BayTrust Financial, Author at BayTrust Financial

Oct 13

Mitch Zacks – Weekly Market Commentary: Why Markets Rarely Flinch at Government Shutdowns

By BayTrust Financial Weekly Market Commentary

Why Markets Rarely Flinch at Government Shutdowns

As readers are well aware, the U.S. government officially shut down after lawmakers failed to reach a funding deal. To date, paychecks for hundreds of thousands of federal employees have been paused, and some national parks and agencies have been shuttered, including the Bureau of Labor Statistics, which supplies jobs and inflation data.

Government shutdowns almost always get constant media attention, perhaps understandably so. They are disruptive and create plenty of short-term uncertainty.¹

But for investors, they need not be a source of stress or urgent concern. History tells us, quite clearly, that shutdowns have not been a source of meaningful and certainly not lasting economic impact.

Since 1976, there have been more than 20 shutdowns of varying lengths. None has caused a recession. None has triggered a bear market. And in many cases, stocks moved higher during the shutdown and in the months immediately after. The longest shutdown on record, 35 days spanning late 2018 into early 2019, coincided with a strong equity rally.

If we parse out the data even more, going back to all shutdowns since 1976, we find that the S&P 500 was up an average of 12.1% in the year following a shutdown. In the second longest shutdown (21 days in late 1995 and early 1996), stocks went up 3.1% in the month after the shutdown, and +21.3% in the following year.

This is not to say shutdowns come without consequences and should be completely ignored. Hundreds of thousands of federal employees are furloughed without pay, while others, such as members of the military and air traffic controllers, continue working but receive their paychecks later. Businesses that depend on government contracts can see delays, and data collection also halts—which means key economic reports, including the monthly jobs and inflation data, are delayed. In an environment where the Federal Reserve is highly data-dependent, that could momentarily complicate monetary policy decisions.

Still, the broader economic footprint of a shutdown is surprisingly small. Most of the federal budget keeps flowing even when Washington hits a stalemate. Social Security, Medicare, and interest payments on U.S. debt continue, covering roughly three-quarters of total federal outlays. Mandatory programs don’t shut down. And when the government reopens, furloughed workers are paid retroactively, meaning much of the lost income and spending returns to the economy in short order.

For investors, that’s an important distinction. Shutdowns are inherently temporary, and markets know it. A federal funding impasse has yet to alter corporate earnings trends, long-term inflation trajectories, or consumer behavior in any meaningful way. In fact, markets often rise during shutdowns precisely because investors have seen this story before and know how it ends. The government eventually reopens, paychecks resume, and the economic data catch up.

Some commentators have worried about the potential for a shutdown to weigh on consumer confidence or market sentiment. That’s possible in the short term, especially if the headlines grow louder and political rhetoric intensifies. But even in those cases, the effect tends to fade quickly. The same pattern has repeated across decades, with temporary volatility followed by quick stabilization as markets refocus on fundamentals.

Bottom Line for Investors

The question for investors, then, is: are the economic fundamentals still strong enough for markets to look through the shutdown?

In my view, the answer is yes. Growth has moderated from last year’s pace, but the economy continues to expand. The jobs market is showing signs of leveling off, but unemployment remains low. Business investment remains solid, thanks in large part to AI investment, and corporate profits are holding up well. Our colleagues at Zacks Investment Research have been noting for some time now that forward estimates continue to trend higher, signaling confidence in corporate America. The U.S. financial system also remains in fine shape, with healthy lending activity in a monetary easing cycle.

In this kind of environment, it takes more than a political impasse to derail the broader trend.

¹Wall Street Journal. October 1, 2025. https://advisor.zacksim.com/e/376582/-mod-economy-more-article-pos2/5tp38p/1340471816/h/oHCC4EptMjDjKBX9l32s0Ez55oiv-jRLalL68_h0dWM

²Fred Economic Data. October 6, 2025. https://advisor.zacksim.com/e/376582/series-SP500-/5tp38s/1340471816/h/oHCC4EptMjDjKBX9l32s0Ez55oiv-jRLalL68_h0dWM

DISCLOSURE
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Oct 09

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Mitch Zacks – Weekly Market Commentary: Will a Steepening Yield Curve Boost Financials and the Broader Economy?

By BayTrust Financial Weekly Market Commentary

Conditions for a steepening yield curve are forming.

The Federal Reserve cut its benchmark fed funds rate by 25 basis points at its September meeting, and there are indications that more rate cuts are on the horizon. If the next few meetings go as many market participants anticipate, yields on the short end of the curve are poised to keep falling.

Meanwhile, yields on the longer end of the curve (10-year and 30-year U.S. Treasurys) have been steadily climbing. As seen on the chart below, 30-year U.S. Treasury bond yields recently brushed 5%, and the 10-year has remained above 4% all year.

As I wrote in a recent column, there are a few reasons to believe we could see sustained pressure on long duration bond yields. Debt issuance has picked up after the summer lull, increasing supply. Sentiment could also play a role—after years of near-zero interest rates and heavy central bank buying, investors have grown more sensitive to small shifts in expectations about growth, inflation, and policy. Expectations of lower growth and higher inflation can push yields up.

In that same column, I framed this dynamic as a potential positive. I argued that with central banks cutting short-term rates and long yields drifting higher, yield curves could be set to steepen, which is a classic marker of healthier credit conditions since it improves incentives for banks to lend. Remember, the basic business model of banking relies on borrowing money at short-term rates and putting it to work through longer-term loans. When the yield curve slopes upward, long rates exceeding short, banks have higher incentive to extend credit widely because the margin is in their favor.

The chart below shows the yield curve as the difference between yields on 3-month U.S. Treasurys and 10-year U.S. Treasurys. It’s clear that the yield curve has been flat for some time, but as outlined above, there’s a reasonably good thesis that we could see more steepening ahead.

A steeper yield curve is generally good news, but I want to be careful not to portray it as a definitive game-changer.

Although the correlation is relatively tight, banks’ lending margins don’t map directly to government bond spreads. Banks’ funding costs are shaped more by the abundance of deposits, swollen in recent years by pandemic-era fiscal transfers, than by short-term Treasury yields. Loan pricing, meanwhile, generally runs above long-term government yields, reflecting higher credit risk. This helps explain why loan growth (see chart below) has remained steady even during the curve’s inversion. In other words, banks did not suddenly stop lending when the curve flipped upside down, so it’s unlikely that merely un-inverting will spark a dramatic new lending boom.

To be sure, a modestly positive slope can provide a tailwind for Financials stocks, and it may offer some incremental support to credit creation. But as a barometer for the U.S. economy overall, the curve’s current steepening is more symbolic than fundamental. The bigger picture is that lending activity never really faltered, and the economy has kept grinding ahead despite widespread worries.

Bottom Line for Investors
A steepening yield curve is positive, and it can add some support for Financials. But I do not think we’re in a place in this cycle where a steeper curve will fundamentally alter the economic outlook. The U.S. economy remains sturdier than many appreciate, with strong employment and steady loan growth underscoring that resilience. For investors, a steeper yield curve is something to celebrate, but it’s not a panacea for weakness that could emerge elsewhere in the economy.

¹Fred Economic Data. September 30, 2025. https://advisor.zacksim.com/e/376582/series-DGS10-/5tn8sy/1333099486/h/geOAQyKBeBZ__09SQgDnxopD9r5IOqVUKxnO9oVEqrE

²Fred Economic Data. September 30, 2025. https://advisor.zacksim.com/e/376582/series-T10Y3M-/5tn8t5/1333099486/h/geOAQyKBeBZ__09SQgDnxopD9r5IOqVUKxnO9oVEqrE

³Fred Economic Data. September 26, 2025. https://advisor.zacksim.com/e/376582/series-TOTLL/5tn8tc/1333099486/h/geOAQyKBeBZ__09SQgDnxopD9r5IOqVUKxnO9oVEqrE

DISCLOSURE
Past performance is no guarantee of future results. Inherent in any investment is the potential for loss.

Oct 03

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Mitch Zacks – Weekly Market Commentary: The 4 Risks Investors Should Worry About Most

By BayTrust Financial Weekly Market Commentary

Barring a sharp correction in the next few trading sessions, U.S. stocks are likely heading into the fourth quarter near all-time highs. I’ve made the case previously that steady, although fairly modest, economic growth paired with resilient earnings has supported prices to date. With the Federal Reserve poised to ease monetary policy as the economy expands, there is not a great case for being outright bearish.¹

But that does not mean risks are low. Below, I outline four that I think investors should be keenly watching in the next quarter and beyond.

Risk #1: A Second Wave of Inflation

Among institutional investors, recession fears dominated earlier this year, particularly following the “Liberation Day” announcement. Today, it’s inflation that is again the top concern. August CPI data underscored this concern, with inflation coming in hotter-than-expected. The risk here is that the Fed will again have to reverse course, just as the market is baking in expectations for several rate cuts.

Prices for some goods may rise, especially where tariffs hit. But without the monetary backdrop to sustain a broad-based surge, the specter of runaway inflation looks overstated, in my view. Broad money supply growth in the U.S. remains tame (see M2 money supply chart below), though the trend line will be worth watching closely in the months ahead.

Source: Federal Reserve Bank of St. Louis ²

Risk #2: Concern Over Federal Reserve Independence and U.S. Dollar Weakness

Fed policy is always political to some degree, given that appointments come from the White House and confirmations from the Senate. Removing Fed governors because of a disagreement over policy would be a major concern, but the Supreme Court already reaffirmed this year that such an act would be illegal. Public criticism of rate policy may seem threatening, but it’s also nothing new, and there is little evidence it has swayed decision-making from the Federal Open Markets Committee.

As for the dollar, “de-dollarization” chatter resurfaces regularly, with Russia, China, or the BRICS bloc often floated as challengers. Yet data show the dollar still comprises more than half of global currency reserves, and it is involved in nearly 90% of all foreign exchange transactions. No other currency matches the U.S. dollar’s liquidity, stability, and global reach. Over time, the dollar’s share may fluctuate, but fears of sudden debasement or collapse look misplaced.

Risk #3: Over-Concentration

Tech remains the market’s favorite sector, with AI-related companies driving much of 2025’s gains. In my view, this enthusiasm reflects strong fundamentals. Q3 2025 Tech earnings are expected to rise over 12% year-over-year on similarly strong revenue growth.

But with enthusiasm comes concentration. When too much capital chases the same trade, markets become vulnerable to abrupt reversals if sentiment shifts. For now, earnings support remains solid, but this is a reminder of the importance of diversification. Overcrowding isn’t a reason to avoid strong companies, but it does raise the odds of volatility if momentum cools.

Risk #4: Rising Long-Term Bond Yields

The summer saw 30-year yields in the U.S., U.K., France, and Germany climb to multi-year highs, sparking a wave of debt-crisis headlines. In Britain, rising gilt yields were pinned on budget concerns. In France, an offhand remark about an IMF bailout got blown out of proportion. In the U.S., some tied higher yields to worries about refunding tariffs should courts strike them down.

But a closer look reveals that rising long yields is a global issue. Italy, Spain, Canada, and Australia all saw long-term yields rise in tandem. In my view, and as I’ve written before, this trend is less about country-specific fiscal woes and more about sentiment flowing through interconnected global bond markets. Historically, modest increases in long rates alongside central bank rate cuts steepen yield curves, which is a setup that can support lending and growth.

Bottom Line for Investors

It’s a mixed bag right now for investors. Many are growing more bullish as 2025 closes, but worries also remain. Inflation, Fed independence, dollar stability, crowded trades, and rising yields all top the list. But it’s also true that these risks are widely known and widely discussed, which in my view reduces their power to derail the bull market.

For long-term investors, the persistence of these worries ultimately creates a constructive backdrop. Earnings continue to hold up, the Fed has begun easing, and the economy is chugging along despite headwinds. Volatility may flare if one of these worries dominates headlines again, or if the risk comes to fruition in a worse way than expected. That’s why I’m urging investors to stay focused on them.

¹TrustNet. September 16, 2025. https://advisor.zacksim.com/e/376582/ite-record-overvaluation-fears/5tmj31/1326236343/h/GiShj21LxhtbTDGNKyNnyarlFm8_dLP4EUXm8RxlG2U

²Fred Economic Data. September 23, 2025. https://advisor.zacksim.com/e/376582/series-WM2NS-/5tmj34/1326236343/h/GiShj21LxhtbTDGNKyNnyarlFm8_dLP4EUXm8RxlG2U

DISCLOSURE
Past performance is no guarantee of future results. Inherent in any investment is the potential for loss.

Sep 24

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Mitch Zacks – Weekly Market Commentary: The Fed Cuts Rates, But Remember What Really Moves Markets

By BayTrust Financial Weekly Market Commentary

The Federal Reserve cut rates by 25 basis points last week, a widely expected move that I would argue was priced into markets weeks, if not months, ago. Readers should expect the media and Fed prognosticators to spend the next several weeks debating the size and frequency of future cuts.

From an investment perspective, however, there are far better ways to spend your time.

I’d start by parsing the economic backdrop against which the Fed made its move. Last week brought a pair of reports that I would label as “stagflation-light.” Consumer prices in August accelerated slightly faster than expected, with core CPI rising 3.1% year-over-year. At the same time, labor market figures showed more weakness than previously thought. A major revision reduced payroll gains by nearly a million jobs from prior estimates, and August’s unemployment rate ticked up to 4.3%. Payroll growth slowed to a trickle, with June even registering a net job loss after revisions. A headline in the Wall Street Journal this week summed it up: “More Americans are Stuck with the Jobs They Can Get, Not the Ones They Want.”¹

Taken together, the view from 30,000 feet suggests that while the job market isn’t collapsing, the days of “goldilocks” balance, low inflation, and strong job growth, are clearly behind us.

This combination does not amount to stagflation in the 1970s sense, however, with runaway inflation and high unemployment. Instead, it looks more like stagnation: a slow patch where growth cools, inflation runs a bit hotter than policymakers would like, and businesses hesitate to make longer-term investments. Consumer spending is still positive, and business outlays on areas, like intellectual property and AI infrastructure, remain robust. This results in a picture of an economy experiencing ‘muddle-through’ growth—not great, but not dismal either.

Against this backdrop, the Fed’s quarter-point cut looks less like the start of an aggressive easing cycle and more like a recalibration. Policymakers appear to be acknowledging that tariff-related inflation pressures are likely a one-time shock rather than the start of a lasting upward spiral. At the same time, they are signaling an awareness that labor market weakness is mounting. The Fed’s updated projections will show just how seriously they are weighing those risks. But whether this cut turns into a series of cuts will ultimately depend on the data in the coming months.

For investors, the key point to come back to, in my view, is that monetary policy is not the main driver of stock prices. Earnings remain the heartbeat of equity markets, and here, the outlook is broadly supportive. With the Q2 reporting season effectively in the rearview mirror, S&P 500 earnings are on track to have risen +12.1% from a year earlier on +6.1% revenue growth. Looking ahead, Q3 earnings for the index are expected to climb another +5.1% on +5.9% higher revenues. Importantly, estimates have been revised upward in recent weeks, as seen in the chart below.

To be fair, the earnings picture remains top-heavy. Strip out Tech’s contribution in the coming quarter, and S&P 500 earnings growth would be closer to +2.1%. This unevenness raises the odds that actual results could disappoint relative to rising expectations, particularly in sectors under pressure like Medical, Transportation, and Basic Materials.

Still, the overall revisions trend is positive, which is not what you would expect if the economy were tipping into recession. Yes, the economy is slowing, and yes, tariffs are creating headwinds. But corporate America is still finding ways to grow, and earnings power is intact.

Bottom Line for Investors

Shifting the focus away from the Fed decision is not meant to totally diminish its significance. A lower policy rate can help steepen the yield curve and reduce some financing pressures, particularly in interest-rate-sensitive areas like housing or credit creation. But it would be a stretch to argue that one quarter-point cut will meaningfully change the economic cycle or override the market’s longer-term trend. The decision was telegraphed well in advance and priced in by investors weeks ago. That means the announcement itself carries little surprise power for markets.

More important is the economic backdrop, which I would characterize more as stagnation than stagflation. While policy uncertainty and weaker job growth may keep volatility elevated in the near term, corporate earnings remain the critical driver for markets, and the outlook for Q3 is encouraging at this moment.

¹Reuters. September 12, 2025. https://advisor.zacksim.com/e/376582/r-than-stagflation-2025-09-12-/5tl1m1/1320635682/h/Sk9R3dptH8K4_UDgkXGz6C-jhr5TPu_NGuh–53dZmw

²Zacks.com. September 10, 2025. https://advisor.zacksim.com/e/376582/nings-expectations-good-or-bad/5tl1m4/1320635682/h/Sk9R3dptH8K4_UDgkXGz6C-jhr5TPu_NGuh–53dZmw

DISCLOSURE
Past performance is no guarantee of future results. Inherent in any investment is the potential for loss.

Sep 16

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Mitch Zacks – Weekly Market Commentary: Bond Yields are Rising Globally. Should Investors Be Concerned?

By BayTrust Financial Weekly Market Commentary

Bond markets aren’t known for volatility and tend to be viewed as a relatively boring, relatively stable component of capital markets. Stories over the past couple of weeks have suggested otherwise.

We’ve seen quite a bit of coverage concerning rising long-term government bond yields across the world. Notably, the 30-year U.S. Treasury brushed 5%, U.K. gilt yields reached their highest levels since 1998, and French yields hit multidecade peaks. Commentary about potential debt crises, inflation spirals, or even potential bailouts (France) followed shortly thereafter.

The spoiler alert here is that long duration bond yields have fallen back since, as has the media coverage about a potential crisis. But the unfolding of this story is worth a closer look, as it offers insights and takeaways for investors to keep in mind going forward.¹

Take the U.S. narrative as an example. Some reports tied higher 30-year Treasury yields to fears about America’s fiscal trajectory, pointing out that interest costs on our country’s debt have ballooned and now exceed defense spending. In the U.K., coverage pointed to public finance concerns and a currency under pressure. France got its turn when a finance minister’s offhand comment about the IMF was spun into bailout speculation. And finally, Germany’s rising yields were tied to the cost and timing of its fiscal stimulus.

The key point for investors to notice is that each country’s rising yields came with their own unique explanation, but the broader story seemed to be missed completely. That is, that long duration yields were moving in tandem across developed markets. Even countries showing fiscal restraint, like Italy, saw their 30-year yield jump recently. The Netherlands, where debt is less than 50% of GDP, has experienced one of the biggest moves of all. Clearly, this isn’t about one country’s fiscal or inflation outlook.

So, what could have been a factor driving global bond yields higher? There’s no single answer, in my view, but there could be a few factors at play. Debt issuance has picked up after the summer lull, increasing supply. Seasonal patterns matter as well. September has historically been a weak month for long bonds, with global long-dated government debt posting a median loss of about 2% over the past decade. Finally, sentiment almost always plays a role. After years of near-zero interest rates and heavy central bank buying, investors have grown more sensitive to small shifts in expectations about growth, inflation, or policy. Long-term yields are where those expectations get expressed.

This is not to say that tariffs, inflation, or deficits are irrelevant. Tariff-driven price pressures have shown up modestly in recent inflation readings, and governments everywhere are contending with higher refinancing costs after borrowing heavily during the pandemic. But these are longer-term drags, not sudden shocks. The fact that yields are rising together across continents suggests the driver isn’t one country’s fiscal math, but rather a broad repricing of long-term debt globally. In short, something to keep an eye on but not panic over.

Perspective also helps. Looking at a 5-year chart of the U.S. 30-year Treasury bond yield shows a line moving steeply, up and to the right. But that’s only because yields were closer to 1.5% in 2020, which interest rates were at historic lows in the wake of the pandemic. Zooming out even further, it’s plain to see that today’s levels are low relative to previous decades.

In fact, there may be positives here. With central banks cutting short-term rates and long yields drifting higher, yield curves are steepening, particularly outside the U.S. A steeper curve is a classic marker of healthier credit conditions, since it improves incentives for banks to lend. Rather than a warning sign, it may be an early indication that growth momentum is building, even if tariff and policy uncertainty continue to cloud the outlook.

Bottom Line for Investors

The ‘relatively stable, relatively boring’ expectation for bond markets can make sudden upticks uncomfortable, and it can also give rise to worrisome media narratives. But volatility in bond markets is normal. A few dozen basis points up or down doesn’t necessarily mark a crisis, and it’s not always necessary or constructive to require an explanation. Sometimes it’s just global markets adjusting and sentiment shifting.

As mentioned, the uptick in long-duration bond yields could even be construed as a positive for equity markets. A steepening yield curve often signals improving credit conditions, which could provide a growth tailwind looking ahead.

¹Wall Street Journal. September 3, 2025. https://advisor.zacksim.com/e/376582/4-mod-wsj-furtherreading-pos-1/5tjz78/1314640372/h/MDfe-Ly6O6wtwVUdxjVMFG6_yeynFRXXvQzRkm38BtY

DISCLOSURE

Past performance is no guarantee of future results. Inherent in any investment is the potential for loss.

Sep 10

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Mitch Zacks – Weekly Market Commentary: Earnings Strength Confirms Resilience, But Leadership Remains Narrow

By BayTrust Financial Weekly Market Commentary

The Q2 2025 earnings season is wrapping up, with just a handful of companies left to report. The results provide a clear message: American corporations found ways to power ahead, despite a challenging backdrop of tariffs, policy uncertainty, and shifting global demand.

As I write, total Q2 2025 earnings are on track to rise by +12.1% from a year earlier on +6.1% higher revenues. Long time readers of my column know how much weight I place on strong earnings results. But the real market-moving feature of this earnings season was not just the strong results. It was about how much they exceeded expectations.¹

Take a look at the chart below. You can see that 80.3% of S&P 500 companies exceeded earnings per share (EPS) estimates, which is nicely above the five-year average of 77.9%. The percentage of companies that beat revenue estimates also stands out as well above the five-year average and previous years’ results.²

The one sentence takeaway: businesses are still spending, consumers are still buying, and markets have responded accordingly.

This is not a cause for being ‘pound the table bullish,’ however. As I’ve written in recent columns, the feedback loop on tariffs and other policy changes is not immediate. Companies front-ran many tariffs and have worked through inventory, without having to pass on too many costs to consumers or see a big impact on margins. But this can’t continue indefinitely.

If tariffs persist at current levels, or rise further, more companies will likely need to raise prices, which could eventually weigh on demand. Business investment data also point to the same caution. While equipment spending looked solid in Q2, investment in structures fell -10.3%, and R&D registered its third consecutive decline. Both trends hint at executives becoming more selective about long-term projects until they see a clearer policy direction.

Leadership in the market also remains narrow. Technology firms continue to drive much of the growth story. In Q2, Tech sector earnings grew at a double-digit pace, propelled by demand for data centers, chips, and software tied to AI. The “Magnificent 7” stocks in particular have been standout performers, with earnings up +26.4% year-over-year on +15.5% higher revenues. While this leadership has lifted indexes, it has also concentrated risk. Excluding the Tech sector, Q3 earnings for the rest of the S&P 500 are expected to rise just +2.1%, compared with +5% overall. That discrepancy highlights how much weight a small group of companies continues to carry.

There are reasons to be cautious, but on balance, the economy continues to look ‘steady state’ to me. For Q3, S&P 500 earnings are projected to grow +5% from last year on +6% revenue growth. Notably, estimates have ticked higher since the start of July, which is a reversal from recent years when estimates tended to drift lower as the quarter progressed. The growth engine continues to run hottest in a few specific places like Tech, so we’ll need to see if that strength continues to broaden. It’s a reminder that investors should be mindful of concentration and avoid extrapolating recent gains as if they were uniform across the market. It’s important to be selective.

Bottom Line for Investors

Second-quarter earnings confirmed what markets have been signaling for months: resilience is still the operative word for the U.S. economy and corporate profits. Upward revisions to Q3 estimates and continued consumer spending are encouraging signs that growth hasn’t run out of steam. But it would be a mistake to assume the rally will be a straight line higher from here. The earnings picture remains top-heavy, and companies may not be able to shield consumers from higher tariff costs indefinitely.

Overall, I think the backdrop remains bullish, supported by healthy profits, fiscal tailwinds, and a still-strong labor market. Staying invested is the right approach, but balancing exposure beyond the biggest winners can help ensure portfolios remain positioned for whatever the next phase of this expansion delivers.

¹Wall Street Journal. April 28, 2025. https://advisor.zacksim.com/e/376582/onomy-trendingnow-article-pos5/5tj7by/1310520493/h/gMfhEJJWnxSoKzUFqNyuFAcg2GLIuStlz5bnUo-tzGk

²Zacks.com August 27, 2025. https://advisor.zacksim.com/e/376582/q2-retail-earnings-good-or-bad/5tj7c2/1310520493/h/gMfhEJJWnxSoKzUFqNyuFAcg2GLIuStlz5bnUo-tzGk

DISCLOSURE
Past performance is no guarantee of future results. Inherent in any investment is the potential for loss.

Sep 03

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Mitch Zacks – Weekly Market Commentary: Why a September Rate Cut Likely Won’t Impact Markets Much

By BayTrust Financial Weekly Market Commentary

The financial media and many in the investor community are eyeing the Fed’s September meeting with bated breath. I’m already looking past it.

At this stage, markets are pricing in a 100% probability of a 25-basis-point cut, with a very small chance of a larger 50-point move. As I’ve written many times before, markets move on surprises, not widely known information. When it comes to the upcoming Fed decision, the surprise factor is essentially nil. The Fed has been telegraphing its thinking pretty clearly for weeks.¹

Rate cuts make for dramatic headlines, but in practice, they rarely alter the trend already in motion. When the Fed started cutting rates in January 2001 (nearly a year into the dot-com bust), stocks fell another 40% before finally bottoming in 2002. When the Fed cut rates in September 2007, the S&P 500 peaked just a few weeks later. The Global Financial Crisis followed. On both occasions, the cuts were real-time responses to worsening conditions, not tools that fundamentally changed the direction of the cycle.

Some may offer the counter-argument that Fed cuts in 1974 and 1990 were followed by powerful and lasting stock market rallies. But in those years, the Fed began cutting just months after bear markets had already bottomed. I would argue that stocks rebounded not because of the policy shift, but because the cuts happened to coincide with the early months of a new bull market. The rally was driven by positive forward-looking economic fundamentals and the anticipation of an earnings rebound, not by the central bank.

I want to be fair here, however, in acknowledging that rate cut cycles tend to be good for stocks on a forward-looking basis. On average, the S&P 500 has done reasonably well after initial cuts: about 7% forward returns over six months and roughly 12% over 12 months. But investors should not take these averages to mean that the rate cuts are the catalysts for strong returns. The cuts themselves aren’t the deciding factor—the economic and earnings cycles are. Rate cuts help, but they don’t drive.

We saw the opposite play out in 2022. For months, Fed officials downplayed the need to raise rates as inflation accelerated. Remember the “inflation is transitory” narrative? When the Fed reversed course in March and began aggressive hikes, the sudden shift was a surprise, jolting investor sentiment. It wasn’t the hikes themselves that drove the bear market—it was the abrupt change in expectations, i.e. the negative surprise. We don’t have that today.

In the current environment, we largely see a resilient U.S. economy, even as some signs of slowing are starting to show. In this economic environment, a 25-basis-point cut may steepen the yield curve slightly and marginally encourage lending. But the U.S. economy and credit creation have been holding up just fine with rates at current levels, where they’ve been since December 2022. I don’t think a widely telegraphed 25 basis point cut is going to make a major difference.

None of this is to say the direction of rates doesn’t matter. Over the long term, easier monetary policy can support growth at the margin, especially if it steepens the curve and helps banks lend. But investors should remember: The Fed is more often a follower than a leader. Cuts typically reflect conditions already visible in the data, not catalysts that create new ones.

Bottom Line for Investors

September’s rate cut will be a headline-grabber, but its pricing power on stocks is likely to be minimal, in my view. Markets already know it’s coming, and history shows Fed cuts don’t alter the prevailing trend. Investors should focus less on the drama of Fed decision day and more on the fundamentals—corporate earnings, consumer resilience, and global growth drivers. Those, not a single quarter-point move, are what shape long-term market returns.

¹Black Rock. April 25, 2025. https://advisor.zacksim.com/e/376582/tential-portfolio-implications/5thcyf/1303156704/h/QWWdKPoIzENSL0MPL39x8wdrkrkgan-gzxDrYJ_IcEM
DISCLOSURE
Past performance is no guarantee of future results. Inherent in any investment is the potential for loss.

Aug 25

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Mitch Zacks – Weekly Market Commentary: Is There a Disconnect Forming Between the Equity Market and the Economy?

By BayTrust Financial Weekly Market Commentary

The U.S. stock market continues to hover around all-time highs, and with it, in my view, investor optimism has been on the rise. As I alluded to in last week’s column, it seems that many investors are comfortable assuming the worst of the trade war, tariff hikes, and policy uncertainty is behind us.

This may be true. But to arrive at this conclusion, it is also necessary to look past some recent weakness in economic data, where the picture suggests that growth is more middling than booming. For long-term investors, this does not necessarily signal trouble ahead. But it does argue for caution, particularly if enthusiasm is starting to shift toward complacency, as I wrote last week.¹

Let’s look at what the data is telling us.

On the surface, the U.S.’s Q2 GDP print (3.0% annualized) looked very solid. But digging into the details reveals a more mixed picture. In Q1, GDP contracted by -0.5% because imports surged nearly 38% annualized as businesses and consumers rushed to ‘front run’ new tariffs. Since imports subtract from GDP, there’s a fair argument that the economy looked weaker in the first three months than it really was.

But in Q2, that dynamic flipped.

Imports plunged more than -30% annualized, creating a statistical boost to growth. Exports fell as well, down -1.8%, as the rest of the world worked through the goods they had stockpiled earlier in the year. In my view, this indication of declining total trade is what stood out, indicating weakening overall demand in the global economy. It’s one data point, but it will be key to watch these figures for the rest of the year.

When you strip away the trade swings and look at private domestic demand, which again is a more telling signal of economic strength, in my view, the story is less rosy. Consumer spending grew at a 1.4% annualized pace, which was better than Q1 but still pretty moderate. Business investment, which is more cyclical and a key swing factor, slowed sharply from 10.3% in Q1 to just 1.9% in Q2. Investment in structures fell by double-digits, and R&D posted its third straight decline. These are signs businesses are pressing pause on long-term projects until there is more clarity on tariffs and trade policy, and to me, it’s an overlooked negative that prompts me to think more cautiously.

The jobs picture is also looking more complicated than it did a few months ago. July’s payroll growth came in at just 73,000, and prior months’ gains were revised down by a combined 258,000. The Conference Board’s Employment Trends Index fell to 107.6 in July, its lowest reading since last fall. These figures suggest hiring momentum is cooling.

Finally, tariff-related pressures are increasingly evident in inflation data. The core Consumer Price Index rose 3.1% year-over-year in July, up from 2.8% in May. Producer prices surged 0.9% month-over-month, marking the biggest jump in three years. Producer prices have historically led consumer inflation data, so we could see some of this pressure in the CPI data this fall. To be fair, the inflation pass-through looks more gradual than disruptive, but it’s also early. Question marks over inflation can complicate the policy outlook, which can make markets vulnerable to a negative surprise. Remember, at this point, markets continue to price in multiple rate cuts later this year.

Bottom Line for Investors

I want to be clear that we still see the U.S. economy as resilient. That’s the bottom line. But we’re also taking a much closer look at the underlying data, which we think paints more of a ‘muddle-through’ environment than an all-clear expansion.

For investors, this isn’t a reason to turn bearish. But it is a reminder that when sentiment shifts toward complacency, caution is warranted. The market may paint a picture of a gangbuster’s economy, but the data suggests something more moderate. This gap is worth watching closely.

¹J.P. Morgan. August 15, 2025. https://advisor.zacksim.com/e/376582/-p-five-hundred-all-time-highs/5tgjff/1296872166/h/Vi704wUxa3E684HWOfTYB4ShxAFYEiJgt-KnJmeoSwQ

DISCLOSURE
Past performance is no guarantee of future results. Inherent in any investment is the potential for loss.

Aug 19

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Mitch Zacks – Weekly Market Commentary: Are Investors Becoming Too Complacent?

By BayTrust Financial Weekly Market Commentary

A handful of trade deals have materialized, and the most severe elements of the ‘trade war’ have been dialed down. But we still inhabit a world of economic uncertainty.

The U.S.’s effective tariff rate is substantially higher than it was six months ago, the U.S. and China have yet to reach a trade agreement, and new tariffs and economic policies continue to surface. Businesses are still trying to make sense of the shifting policy landscape, which is a factor that can impede long-term planning and investment.

And yet, stocks keep rallying.

In previous columns, I’ve offered a few explanations for the strong performance off April lows. In the first four months of the year, fears about tariffs were disproportionately high. Then we got the 90-day pause, more extensions, a few deals, and dialed down tariff rates. The entire episode registered to markets as a series of “better-than-expected” outcomes, which almost always drives stocks higher. I’ve written it many times—stocks love to climb the wall of worry.¹

But the market’s strength in recent weeks looks a bit different.

There is still plenty of uncertainty regarding effective tariff rates and sectors that may be targeted, but investors seem largely unfazed by each new tariff announcement. Some market participants may be accepting that tariff rates will remain relatively high and that there will be no economic price to pay, now or in the future. But it could also be a sign of growing complacency, which if true, could be worrisome.

I’m not saying investors need to anticipate an economic downturn. I’ve recently written about the resilience of the U.S. economy, which could continue for years. I’m more concerned about investors ruling out even the possibility of an economic impact due to tariffs, assuming instead that everything is working, and will continue working, smoothly. From a sentiment perspective, this could lead to fading pessimism and growing optimism, which is another way of saying that the wall of worry may be shrinking. That’s usually a signal to look at the equity market more cautiously.

Perhaps the most “risk-on” segment of the market today is a familiar one: large-cap technology stocks. The rally we’ve seen recently gives the perception that all trade headwinds are gone, and it’s all clear from here. With big tech’s recent gains, the U.S. equity market is now the most concentrated it has been in over 50 years, with the top 10 stocks making up roughly 37% of the total market cap of the S&P 500 index. This concentration has grown much faster than the earnings those companies contribute to the index (28%), leaving one of the widest valuation and weighting gaps since 1970.

This is the type of strength investors should observe with caution. History shows that when concentration and relative valuations hit these kinds of extremes, like we saw in the late 1960s and the dot-com era, it often precedes a long stretch of underperformance for the biggest names, with stronger relative returns for the rest of the market (in this case, “the other 490”). In fact, during the most concentrated third of historical market conditions (top 10 stocks at 23–39% of index weight), the equal-weighted bottom 490 outperformed the top 10 in 88% of rolling five-year periods.

Again, I don’t mean to fire a warning signal. Big technology companies could continue to deliver, and AI’s impact on the economy and profits could be even bigger than many are anticipating. But history tells us the path is never a straight line, and leadership at this scale will be difficult to sustain over the long term.

For investors, I think it’s a reason to check your portfolio’s balance. In environments like this, trimming back some of the biggest winners, taking profits, and reallocating to areas with better value can reduce risk without sacrificing long-term upside.

Bottom Line for Investors

I’m not ready to declare that optimism is giving way to euphoria in markets today. There are still plenty of skeptics, and I think tariff uncertainty is still meaningful to a healthy segment of investors. But when optimism starts to take hold across the board, especially without a material improvement in underlying economic conditions, history suggests that caution is warranted. Our team is watching these signals closely.

As far as big tech’s outperformance, markets can stay concentrated for a while, and economic data can remain choppy without derailing a bull market. But when leadership narrows, valuations stretch, and the economic picture is cloudy, I’d expect conditions to get a bit choppier. We continue to rebalance portfolios and diversify into attractively valued areas, all while staying disciplined.

¹CFA Institute. April 2, 2025. https://advisor.zacksim.com/e/376582/-decades–mod-djemMoneyBeat-us/5tfmhj/1292261589/h/H6rBn980PI156pgSyq0LCDT8kGec5YoTBEtC0KK9FcA

DISCLOSURE
Past performance is no guarantee of future results. Inherent in any investment is the potential for loss.

Aug 15

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Mitch Zacks – Weekly Market Commentary: The Leading Economic Index (LEI) Keeps Flashing Warning Signals

By BayTrust Financial Weekly Market Commentary

In June, The Conference Board’s Leading Economic Index (LEI) fell -0.3% month-over-month, marking the sharpest drop since February and adding to over two years of successive declines. Readers can see in the chart below that LEI has been in a near-freefall since early 2022.¹

Historically speaking, these consecutive LEI declines would be a troubling sign for the U.S. economy. The index is designed to be a predictive tool, built on 10 components ranging from unemployment claims to building permits to stock prices. As seen above, the past three recessions have all been preceded by a LEI that tops out and rolls over.

Yet here we are, two years removed from LEI’s peak and subsequent declines, with no recession on the books or in sight.

Does this mean LEI is no longer a reliable indicator for the U.S. economy, meaning we should ignore it altogether when making macroeconomic forecasts? Not necessarily, in my view. There’s some context that matters here.

The first big piece is taking into account pandemic distortions. As readers may recall, lockdowns and massive fiscal stimulus (in the form of direct transfers) pulled forward demand for physical goods, which created an unnatural spike in the manufacturing sector. Among the components of the LEI are average weekly hours in manufacturing, new orders, and building permits, which are all geared toward manufacturing and goods-producing sectors.

The issue here is that the manufacturing hangover (post-pandemic) has been a major drag on LEI, even though the sector accounts for less than 20% of U.S. GDP. The U.S. is a services-based economy, and there is not much services-based economic data that goes into the LEI calculation.

The skew here matters. In recent readings, much of the weakness in the LEI comes from falling new orders in manufacturing, declining average work hours, and a slight uptick in jobless claims. Meanwhile, the U.S. services economy, including consumer spending, healthcare, technology, and financial services, continues to hold up solidly. This helps explain why LEI has been in decline since mid-2022, even as U.S. GDP has continued to grow.

Another factor is the yield curve. LEI includes the interest rate spread between 10-year and fed funds rates, which has been inverted for much of the last two years (see chart below). Historically, an inverted yield curve has been a reliable recession signal, as relatively high borrowing rates can give way to a credit crunch. But banks today are still sitting on excess deposits from the pandemic era, muting the need to borrow at high short-term rates. Lending has slowed, but we’re not seeing a collapse.

I still think the LEI is a useful indicator for investors to track, even though its ability to predict recession has not panned out in this cycle. It’s an index that’s constantly evolving; the Conference Board revamped it in 2012 and removed outdated inputs like the M2 money supply and the University of Michigan sentiment index. Even earlier, in 1996, materials prices and manufacturers’ unfilled orders were replaced with the yield curve, reflecting changes in how we’ve come to understand economic inflection points.

Bottom Line for Investors

The trend in the LEI is worth watching going forward, but I don’t think we’re in a place where ‘it’s just a matter of time’ before the recession arrives. Much of the LEI’s current weakness reflects narrow slices of the economy that are not effectively capturing the full picture. Services remain strong, consumers are still spending, and corporate profits are holding up. These drivers represent the lion’s share of output.

The key for market watchers is to treat LEI like one data point of many that you use to make forecasts and ‘check the pulse’ of the U.S. economy. No one indicator is sacrosanct or all-predicting.

¹Wall Street Journal. July 21, 2025.

²Conference Board. 2025. https://advisor.zacksim.com/e/376582/topics-us-leading-indicators-/5tdn4y/1286248270/h/8i0_CYHlAFEcPbSgvN48QvtwBHi6SRBJWpGhW04JHho

³Fred Economic Data. August 5, 2025. https://advisor.zacksim.com/e/376582/series-T10Y3M-/5tdn52/1286248270/h/8i0_CYHlAFEcPbSgvN48QvtwBHi6SRBJWpGhW04JHho

DISCLOSURE
Past performance is no guarantee of future results. Inherent in any investment is the potential for loss.

BayTrust Financial

Mitch Zacks – Weekly Market Commentary: Why Markets Rarely Flinch at Government Shutdowns

Mitch Zacks – Weekly Market Commentary: Will a Steepening Yield Curve Boost Financials and the Broader Economy?

Mitch Zacks – Weekly Market Commentary: The 4 Risks Investors Should Worry About Most

Mitch Zacks – Weekly Market Commentary: The Fed Cuts Rates, But Remember What Really Moves Markets

Mitch Zacks – Weekly Market Commentary: Bond Yields are Rising Globally. Should Investors Be Concerned?

Mitch Zacks – Weekly Market Commentary: Earnings Strength Confirms Resilience, But Leadership Remains Narrow

Mitch Zacks – Weekly Market Commentary: Why a September Rate Cut Likely Won’t Impact Markets Much

Mitch Zacks – Weekly Market Commentary: Is There a Disconnect Forming Between the Equity Market and the Economy?

Mitch Zacks – Weekly Market Commentary: Are Investors Becoming Too Complacent?

Mitch Zacks – Weekly Market Commentary: The Leading Economic Index (LEI) Keeps Flashing Warning Signals

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