Ed Yardeni, President of Yardeni Research, appeared on CNBC’s ‘Squawk on the Street’ to discuss his cautious outlook on equities as January approaches, the reasons behind the rise in Treasury yields, and the broader economic implications of these developments. Yardeni began by expressing concerns about the market entering a correction phase, potentially dropping by 10%, driven by various issues including political uncertainty in Washington and the threat of a longshoremen’s strike in mid-January.
He pointed to the resurgence of political activities, particularly with the incoming administration, as a factor introducing volatility into the market. Yardeni also mentioned “bond vigilantes,” investors who push back against fiscal irresponsibility by selling government bonds, thereby increasing yields, as being unsettled by current economic policies.
Regarding Treasury yields, Yardeni attributed their rise to a combination of factors, including persistent inflation that’s “stickier” than anticipated. He noted that the Federal Reserve has adjusted its stance, recognizing that inflation isn’t as controlled as previously thought, now hovering around 2.5% to 3% rather than the targeted 2%. This realization has led to a more balanced approach from the Fed, moving away from solely focusing on preventing unemployment increases to also addressing inflation control.
Yardeni also discussed consumer behavior amidst these economic conditions. Despite higher prices, consumer sentiment remains strong, with spending continuing unabated. He highlighted the significant role of baby boomers, who, with their substantial nest eggs and lack of financial burdens like mortgages or college fees, are contributing to economic growth. Their preference for higher interest rates, which benefits their investments in money market funds, adds another layer to understanding consumer dynamics.
When it came to the impact of potential new tariff policies under the incoming administration, Yardeni outlined a nuanced scenario. He contrasted the current administration’s America-first approach with the previous one’s more globalized outlook. Trump’s use of tariffs as a negotiation tool could lead to currency fluctuations, particularly if tariffs are raised across the board. An appreciating dollar might offset some tariff costs abroad, but if the dollar doesn’t rise, American consumers could bear the brunt of these costs.
Yardeni concluded by acknowledging the complexity of predicting economic outcomes under what he referred to as “Trump 2.0,” given the numerous moving parts at play. While some believe it could work out favorably, the details, particularly those influenced by political maneuvers in Washington, remain a significant source of uncertainty for markets and investors alike.
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