Notes on the Week Ahead

Back from the Beach: Reviewing the Investment Landscape

American summers, much more so than in the rest of the world, are defined by two bookends: Memorial Day and Labor Day. As a result, the first week in September is always a time to review and plan. This is particularly important for investors this year since, facing a barrage of unsettling political and economic news, on one side, and very solid investment returns, on the other, it’s tempting to ignore fundamentals altogether and leave investments on auto-pilot.

The Investment Implications of the Refund Surge

On August 7^th, with little fanfare, the IRS announced that, as part of its phased implementation of the OBBBA, it would not be adjusting W2 or 1099 forms for the current calendar year but would provide guidance and new forms, in due course, for calendar 2026.

This seemingly innocuous statement confirms that we will see in an even larger crop of personal income tax refunds early in 2026 than was anticipated when the OBBBA was passed. These higher income tax refunds should work much like a new round of stimulus checks, adding to consumer demand and inflation pressures early next year.

Why Money Doesn’t Talk Any More

One of the great challenges of modern life is avoiding distractions.

In our daily lives, we are flooded by breaking news, music on planes, ads in taxis and little numbers, gazing up at us from phone apps, saying that somebody has something to say. In the investment world, we are bombarded by scrolling tickers, new products and jargon, impenetrable financial reports and the analysis of every twist and turn of government policy.

The key, of course, is not to get distracted by things that are not important. One of those things is the money supply.

The Inflation Outlook

The inflation temperature is about to rise. It should be a low-grade fever, triggered by tariff impacts but mitigated by low energy prices, declines in shelter inflation and global economic sluggishness. But it should also linger well above the Fed’s 2% target, as the initial impact of tariffs is supplemented by the effects of a weakening dollar, a lack of labor supply and fiscal stimulus in the first half of 2026. It could, of course, be further sustained by another round of fiscal stimulus before the mid-term elections.

The Investment Implications of Weaker Labor Supply

This is a particularly challenging time to try to develop and present a balanced view of the economic outlook and its implications for investors. This is partly due to dramatic changes in trade, immigration and fiscal policies that are just beginning to impact the economy, partly due to distortion and mismeasurement in many key economic series and partly due to sharp attacks on the Federal Reserve and, more recently, even government statisticians, that can cloud the judgement of political partisans on both sides.

 

The Fed Decisions

For investors, the week ahead will be dominated by the Fed decisions.

Possibly, some AI chatbot will spot the obvious grammatical error in that last sentence and change it from “the Fed decisions” to “the Fed’s decision”. However, there are really two decisions to consider: First, what will the Fed decide to do about interest rates and, second, what will the President decide to do about the Fed. Both have important implications for the economy and investing.

Underreacting and then Overreacting to Policy Shocks

As you make your way through Terminal 5 in Heathrow airport, there are plenty of opportunities to buy a T-shirt bearing the slogan “Keep Calm and Carry On”. The wearer of such a garment, upon their return to the United States, is presumably advertising the idea that a visit to the blessed plot has bestowed upon them the ability to weather all manner of shocks with equanimity.

When it comes to financial markets, however, the British could learn calmness from the Americans. The U.K. gilt market, petted and coddled by timid politicians, seems to descend into turmoil under the mildest provocation. Meanwhile, U.S. markets, hardened by years of unruly words and abrupt policy changes from Washington, does indeed seem to “keep calm and carry on”.

The Investment Implications of a Falling Dollar

Despite very significant shifts in U.S. economic policy and major geopolitical events, investors can look back at the first half of 2025 with some satisfaction. Through July 3rd, the S&P500 provided a total return of 7.5% for the year, despite being on the brink of a bear market just three months ago. Fixed income has also done well, with 10-year Treasury yields falling by 23 basis points, generating a 4.2% return year-to-date while high-yield bonds have delivered 4.8% on the back of a further narrowing of already tight spreads.

OBBBA and a Cold, Hot, Cold Forecast

On Tuesday, we will release our third quarter 2025 Guide to the Markets.  On Wednesday, we will host conference calls with financial professionals to discuss the outlook. 

It’s an outlook dominated by the impact of dramatic policy changes on a relatively slow-growing U.S. economy.  The result, in the short run, may resemble a wave, as the economy cools down in the second half of this year, heats up in early 2026 and then cool down again.  However, in the long run, the net effect of these policy changes could result in an economy with slightly slower growth and higher interest rates than seemed likely at the start of the year.  This being the case, it is hard to justify this spring’s rebound in U.S. stocks to new record highs less than three months after teetering on the brink of a bear market.  Consequently, investors would still be well-advised to seek broader diversification in areas such as international equities, value equities and alternative assets.

Tariffs and Inflation

Investors this week will be focused on the implications of the U.S. attack on Iranian nuclear facilities. While this is clearly a very significant event from a geopolitical perspective, it may be less important for financial markets.

The key issue is how Iran responds. One often-mentioned scenario is that they could try to close the Strait of Hormuz. Such a move would have a dramatic impact on world energy markets as roughly 20% of the world’s oil production moves through the Strait. However, this strategy would be highly counterproductive for Iran, first, because it would eliminate its own ability to export oil and second because it would trigger a U.S. effort to reopen the Strait that could further damage Iran’s depleted military capabilities.