Fed decision a 'wild card' for markets in second half of year

As stock markets (^DJI,^IXIC,^GSPC) enter the second half of the year, investor focus has shifted to the Federal Reserve's stance on monetary policy. SEI chief investment officer Jim Smigiel offers his insights on the economic landscape.

While acknowledging the economy's resilience, Smigiel warns that higher interest rates will likely remain challenging in the coming months. He states, "We see inflation being stickier than expectations," and suggests that if the Fed were to cut rates, it would likely be limited to only one for the year.

"The one wild card here is what will the Fed do," Smigiel told Yahoo Finance. He believes a July rate cut is "off the table" and views a September rate cut as unlikely, given its proximity to the election.

For more expert insight and the latest market action, click here to watch this full episode of Market Domination.

This post was written by Angel Smith

Video transcript

Our investors prepare for hopefully another strong July ahead.

Focus still remains on the Fed and the path ahead for the second half of the year.

And joining us now is Jim S. Miguel SE.

I Chief investment officer Jim, Great to see you.

Good to see you again, Josh.

So we had a Maybe some big picture.

Jim, we had, you know, obviously strong first half.

Um, What are you telling your clients, You know, Do you think the good times continue?

Do we repeat this in the second half?

We're we're definitely letting them know that we think the economy has been much, much more resilient than we had expected.

Uh, but we also are having them prepare for higher interest rates.

We're seeing that today.

This has been two pretty strong days.

Uh, obviously, a lot of that based may be on the outcome of the, uh, of the last debate and what that portends for November.

But but our view has kind of always been, and this is being one of our biggest tactical positions.

This year has been for higher 10 year rates.

I mean, we we see inflation being stickier than expectations.

The Fed wants to cut.

There's no doubt about that whether or not they should or not.

But we think we're only gonna get one this year.

Uh, and and we think the tenure does continue to drift even drift back up to that 5% level.

We the the bigger news last week, maybe even from a debt perspective outside of the, uh, debate was really the CBO report.

So you know, we 400 we are.

We're gonna add $400 billion to the debt Since the February estimate.

We're looking at 100 and 22% debt to GDP in the in the next 10 years.

Interest costs, overtaking defence spending.

The picture is not is not a pretty one.

And supply and demand at some point is going to matter in the treasury market.

When you talk about getting back potentially up to that 5% level, what does that timeline look like?

How quickly do you think we could re approach those?

We wouldn't be surprised to see that as we approach the end of the year.

So, you know, the one wild card here is what will the fed do?

We think we don't have enough time between now and July.

July is off the table, and September might just be a little too close to the election.

So again, they want to cut.

Whether or not the data is gonna allow them to do that remains to be seen.

We'll get another picture of that, uh, this coming Friday with, uh, NFP.

Uh, but this bear Steen that we've seen in the curve is something that we expect to continue.

Uh, so this could definitely be by the fourth quarter of this year.

We're going to test those levels again.

Let me ask you, Jim, um, another earning season fast approaching here where I'm just curious to get your take.

When you look at earnings expectations, do they look, um, achievable to you, Jim?

Do they look lofty?

How how do you think about it?

I'll take the latter.

They look a bit lofty.

Um, very optimistic.

Uh, I think earnings season is gonna be interesting from not necessarily Do do companies hit their numbers, but how they hit their numbers.

Are we talking about Is this is this micro management?

Is this expense management and buybacks to get to this number that the street has put, uh, on each individual company or are we actually seeing kind of organic growth?

And and outside of all that, we're really more interested in guidance than we are in kind of the earnings, Like how?

How are what are?

How are companies seeing the next kind of six months of the year?

How are they preparing?

What do what do they see the the economy on that kind of day to day basis?

What does that mean for the consumer?

What does that mean for the business environment?

That's gonna be the most interesting thing.

But the the bar is high.

The bar is particularly high in in Mech.

I mean, that's that's where it's it's very, very lofty.