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Markets (^GSPC, ^IXIC, ^DJI) continue to reel as investors weigh political risks and global volatility, with sharp moves in bonds (^TNX, ^TYX, ^FVX), the US dollar (DX=F), and equities.
FS Investments chief market strategist Troy Gayeski joins Market Domination to discuss why recession risks and the clash between President Trump and Federal Reserve Chairman Jerome Powell are adding pressure across asset classes.
To watch more expert insights and analysis on the latest market action, check out more Market Domination here.
I think the main point to remember, as we discuss today, which I've made the past six weeks, is that, you know, you've really never had a president or a cabinet that's been willing to run a reasonably high risk of a recession, and we're already have had a bare market, in order to achieve trade goals, right? As noble as they may be, you know, that's a very big risk to run, and you're seeing the market reaction, and you know, you can kind of think of this in a variety of ways. Our favorite kind of comparison is to 2022, which was the original galactic mean reversion. A lot of the forces that had driven equity prices well in excess of corporate profit growth and nominal GDP growth had been reversed. And one of those forces was lower interest rates, interest rates went up a lot. The other was the Fed printed money like crazy and then the Fed started to constrain money supply. This time around though, it's caused by really a full-on assault on those that benefited the most from globalization, which have been primarily, primarily been US multinationals, which make up the largest market cap in the world and US markets, as well as our trade partners, which certainly in some ways took advantage of us, but, you know, they were playing by the rules that we established as a country. So, the point there is when you think of the pain that we've had so far, which is certainly, if you've had too much beta coming into this environment, it's been very painful. Um, it's going to take quite a long period of time to sort out because, you know, corporate profit margins were expected to increase from 12% to 13% this year, which always seemed pretty crazy. And now there's a realistic probability they compress and we get flat earnings growth, or or no earnings growth, even if we can avoid recession.
You know, Troy, today, it did not seem like tariffs or earnings were front and center for investors. I mean, really, what seemed to be front and center, it was Trump going after Powell, very, very publicly and very personally. You know, he's late, he's a loser, they should be preemptively cutting. One, I'm just curious, I mean, you saw that. Do you think, do you think Trump could really try and make a definitive, deliberate move here to get Powell removed? And two, if he did do that, Troy, what do you think the response and reaction of markets could be?
Yeah, so, I think oftentimes there's a lot of rhetoric that comes from the president that he, uh, fortunately doesn't follow through with. Um, that being said, to your point, what's exacerbated this downturn, right? Is you've had all these flows of capital that have supported US markets internationally, um, really go in reverse at a very rapid pace. You think of how much the dollar's weakened versus the euro as an example, which, you know, the euro was up super strong today over 1% versus the dollar. You think of the ugly price action at the back end of the yield curve that the 10-year and 30-year treasury bonds are getting slaughtered again today. And again, if you're selling US assets and you're moving them overseas, you only have deep liquid market choices, which, of course, bring you back to, uh, the Magnificent Seven, you know, listed equities on the Nasdaq or in the S&P. And so, both the dollar, the bond market, and equity markets are taking on the chin, some of which was undoubtedly exacerbated by the comments directed at Chairman Powell.