A Hot CPI Report Causes Problems for Fed, Caron Says

Summary

Jim Caron argues that a hot CPI report could complicate the Fed’s September decision, but higher nominal growth remains the primary driver of equity prices. He believes even a 25bp rate hike would not derail the equity rally and that the bond market is more sensitive to Fed moves. He criticizes the traditional 60/40 portfolio, saying passive fixed income (the US Agg) has delivered near-zero returns and fails to hedge equities, advocating active fixed-income management instead.

• CPI data is critical for the September Fed meeting; a hot print lowers the odds of a hike but creates uncertainty.
• Higher nominal GDP growth (including inflation) is boosting earnings and equity prices.
• A 25bp Fed rate hike would not derail the equity rally because nominal growth supports earnings.
• The real impact of Fed moves falls on the bond market, not equities.
• Market gains are broadening beyond AI, supported by tax policy, deregulation, and reshoring.
• The 60/40 portfolio is flawed due to the 40% fixed-income component.
• The US Aggregate bond index has returned zero over five years and is highly correlated with equities.
• Active fixed-income management is needed to generate alpha; passive bond investing is destructive.