesting fact is that during Q2, India became the largest exporter of smartphones to the U.S. surpassing China. However, electronics are excluded for now from the 50% tariff recently put in place.
Last month, we mentioned that trade deals included hundreds of billions of dollars of commitments to invest in the U.S., but the parties to the trade deals had not confirmed this aspect of the agreements, only the rates. Sitting here at the end of August, we still have no details. The President of South Korea visited the White House last week to further refine the trade deal while talks with Japan are ongoing.
China and the U.S. still remain at odds over terms of any trade agreement with rare earth minerals, strategic resources that are essential for a number of advanced technologies, being a central sticking point. The countries agreed during August to postpone tariff escalations for at least 90 days.
Geopolitics
A peace deal in Ukraine remains elusive. Despite Trump meeting with Putin in Alaska and separately with Zelenskyy and European leaders in the White House, neither a peace deal nor a ceasefire have materialized. At this point, it is expected that land concessions or swaps along with security guarantees would be part of any peace deal. Following these meetings, the Trump Administration announced it would give both sides two more weeks to come to terms. There was no mention of what would happen if there is no peace deal at the end of two weeks.
Days after this two-week extension was announced, Russia launched one of its largest aerial assaults on Ukraine since the war began, bombing Kyiv with hundreds of drones and missiles. As discussed previously, a peace deal could be a short-term catalyst for markets but will not be a long-term event for equity markets. If sanctions are lifted on Russia’s oil production, it could bring down the price of oil, all else equal. Much will depend on how OPEC reacts.
Markets
Equity markets rose again during August with the S&P 500 increasing 2% during the month. The expectation that the Fed will cut rates in September supported investor sentiment.
⮚The Dow Jones Industrial Average (DJIA) hit its first new all-time high of 2025 on August 23. This is the 13th consecutive year during which the DJIA has set an all-time high, the longest streak in its history surpassing a 12-year streak from 1989-2000. The S&P 500 also set another new high last week, surpassing 6,500 for the first time. While equity prices have been rising, the dividend yield for the index has been falling. The dividend yield for the S&P 500 dropped below 1.2% last week, the lowest level since 2000.
The S&P is now up 10.8% year-to-date (YTD). International stocks continued their strong 2025 performance in August. International stocks rose 4% during the month and are now up over 20% YTD.
⮚U.S. acquires a stake in Intel (INTC). The Trump Administration announced that the U.S. would acquire a 10% stake in Intel. While most agree that the U.S. needs to maintain its lead in semiconductor technology while expanding domestic manufacturing of chips, many republicans, democrats and investors are questioning the government taking an equity stake in a publicly traded company. The U.S. invested directly in several companies during the financial crisis in order to stabilize or save those companies, but this is a different environment for investment.
Another controversial aspect is repurposing grants from previous Congressional legislation. Most of this investment had already been allocated to Intel via grants or other mechanisms in the CHIPS Act under the Biden Administration. Sixty-four percent of the senate voted for this legislation, with 17 republicans and 47 democrats voting in favor. It’s not the dollar amount or even the repurposing of Congressional action that has created the most concerns. It’s the risk of the U.S. demanding equity stakes in companies that do a lot of business with the federal government.
The Administration has indicated a desire to do more deals like this creating more quasi state-controlled entities. This creates several risks, including less overseas sales (similar to Western companies not wanting to buy as much from Chinese controlled entities) or conflicts of interest between the government and shareholders that could lead to less competition if favorable contracts are granted.
Economic Trends
⮚The Michigan Consumer Sentiment Index sank to 58.2 in August. According to the director of the survey, “Overall, consumers are no longer bracing for the worst-case scenario for the economy feared in April when reciprocal tariffs were announced and then paused. However, consumers continue to expect both inflation and unemployment to deteriorate in the future. Year-ahead inflation expectations rose from 4.5% last month to 4.9% this month. This increase was seen across multiple demographic groups and all three political affiliations. Long-run inflation expectations also lifted from 3.4% in July to 3.9% in August.” Consumers’ concerns align with the Fed’s current concerns for the economy, especially following the negative revisions to nonfarm payrolls at the beginning of August.
The Conference Board Consumer Confidence Index was close to flat in August. However, “write-in responses showed that references to tariffs increased somewhat and continued to be associated with concerns about higher prices. Meanwhile, references to high prices and inflation, including food and groceries, rose again in August. Consumers’ average 12-month inflation expectations picked up after three consecutive months of easing and reached 6.2% in August – up from 5.7% in July but still below the April peak of 7.0%.”
⮚Headline Inflation (CPI) remains at 2.7% while Core Inflation rises to 3.1%. CPI came in slightly below expectations in July at 2.7%, while core inflation rose to 3.1% from 2.9%. Shelter cost increases continue to drive core inflation given its heavy weighting in the index. Shelter costs rose 3.7% YoY. The Fed will continue to watch inflation closely to see how tariffs affect prices. The Fed’s preferred inflation measure, the core Personal Consumption Expenditures (PCE) price index (excludes food and energy prices given their volatility), rose 0.3% from the previous month in July. This reading was in line with market expectations and was the same increase that was observed the previous month in June. Over the past twelve months, core PCE inflation was 2.9%, a slight increase from 2.8% in June.
⮚Q2 GDP growth was revised up to 3.3% from an initial print of 3%. The U.S. economy grew faster during the second quarter than initially thought. Business investment in artificial intelligence was one driver of growth, but tariff uncertainty continued to cloud the picture. The Commerce Department’s report also reflected upward revisions to consumer spending and business investment in equipment.
⮚While there was no Fed meeting during August, the Federal Reserve remained uncharacteristically in the spotlight. The Fed began the month with a resignation from a governor. It is ending the month with the President’s attempted firing of a governor – a move many believe is illegal. Whether Trump has the authority to fire a governor will be a question that likely ends up in the courts. Fed Governor Cook has been accused of mortgage fraud. While we are not going to adjudicate the charges here, the implications of her being fired and replaced by a Trump appointee could be significant. Cook is part of the seven-person Board of Governors. Following the resignation of another member of the board at the beginning of August, Trump replaced the departing governor with his own appointee, Fed Governor Miran. When combined with Trump appointees Waller and Bowman, Trump would essentially control the majority of the Board of Governors if he is able to replace Cook with his own pick.
According to Strategas, “If Trump is successful in removing Cook, there are two critical key takeaways. First, Trump will have appointed a majority of Federal Reserve Board Governors, which likely tilts the scale to a more aggressive financial deregulation plan. Second, the Trump selections will be in place when the regional Fed presidents’ terms expire in February 2026 and they could choose to not reappoint the current presidents.” It appears that Cook is going to fight the firing, so this will be a plotline to follow during the rest of 2025.
SFG’s Take: SFG continues to focus on diversification across asset classes including private alternatives which include infrastructure, real estate and credit. Our strategy this year has been effective despite wild market swings, oscillating trade policies and potential war in the Middle East. We believe the next few months are likely to bring more volatility as the global trade war continues and the initial effects of the tariffs that have already been applied flow through the global economic system.
As we have discussed, it is imperative that an investor be in the correct risk tolerance for their own personal situation. With the recovery in equity markets during the past three months, now may be a good time to revisit your current strategy if you have concerns. Please do not hesitate to reach out to your wealth advisor.
Sources:
- Reuters.com., Fed still on track for September rate cut after Trump’s move on Cook, August 26, 2025.
- CNBC.com, Stocks close lower, but S&P 500 notches its 4th winning month in a row, August 29, 2025.
- Trading Economics, as of August 29, 2025.
- The Conference Board, Press Release on August 26, 2025.
- Trading Economics, United States Inflation Rate, as of August 29, 2025.
- U.S. Bureau of Economic Analysis, Gross Domestic Product, 2nd Quarter 2025 (Second Estimate) and Corporate Profits (Preliminary), August 28, 2025.
- Strategas, Policy Outlook as of August 26, 2025.
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