Takeaways from the Fed’s Jackson Hole Symposium with Joe Keating

INTRO: Helping community bankers grow themselves, their team and their profits. This is the Community Bank Podcast.

CALEB: Well, hey everybody, and welcome back to the Community Bank Podcast. Thanks for joining today’s conversation. I’m Caleb Stevens with SouthState Bank’s Capital Markets and Correspondent Banking Division. And a couple weeks ago, Tom Fitzgerald sat down with Lelia Coggins from our broker dealer SouthState|Duncan Williams, to discuss the bond portfolio and what it means for community banks in light of recent economic trends and data. And we’re piggybacking off that show to talk with Joe Keating. Joe works with our wealth management division. He’s a longtime friend of both the bank and the podcast, and Joe follows the economy very closely. We’ve used him throughout the years for our economic updates, and so Tom Fitzgerald sits down with Joe Keating to talk about the upcoming FOMC meeting later in September and what that might mean for your bank as well.

CALEB, continued: So, hope you enjoy this conversation. And, real quick, before we get there. We’ve mentioned this several times on the show, but we would love for you to join us at the Elevate Banking forum. It’s in Birmingham, Alabama on October 10th and 11th, and we’re bringing the best community bankers together for this two-day summit to discuss what it looks like for your community bank to innovate, grow your profitability, mitigate risk, and stay independent into the future. To register, click the link in the show notes of this episode, or you can go to SouthStateCorrespondent.com and click on our “Live Events” tab, and you’ll see it there as well. So, check it out. The Elevate Banking Forum in Birmingham, Alabama. We hope you can join us for that. And now here is Tom Fitzgerald and Joe Keating.

TOM: Well, hello everybody, and welcome to another episode of the Community Bank Podcast. I’m Tom Fitzgerald, and I am joined once again by Joe Keating from our wealth management group. Joe, how are you doing today?

JOE: Tom, I’m just great today. How are you?

TOM: I’m doing fine, and I gotta think you are our number one guest, and it’s probably—if you know for sure, because I don’t—but it’s got to be almost in the double digits now, right? As far as your appearances on our show.

JOE: I believe that’s true. You guys have suffered through a lot of my commentary.

TOM: Well, I think our listeners like it because we get lots of comments back that they do enjoy it so, that’s why we keep bugging you to come back and do these episodes. So, and certainly there’s more than enough to talk about, and that’s kind of why, you know, I think our listeners like it. And I certainly like talking to you about it as well.

JOE: Same here.

TOM: Anyway, let’s just kind of launch right into it. You know, we’re kind of recording this a few days past the Jackson Hole meetings, and I thought we could just open by, I’ll kind of give my thoughts on what we learned from that meeting and then get kind of get your thoughts and impressions as well. And you know, going into the meeting, I thought for sure that Powell would, you know, he would open the door for possible rate cut in September, but he really kicked it wide open in my view. I think he really, he kind of made it definitive now that the dual mandate, that the full employment mandate is going to be sort of taking precedence over the inflation mandate. He felt like that they’ve got greater confidence that they’re heading towards that 2% target. But in the meantime, they feel like the labor market is cooling in its momentum, and he doesn’t want that to cool anymore. So, it does seem like that, you know, the emphasis on inflation is going to take a back seat for a while to the labor numbers. And so, that was a big shift. The question is going to be in September, you know, how big is that rate cut going to be? But, before we go down that road, kind of what were your thoughts, Joe, on what you heard from Powell last Friday?

JOE: Well, Tom, I’m in complete agreement with everything you’ve just said. I would refer to Mr. Powell’s presentation at Jackson Hole as pretty much a landmark speech. I think he offered up three key statements that the markets been waiting on to signal that the rate cutting cycle was about to begin. First, Mr. Powell stated that, “My confidence has grown that inflation is on a sustainable path to 2%,” and you know if folks have been following the the Federal Reserve over the past few months, this statement from Powell was a necessary condition that the FOMC Committee laid out back at the March 1920 FOMC meeting for rates to be lowered. So, that was really key. Consistent with the, as you mentioned, Tom, with the recent focus of the Federal Reserve officials on the employment part of their dual mandate, Chair Powell stated that the members of the committee, and this I think is really important, “Do not seek or welcome further cooling in the labor markets,” adding that the slowdown in the labor market was unmistakable.

JOE, continued: So, I think that that’s a statement that has not been appreciated by the press to the extent that it might be. But I do think the futures market, which is looking for, you know, 200 basis points of cuts by the end of 25. The only reason we would get 200 basis points of cuts with the economy, you know, looking to come in on a soft landing, is if we do see a more significant deterioration in the labor market. Now that may be a tail risk that the futures market is pricing in, but I think him saying that they “do not seek or welcome further cooling” is really important. And finally, Mr. Powell delivered what I view as the money line. “The time has come for policy to adjust.” We’ve been all waiting for that line, right?

TOM: Right.

JOE: And that says that the official pivot to a period of lower borrowing costs has arrived. And, as we know, well, there’s been a little bit of a back and forth this week. The markets responded fairly positively, with stock prices rallying and treasury yields easing a bit further following Mr. Powell’s comments. So, this is a point in time that we’ve been waiting for. Ever since the inflation spiral picked up at the end of 21, early 22, and with all the tightening that took place from March of 22 to July of 23. So, we’re here, and I think the markets are really enjoying that. Do you have thoughts yourself, Tom, in terms of you say, “kick the door open,” and I agree with that—do you think he kicked it open to 25 in September, or do you think he kicked it open to 50?

TOM: Well, I think in that regards, they would rather go 25 than 50 just because almost psychologically, if they did 50, the market would say, “Well, that means every meeting’s going to be 50” when they may not intend that. So, you know, but like you said, they made it pretty unmistakable they don’t want any further weakness in the labor market. Now this week, like today, we just got jobless claims numbers, and they continued to kind of drift around that 230,000 level, which doesn’t, you know, it doesn’t show that we’re getting another leg lower, you know, with layoffs, it seems like it’s still—companies are still resorting to cutting hours or cutting back on temp help versus increasing layoffs of full-time workers. So, you know, of course we will get that August employment report next Friday, and to me that’ll be the big tell.

TOM, continued: If it’s as weak or weaker than what we saw in July, then I think 50 could be on the table for sure, but I think expectations right now are that it’s going to be a fairly decent number. I think I’ve seen 150,000 for the headline number, and then even a tick lower in the unemployment rate to 4.2. Now whether that comes to pass or not, we’ll see. But if it comes in sort of at that level, then I think they would prefer the 25, just because we’ve heard a few talking of Fed heads this week talking about wanting to be methodical and measured. And so, to me, that kind of speaks more towards wanting to do 25 versus 50, but again, if the data calls for it, I think that they, you know, they would go there, but probably reluctantly. Do you share that same view or do you view it differently?

JOE: No, I totally agree. I really think as you say, it might be alarmist to do 50 like, “Hey, they know something that we don’t know.” So, I do think that would keep them more of a calm in in the markets by doing 25, and that’s what the futures market is expecting right now. You know thereafter in terms of, you know, do they do they cut every other meeting? Every meeting? Do they alter from the 25 to 50? I think all of that will be dependent upon what goes on in the labor market. And kind of going back to what I was just talking about before with him saying, Mr. Powell saying, that they do not welcome any further cooling of the labor market. I do think if they see it, I think they’ll respond fairly aggressively.

TOM: Yeah, I agree. I think they would like to, I guess if they have their druthers, they would like to do say 25 on every quarter-end meeting, but if the data speaks to maybe doing more, that they would first revert to doing, say, every meeting being a live meeting, and then if that wasn’t enough, then, “Okay, let’s do 50 basis,” and then go from, you know, from there. So, I think right now they’ve got some leeway to sort of increase policy response if they need to, but that they would rather start sort of on this limited, you know, 25 at every quarter-end meeting. That’s kind of how I’m envisioning it right now. But again, like you said, it’ll be on the data and, really, the labor market data. You know, specifically versus what we’ve been staring at with the inflation numbers for the last couple of years.

TOM, continued: Do you, kind of just talking away from the rates for a second, do you see from the economic numbers, you know, we just got a third, the second quarter revision, the second revision I guess now, for second quarter, and it was very solid. Up I think 3%, and then the consumer again kind of came through up at 2.9% on consumption. I think the Atlanta Fed right now is at 2% for the third quarter. But, how do you view as far as the economy goes, are we looking soft landing versus recession? Kind of where do you stand on that?

JOE: Well, we’ve been in the in the soft-landing camp for an incredibly long period of time. In fact, we first started talking about that and writing about it back in the summer of 22, which seems like an awfully long time ago. But we’ve been there, and we continue to be there. You know, the key thing, and we’ve talked about this in the past, that kept the economy out of recession—and there were really two things—was one that if you go back to the summer of 22, the ratio of job openings to unemployed workers in the economy was two times, which is, you know, historically high. And so, the tightening by the Fed basically resulted in a lot of open positions go away.

JOE, continued: As opposed to actual folks actually losing their job. And then that kept the income households flush with income and kept consumer spending going. The other is that the economy clearly turned out to be far less interest rate-sensitive during this rate hiking cycle than in previous ones because of all of the refinancing of the debt that was done by both households and businesses. You know, leading up to the rate hiking cycle, we had that, you know, basically going back from the end of the financial crisis to, you know, late 2020, early 2021. Companies and businesses had lots of opportunities to refinance their debt long at very low rates, and that helped a lot. I do think that, now all that is the past, the one thing that I’m watching very closely is, you know, lower inflation is good for households. It’s not all that good for businesses. It does lead to some margin pressure. So, I think what we don’t want to see is businesses begin to protect their margins by trying to lower their costs. And we all know it takes a little bit of time for companies to lower their cost relative to business capital spending. But they can do it pretty quickly on the employment front, in terms of cutting back on hiring, as well as doing some layoffs. So, that’s the key thing that I’m watching right now.

JOE, continued: And I think initial claims for unemployment insurance is a real key measure to watch because if we’re going to see a worsening economy—so, you know, getting towards a mild recession—I don’t see any kind of deep recession—it’s going to show up out of the labor market with companies trying to protect their margins. That’s not my best-case forecast at the moment, but that is what I’m watching in terms of, you know, will this soft landing actually persist for some period of time? You know, along those lines and kind of going back to one of the things I mentioned about what the labor market or the household sector has done over the last couple of years, are you seeing, Tom, any weakening in consumer spending? Which you know really is the key for the for the business cycle because it’s, you know roughly 70% of the economy.

TOM: Right. And like we saw, you know, like I mentioned, you know, we got the second estimate on second quarter GDP, and the big bump to 3% on GDP came from the consumer. That the revisions to their consumption was way up. And, I’m not seeing that. I think, I’m not seeing the slowdown, I guess is I should say. I was thinking back to last year, the first couple quarters, the consumer did pull back a bit and there was that thought that “Okay, here he goes, the consumer is starting to roll over.” Well, we know what happened. He rolled over and got his second wind in the second half of the year. Well, the first part of this year looks to be almost just as strong as the second half of last year. So, I’m not willing to be the guy that says the consumer is going to the bunker and you know, pulling in the purse strings. And so, I still think, yeah, you can point to some, you know, personal savings rates have been dropping. Credit card balance is going up, credit card delinquencies going up. You can point to some items here and there, but I think what’s happening is that lower-income consumer is feeling a little bit more stressed from the higher prices and higher rates that they’re dealing with.

TOM: But I think the middle- to higher-income consumer continues to just roll along for the most part. And I think that’s going to be enough to keep, you know, the economy, you know, well away from recessionary territory. One of the things I look at, Joe, on a daily basis is the TSA boarding statistics. And so, you can get, you know, yesterday’s numbers by 9am today. So, it really is a real timely indicator of what is going on with travel. And you can count on one hand this year the number of times that the level of boardings didn’t exceed last year. And so, even today, I looked at it this morning just to make sure, and we continue to see stronger levels of travel and boardings this year versus last year. And you know, if you fly somewhere, that means you’re probably staying in a hotel, you’re probably going to a restaurant. You’re probably going to some sort of entertainment or athletic event which, you know, all of that spending generates the consumption that we see. And so, I’m just not seeing that in all of the—I’m looking for that, you know, that canary in the coal mine that tells me that the consumer is rolling over. And I’m just not seeing it right now. Like I said, there could be some distinction between income classes, but I think overall, the consumer is still in a decent spot and I’m not, you know, I’m certainly not willing to say that that’s going to end. But let me ask you, Joe, about some of the other sectors we did see in that second quarter GDP. The residential investment was off, and that was one of the weaknesses in the second quarter numbers. Kind of give me your thoughts on where you see the residential construction and the business capital spending going for the balance of this year and into next year.

JOE: Yeah. Well, I think that second quarter number on residential construction outlays—it may be the bottom. You know, we all follow three things for housing. We follow housing starts, we follow new home sales, which follows housing starts, and of course we follow what’s going on with existing home sales. And of course, the existing home sales market has been locked up because of folks being unwilling to say goodbye to their 2 and 3% mortgages. The most recent report on new home sales was actually very strong for July, up almost 11% month-to-month. And, if you adjust for the revision upward of almost 51,000 units in June, the July report was super strong and got us back to a level at 739,000 annual sales pace, that it is roughly the same pace as from 2019 before COVID. So, I’m tempted to say that despite the fact that affordability remains tough because of where housing prices are, and where mortgage rates have been, I think we may be seeing the bottom in the housing cycle. June could have been the bottom, and I think that, particularly with the Fed entering a rate cutting cycle and with the decline in yields on 10-year Treasury securities which has fed over into lower mortgage rates, I do think the mortgage, the housing market is going to receive a boost here. Not a major boost, but I do think we’re going to see an upturn in housing as we end 2024 and go into 2025.

JOE, continued: You know, one of the key things that’s a secular issue for the housing market is, depending upon the methodology, and I’ve seen reports that say we’re short 3 million homes in the economy. I’ve seen other reports that we’re 7 million homes short. The work that I did says we’re about 5 million homes short. Now, this goes back to coming out of the great financial crisis right through today. And that shortage of housing is going to keep a bid, if you will, in the housing market as we move forward. So, I do think potentially the bottom and residential construction is in. As for our business capital spending, you know, it’s really being driven by the fundamentals of strong artificial intelligence-related spending. Particularly on data center build outs right now. And company is doing everything they can to incorporate artificial intelligence into their business models. But the glut of office space will continue to weigh on the commercial real estate market. The fiscal support from the CHIPS and Science Act, which supported construction of semiconductor manufacturing plants, electric vehicle battery facilities, has begun to wane a bit. So, I do think that we’ll continue to see a, you know, 2 to 3% gain in business capital spending.

JOE, continued: So, you put business capital spending together with residential construction outlays, and your comments on the consumer sector, Tom, and, you know, I think anyone that’s looking for an imminent recession in the economy is really barking up the wrong tree. On top of that, let’s say you and I are wrong, and we do go into a mild recession. I can’t even think about us going into a deep recession here, but let’s say we go into mild recession. You know, one of the good things about the Fed raising rates is they now have over 500 basis points that they can cut rates and really help support the economy. So, I do think that those two sectors of the economy will continue to support the business cycle going forward. And along those lines, Tom, you know, related to all that is the yield curve. And we both know that we’ve had a negative slope to the yield curve, that is short rates being above long rates, you know going back to July of 22. When I looked earlier this morning, the inversion is 2 basis points today. You know, it was 38 at the end of 2023. It was over 100 back in March of 23. Do you see the positive slope returning to the yield curve anytime soon?

TOM: I don’t know about anytime soon. And you’re right. I was looking at that this morning, that basically the 2-year and 10-year right on top of each other. And I think some of that was the back the 2-year kind of backing up a bit with the thought that, you know, that the jobless claims numbers and the pickup in second quarter GDP probably want to keep the Fed in that slower rate cutting cycle of 25 maybe every quarter instead of something larger every meeting. But I do think that when we do get that positive slope, it’s going to come from the 2-year dropping. Right now, it’s what? 3.90-ish, almost 4%. I think when the rate cutting cycle begins, it will start to drift lower.

TOM, continued: I kind of look at the two year sort of a rolling 2-year expectation of where Fed Funds is going to be. So, you know, we’re, what 5.25 to 5.50 right now. You know, if we cut say 150 basis points by the end of next year, we’re at 4, and that’s pretty much where the 2-year is. So, right now, I think that’s kind of where it’s looking at going forward. Now if we get further weakness and the Fed has to up their rate cutting, either magnitude or pace, then that 2-year, I think starts to move closer and closer to 3. At the same time, though, that you know, if that’s going on, then that means the economy is struggling a bit. So, that would to me would keep the 10-year from lifting. So, you’re probably still in in the 350-375 range on the 10. And then as the 2 moves to 3, then you start to get that positive slope. But I don’t think it’s going to be that slope that we were used to say coming out of the great financial crisis when you, you know, when you had the Fed Funds rate locked in at 0 for so long. But it could come as close as today, but I think the real positively sloped curve is probably going to come either later this year or into next year when the expectation that we’re going to go closer to a 3% Funds rate starts to become more kind of, I guess the consensus thought. And that the 2-year will start to track down towards that level. Is that kind of, you know, do you view it similarly, or do you have a different outlook on that?

JOE: No, I’m very much there, Tom. You know, I do think that the decline that we’ve seen in the 2-year so far is basically in expectation of the Fed beginning to cut rates. So, some of it’s being priced in prior to the actual rate cutting cycle commencing. And then, I think as we go through 2025, we’ll start to see the yield on the 2-year pretty much mirror what’s happening with the Fed cutting rates. So, you know, I agree that we’ll probably see the Funds rate get down, you know, about 200 basis points lower than it is today, which should allow that the 2-year Treasury yield to get down, you know, roughly into the 3% range. Now, this assumes that we’re not wrong on the economy falling into a recession, and that we do do a soft landing. And on the 10-year. You know the best forecast that I’ve seen in my career of the yield on the 10-year is that it tends to stay pretty much in line with nominal GDP, okay? Obviously it moves away from nominal GDP when the economy is either heating up or being restrained, but kind of under normal circumstances, it pretty much tracks with nominal GDP, and if you see a nominal—if you see inflation running at around 2% here over the next couple of years, and a 1.5 to 2% growth rate in the economy, you know that gives you a nominal GDP of 3.5 to 4%. And so, they’re, you know, we’re pretty much there at, you know, 388 today on the 10-year Treasury. So, I agree that there’s probably in terms of a basis point decline, there’s more action ahead of us at the shorter end and intermediate portion of the Treasury yield curve than at the longer end of the Treasury yield curve. If I’m wrong on that, it’s because the economy was materially weaker, and we saw 10-year Treasury yields come down more along with 2-year Treasury yields that I’m expecting. So, I think we’re kind of in sync with each other, Tom, in terms of how we’re looking at the yield curve in general, as well as the outlook for specifically 2s and 10s over the next you know 15-18 months.

TOM: Yeah, and I would say too, when you think about sort of, you know, the destination of where is the Fed going to take the Funds rate, I kind of think. I kind of go back to that neutral rate concept, right? Where it’s that rate that’s not too hot, not too cold kind of the, you know, not restrictive, not accommodative. I think, you know, for years, it was kind of the Fed estimated at around 2.5%. I think they, you know, coming out of post-pandemic and the little bit of a higher cost environment, they probably would tell you it’s closer to 3 now. I think if most of them, you know, would dare to put a number on it. So, I think that’s probably where eventually the Fed Funds rate moves to, and again like you said, if the economy were to weaken, then obviously they would go past, go through that to generate some, you know, some monetary stimulus.

TOM, continued: So, to me, the floor, you know, so that’s where I kind of see the 2-year heading as well. To like a 3% level that kind of approaches where that neutral rate would be sort of in this post-pandemic world. But, like you said, I don’t see the catalyst that really moves the 10-year up, you know, much higher than kind of, you know, that 4-ish level where we are right now. But with the trend, you know, like you said when you talk about GDP and inflation, that 3.5% is kind of where I had forecast the 10-year to end up at the end of this year and then into next year as well. So, I think we’re kind of in agreement there as to where we think rates are headed. Which that and $1.50 might get you a soft drink at the QT or something. But, let me ask you though. You know, we just had the NVIDIA’s earnings yesterday and, you know, they beat on the top and bottom, but it wasn’t enough for Wall Street, even though they’re profiting. You got a company that does profit margins over 50% and people still aren’t happy with that. But anyway, that’s, you know, that’s the nature of NVIDIA right now. But do you see, you know, we’re all kind of casting around looking for that next great productivity enhancer. Do you see this AI generation as being kind of what the desktop transition and the smartphone, smart handhelds, was to the 90s? Is that kind of, do you see that as the next great productivity enhancer?

JOE: Well, I think it’s definitely going to be positive productivity. I don’t know that anything can really spur productivity the way desktop computers did. And then the iPhone. The smartphones did. But I do see it being positive for companies. You know, I think what it’s going to do is, besides giving us a boost to productivity, it’s likely going to increase the quality of some of the services that companies are offering. And I do think that that’s a that’s a real positive for the economy moving forward. So, a positive yes. And folks that are a lot smarter than me—I’ll call them the innovators. The innovators are out there trying to figure out how to incorporate artificial intelligence into every piece of the business community. And I think they’ll be successful.

JOE, continued: But you know, I think back, Tom, about my days when I started at the Fed coming out of graduate school, and I would run one regression analysis and submit it to the computing area, and I would get the results of that one regression analysis back in about, you know, five to seven days. Now, you and I can sit in our offices and do 100 regression analyses, you know, in the next couple of minutes if we so desired. So, that’s germane obviously to the world that you and I live in. But I think it’s a great example of the productivity enhancement that came from the technological revolution in the 90s relative to desktops, laptops, and then subsequently the next revolution related to smartphones.

TOM: Yeah, and I agree. And I think, you know, of course, with AI there’s, you know, the positive aspect, and then there’s that potential negative aspect from, you know, bad actors wanting to utilize it detrimentally. And I think that’s always a risk anytime you sort of have a new technology that comes to the fore. And that kind of brings me to a thought. You know, it sounds like we’re both fairly optimistic about the economy and where we’re headed, but there’s a couple things that kind of nag at me to say, “Boy, if that were to happen, that would kind of change the ball game.”

TOM, continued: And I’ll just list a couple of those and just kind of see what are the things that maybe keep you up at night, or at least make you, you know, kind of toss and turn a bit. But I would say number one is just the size of our deficit. You know, I can remember when 2 or 300 billion was sort of hand wringing deficit sizes, and now we’re doing $2 trillion on a regular basis and so far, the Treasury’s been able to sell all that debt, you know, pretty well. We haven’t had a failed auction. We haven’t had auctions that have really gotten ugly, but it’s a risk every time you do have to come to market that, you know, when you’re selling $40 or $50 billion dollars of a 10-year Treasury or something along those lines. So, that kind of is an issue that continues to nag at me. And then also just more the geopolitical. You know, we’ve got Ukraine and Russia. We’ve got the Middle East, you know Israel and Gaza. And we’ve got that China, I think being, you know, obviously watching all of this and being probably a little more belligerent or looking at their opportunities with Taiwan. So, those are the things that nothing that you or I can do about them, but those are the kind of issues that I think that so-called “Black Swan” event, but hopefully they don’t come to pass. But those are the things that, you know, kind of kind of just nag at me and I just, you know, wondered if you had any others that you could add to that list.

JOE: Well, you know, there’s a whole laundry list of things we could talk about now, but I will tell you hit the two key ones. Right at the top. And they’re both, in my opinion, related to defense spending. You know, I started giving talks back in the Reagan era. And the Reagan era was the first time that we had outsized budget deficits outside of a war period. And so, I started getting, you know, questions about, you know, what did I think about these budget deficits and the growth in the national debt. My comment then was that the budget deficits and the national debt will matter when they matter. And what I meant by that was when the cost of carrying the size of our national debt started to impinge upon the ability for the other functions of government to take place, that’s when it would matter. And we’re there. It’s mattering. As you know, in fiscal 2025, the interest payment on the national debt will exceed what we’re spending on defense.

JOE, continued: To me, that’s frightening. Absolutely frightening. Particularly with both parties out there, you know, not giving any serious consideration to reining in their spending. Because, you know, this issue on the budget deficit is not going to be solved on the revenue side. It’s going to be solved on the spending side, and no one is looking at that. So, and I say national defense spending is the key because that’s also what keeps down geopolitical threats. If we have a strong defense, then our adversaries are far less likely to try to engage us. So, you hit the key ones, Tom. It’s, in my opinion, it’s what’s going on with the budget deficit, along with what it means in terms of being able to support our national debt.

TOM: Yeah. And I can remember a dozen years ago, you know, we had the Simpson Bowles Commission that was supposed to solve, or at least provide some solutions to the debt situation. And, like you said, we’re not hearing anything about establishing something like that again. It’s not even a topic of conversation anymore by both parties. So, that’s, like you said, it’s going to matter when it matters, and then you know that’s when it’s going to, you know, become the top story on the nightly news. But, I can’t let you run Joe until I do get your thoughts on common stocks and kind of where you, you know, you see the stock market going and any sectors that you find attractive at this point.

JOE: Sure. Well, you know, last time we visited, Tom, was late May. And I’m going to give you basically the same answer I did then, which was also the same answer, or position that we took at the beginning of 2024 and actually was the same position we took at the beginning of 2023. And, I’m basically looking at 5 things, a couple of them further along today than they were at the beginning of 23, in the beginning of 24, but still, the notions being the same. You know, one, we did not fall into a recession and the economy, and therefore earnings continue to grow. And we both know that the key to higher common stock prices over time is earning growing. So those are the first two things that I think are just really important. Third, Treasury yields have fallen sharply since late April. As we’ve already talked about, that lowers the competition for common stocks. It also lowers the cost of capital for companies.

JOE, continued: I think the fourth, the disinflationary influences in the economy are well entrenched. And what’s important about that is that leads to fewer distortions in the economy and the financial markets and should, you know, keep the yields on Treasury securities, as well as what the Federal Reserve does from, you know, moving yields and rates higher. And then lastly, the Fed is about to start a rate cutting cycle. So, we think the backdrop for common stocks is positive. That doesn’t mean that we can’t, you know, have another you know 7 to 10% decline in the market, you know, at any point in time. Particularly as we move into September, which is the, you know, historically weakest month of the year. I tend not to pay a whole lot of attention to these seasonal things, but it is a fact that if you look at the data, September is the weakest month of the year.

JOE, continued: And I think the key dynamic here has been that the disinflationary forces or influences in the economy have taken hold without the economy falling into recession. So, I think as long as the economy continues to grow and therefore earnings will continue to grow, and the Fed not needing to do any reset in terms of policy—reset in a negative way, not reset in a positive way—which is what they’re doing. You know, I think the business expansion will continue to roll along. And as the business expansion rolls along, I think we’ll see higher common stock prices over time. So, we remain fairly bullish at the moment.

TOM: Well, I like that view, Joe, and I kind of agree with it. And I hope, you know, you think about, and I’ve heard all sorts of dollar numbers bandied about, but maybe $5 trillion that’s sitting in money market funds, you know earning 5%. And which, you know, when the Fed starts cutting, you know those rates will come down. And I think, you know, that money may start to drift back into the market, which would be a, you know, a help to that.

TOM, continued: But you’re right, the earnings, everything that I’ve seen you know for most companies now they may be guiding a little bit softer, which I think it’s probably from a managerial perspective, it’s probably the prudent thing to do. But you know the earnings numbers that we’ve seen for most companies for this past quarter have been solid. And I think that backdrop probably will continue, just like in your thoughts. So, I tend to agree and hope that it does come to fruition as we move into 25 so. But anyway Joe, I appreciate again—once again, all of your insights and your thoughts. I know our listeners do as well. And I’m sure we’ll get you back here in a few months to kind of rehash things as we get past the election and into 25 and see what, you know, what the land looks like then. So anyway, thanks, Joe, for coming in today and talking to everybody, we do appreciate it.

JOE: It’s my pleasure, Tom. And it’s always fun to kick things around with you. So, you have a great rest of the day.

TOM: Okay, you too. Take care.