By John Lau, CPA, CFP®
September 2, 2025 – Markets surged following Fed Chair Jerome Powell’s Jackson Hole speech, where he struck a more dovish tone and openly signaled that a September rate cut is on the table. That shift fueled aggressive rate-cut assumptions, propelling cyclical sectors, small caps, and broad indices higher.
On the surface, it feels like Powell introduced a fresh bullish catalyst. In reality, all he did was reinforce expectations already firmly in place—the Fed Watch tool had September cut odds near 100% before Powell spoke. The real reason stocks took off was that his comments helped investors look past “hot” August inflation data (CPI, PMI price indices, and Walmart’s tariff warnings). With Powell easing fears, investors could instead focus on strong economic data, especially robust PMIs, creating a recipe of stable growth, some inflation pressure, and a Fed still poised to cut rates. That’s a short-term positive mix for equities, reinforced by momentum and new S&P 500 highs.
The Bigger Picture: Stagflation Risks
Despite the optimism, it’s important not to confuse Powell’s dovishness with falling stagflation risks. In fact, they are rising:
- Inflation pressures are mounting again, with multiple price metrics trending hotter.
- Labor market momentum is softening, as continuing jobless claims and monthly reports head in the wrong direction.
None of this is severe enough yet to derail markets, but if stagflation fears intensify, the S&P 500 could fall (could be 5–10%)—or more if true stagflation takes hold.
Portfolio Positioning
At this stage, these risks don’t warrant going defensive or slashing volatility in portfolios. Instead, the right approach is balance:
- Maintain cyclical exposure (industrials, financials, materials).
- Continue owning large-cap AI and AI-tangent names (mega-cap tech, consumer discretionary, utilities).
I believe this positioning captures near-term market strength while guarding against longer-term risks.
Our clients rely on us for timely information, and our job is to deliver.
Powell, Rate Cuts, and Stagflation Risks
By John Lau, CPA, CFP®
September 2, 2025 – Markets surged following Fed Chair Jerome Powell’s Jackson Hole speech, where he struck a more dovish tone and openly signaled that a September rate cut is on the table. That shift fueled aggressive rate-cut assumptions, propelling cyclical sectors, small caps, and broad indices higher.
On the surface, it feels like Powell introduced a fresh bullish catalyst. In reality, all he did was reinforce expectations already firmly in place—the Fed Watch tool had September cut odds near 100% before Powell spoke. The real reason stocks took off was that his comments helped investors look past “hot” August inflation data (CPI, PMI price indices, and Walmart’s tariff warnings). With Powell easing fears, investors could instead focus on strong economic data, especially robust PMIs, creating a recipe of stable growth, some inflation pressure, and a Fed still poised to cut rates. That’s a short-term positive mix for equities, reinforced by momentum and new S&P 500 highs.
The Bigger Picture: Stagflation Risks
Despite the optimism, it’s important not to confuse Powell’s dovishness with falling stagflation risks. In fact, they are rising:
None of this is severe enough yet to derail markets, but if stagflation fears intensify, the S&P 500 could fall (could be 5–10%)—or more if true stagflation takes hold.
Portfolio Positioning
At this stage, these risks don’t warrant going defensive or slashing volatility in portfolios. Instead, the right approach is balance:
I believe this positioning captures near-term market strength while guarding against longer-term risks.
Our clients rely on us for timely information, and our job is to deliver.
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