September 1, 2025

Happy Labor Day!

First let me inform you that next week I will be taking the day off from writing this newsletter, I will be back pontificating on September 15th. Here are the numbers from relatively flat last week. The S&P 500 gained a slight .04%, the Dow Jones Industrial Average fell -.13%, the Nasdaq shaved -.05%. Internationally the FTSE 100 had a tough week off -1.31%, and the MSCI-EAFE lost -1.8%. The 2-Year Treasury paid 3.632% and the 10-Year yield finished at 4.232%.

So, what happened? Some big news with an appellate court ruling the Presidents tariffs is illegal, setting up a welcome move to the Supreme Court as the continued intrusion into the Executive branch by the Judiciary continues. The significance is that despite the ruling the court allowed the tariffs to continue to October 16, allowing the collection of the very significant revenue to the treasury, and the time to appeal. The point is the left has used the courts to further their agenda which they could not achieve in the Legislative branch. Up until this administration they have mostly succeeded. However, the combination of who is the president, the mandate he received from the electorate, plus the fact that all these tactics have been intentionally or unintentionally shown the light of day (and the majority of the American people are paying attention,) we may see a return to each of the co-equal branches of government get back in their lane as the founders intended.

On to the markets, the markets closed out the month on something of a lackluster note, but given how many traders/investors are probably on vacation, it is hard to read too much into the gyrations last Friday. There was little economic news all week, and outside of NVIDIA’s earnings report, the focus of attention was basically on the battle between the President and the Fed. But for the full month, the markets were cooperative. Small-cap stocks finally started to get a bit of jig in their step, as did the banks, and the uranium theme percolated nicely.

The main economic report was the release of the Fed’s preferred inflation gauge for July. The core PCE price index rose 2.9% year-over-year in July. This was consistent with the forecast and a tick higher than June’s reading of 2.8%. No big surprises here. No one is shocked that inflation seems stuck in the 2.5% to 3% range, and few put much, if any, credence in the Fed hitting its 2% target any time soon. And depending on what happens in D.C. in days and weeks to come, the idea that the Fed has any inflation target at all may go out the window entirely.

Picking up on my theme of the Judiciary, the Fed battle will end up there also. An Analysis by Gemmer Asset Management is quite insightful and on point:  By now there is little doubt that the structure of the Federal Reserve is going to change in the weeks and months to come. The debate could go around in circles forever about the merits of whatever change may occur, but all investors can do is adapt. The latest step was President Trump firing Lisa Cook as Fed governor, more than a decade before her term was up. Of course, Cook protested and is suing, alleging that such a move is illegal. A federal judge actually heard the case on Friday. This is unprecedented stuff. It’s in the Fed’s constitution that a governor can be fired ‘for cause’, but the term isn’t defined, and the power has never been tested. The judiciary is now tasked with defining the term, and it’s not much of a stretch to envision a legal drama going to the Supreme Court. But in a way, what’s to come doesn’t much matter. The agenda behind firing Cook is obvious, as Trump told a cabinet meeting earlier in the week: “We’ll have a majority (on the FOMC) very shortly. Once we have a majority, housing is going to swing, and it’s going to be great. People are paying too high an interest rate. That’s the only problem with us. We have to get the rates down a little bit.”

First, some background. The Fed Funds rate is an overnight interest rate and is set by the full Federal Open Market Committee — or FOMC. The FOMC consists of the seven-member Board of Governors in Washington, the president of the Federal Reserve Bank of New York, and four of the remaining eleven Reserve Bank presidents, who serve one-year FOMC terms on a rotating basis. Replacing Cook with a loyalist would mean four of the seven Board members would be the President’s nominees. Now the heads of the regional Feds — based in Cleveland, Minneapolis, Dallas, Philadelphia, Kansas City, St Louis, Boston, Atlanta, Richmond, San Francisco and Chicago — are selected locally, but they have to be approved every five years by the seven-member Board of Governors. Control the board, and in theory you control the regional Feds. Oh, and every single one of the dozen regional presidents is due for re-approval this February. As J.P. Morgan notes: ‘If the president were successful, the outcome would be momentous…the entire slate of 12 presidents’ terms are recertified every five years by the Board of Governors, in February of years beginning with a 1 or 6 (i.e. next February). That means that if the two most recent dissenters allied with whoever fills the two new vacancies, they could remove all twelve presidents, thereby dramatically reshaping the FOMC. Before jumping to that conclusion, however, we should point out that those recent dissents were predicated on differing opinions about the balance of risks to the outlook, not the competency of the presidents. Perhaps the more relevant outcome of a successful removal of Cook is that other governors could potentially be exposed to removal as well.’ It seems another long-established bureaucratic norm is finally under scrutiny; I chuckle because the famous libertarian Ron Paul, former Congressmen from Texas, has screamed about auditing the Federal Reserve for most of my adult life.

The end game? The talk all week was about the imminent end of Fed independence. Well, maybe, but we suspect the outcomes here aren’t binary. This seems like more of a ‘dimmer switch’ type of scenario. Under a traditional economic framework, the Fed balances the tradeoffs between inflation and unemployment. More of one means less of the other. This isn’t an uncontroversial view, but it’s at least how the Fed views its mandate at the moment. If diminishing Fed independence is like a dimmer switch, then rather than evenly assessing the tradeoffs between the two factors, there will always be a finger on the scale in favor of lower rates, implying a greater tolerance for inflation. (As an aside – it isn’t like past Fed’s have divine wisdom a la Solomon. The members of the Fed Board are human, like everyone else [despite rumors to the contrary], and they have biases. Paul Volcker took it upon himself to crush inflation. Greenspan saw himself as the [Ann Rand-inspired] maestro, artfully conducting the global economy. Volcker’s choices have largely been validated by history, Greenspan’s not so much.) But if the President gets his way, policy is likely to be easier in the months and quarters to come than it would have been. There were hints of this in the market’s reaction to the Cook news this week. Shorter-term bond yields have dipped as investors priced in rate cuts, but longer-term yields actually ticked higher. Forgive the length of this explanation, I thought it of great value to communicate why all this matters to you and your money. Obviously, what the Federal Reserve does affect many important points in our economy and subsequently the US and World markets.

Just a word about Europe, August was another good month for the S&P Europe 350®, ending in the black with a positive return of 1% and extending gains over the quarter. The U.K., holding nearly 24% of weight in the index, was the lead contributor to S&P Europe 350 gains again in August, despite the half percentage point deficit of the S&P United Kingdom (GBP) versus the S&P Europe Ex-UK LargeMidCap. France, facing another crisis within its government, lagged the rest of the continent. Health Care and Consumer Staples led the charge among sectors, with healthy returns above 4% and 3%, respectively. The biggest losers, Information Technology, Utilities and Industrials, saw comparatively smaller losses under 2%, reflecting the growth of the S&P Europe 350 over the course of the month.

Finally, As Barrons Alex Eule reports: The Nasdaq is up 11% on the year. The S&P 500 has seen a 9.8% gain, and the Dow is up 7.1%. Ultimately, the uncertainty around trade and geopolitics has been overshadowed by a strong stretch of corporate earnings, and, most importantly, the growing hope for rate cuts.

The rate-focus will be that much more intense when traders return from the Labor Day holiday. The Federal Open Market Committee meets from Sept. 16 to 17, with a near universal expectation for a quarter-point rate cut coming out of that meeting. Anything that changes those expectations — a jobs report next Friday or a CPI report on Sept. 11 — would be unwelcome surprises for stocks. So, September traditionally the worst month for stocks (an average a 1.9% decline) may validate history or like everything lately turnout to be a nice surprise.

Mike