Above the Noise: Solid ground for markets

My firstborn daughter will be among roughly 3.7 million young adults in America graduating high school in the coming weeks, part of a class achieving a nearly 90% graduation rate that stands near a record high.¹ Not surprisingly, I wasn’t asked to deliver a commencement speech, but I still feel compelled to say something to this class:

First, congratulations. If you’ve managed to take a break from graduation and bed/commitment parties to scroll through the headlines, you’ve probably heard that you’ll fall behind your parents’ standard of living and that your generation could preside over a long decline in the US. Don’t believe the decline narratives! I was born in 1976, when many believed American prosperity had already peaked. Eighteen years later, I graduated from high school as part of a “slacker generation” that, we were told, would never amount to much. So much for that!

Admittedly, you haven’t had it easy. Your class didn’t just grow up fast (at least from my perspective), it had to adapt fast. You were born into a financial crisis, educated through a pandemic, and shaped by social tension and rapid technological change. And yet, you’ve shown remarkable resilience. You’re ready for this moment. You’re as educated, globally aware, technologically fluent, diverse, and decent as any graduating class in recent memory. The future isn’t something to fear, but something for you to build.

Thanks to you and your classmates, the world is about to get a whole lot better.

It may be confirmation bias but …

… the recent surge in gas prices is unlikely to derail the consumer to the extent many fear. What really matters isn’t the price at the pump, even though it clearly hurts, but the share of income it consumes.

US spending on gas was below 2% of disposable personal income, as of the end of March. (See the chart below.) That’s about one standard deviation below its long-term average going back to 1958, and that was with prices already above $4 per gallon. That’s very different from prior energy shocks. In the 1970s, gas was more than 3% of income and ultimately moved toward 4.0%–4.5% by the early 1980s, levels that genuinely crowded out other forms of spending.²

None of this is meant to dismiss the pain. Paying $60 to $70 or more to fill up a car is real,³ and it’s even more challenging knowing that the burden falls much more heavily on lower-income households. But the math matters. And right now, it suggests it’s more likely to be a sentiment headwind than a true spending shock, and unlikely to push the economy into recession on its own.

Since you asked (part 1)

Q: Are you concerned that new Federal Reserve (Fed) Chairman Kevin Warsh will be tested by the market early in his tenure, as is often the case?

A: Warsh is stepping into the Fed at a challenging moment, with political pressure for lower rates colliding with rising inflation expectations.⁴ I’d view the narrative that the market tests new Fed Chairs, however, as little more than a coincidence.

The idea may trace back to October 1987, when the stock market crashed just two months after Alan Greenspan took office.⁵ And yes, Ben Bernanke encountered the early housing downturn, and Janet Yellen walked in just after the Taper Tantrum. But these examples speak more to the challenges of a specific time than to any deliberate market gauntlet.

In fact, the data doesn’t support the notion of an automatic stress test for new Fed Chairs. The average six-month S&P 500 return following the start of the last six Fed Chair tenures is a positive 3.60% with a wide range of returns, including 19.64% for G. William Miller, 10.37% for Paul Volcker, –25.27% for Alan Greenspan, –0.90% for Ben Bernanke, 10.52% for Janet Yellen, and 7.23% for Jerome Powell.⁶ This dispersion suggests that each Chair inherits a different backdrop, and markets respond to fundamentals, not tenure.

Since you asked (part 2)

Q: You’ve consistently noted tight credit spreads. Do you think we’re seeing any structural changes underpinning this, particularly related to the growth of the private credit market?

A: Public credit spreads have tightened since the conflict with Iran began,⁷ and I still view that as our best real-time signal of the underlying strength of US businesses and the broader economy. It’s true that stress in private markets can emerge more slowly. But if there were systemic issues developing in private credit, you’d likely see it reflected in public markets with wider high yield spreads and rising credit default swaps, especially given the overlap in borrowers across these ecosystems. What continues to give me comfort is how restrained leverage growth has been for US corporates since the pandemic.⁸ This simply doesn’t look like an over-levered economy. That backdrop reinforces the message from credit markets that the foundation remains sound.

It was said

“Expect substantial disinflation after one to two more hot inflation numbers.”

– Treasury Secretary Scott Bessent

The hot inflation number he referenced is the 3.8% increase in the US Consumer Price Index from one year ago.⁹ The more important question is whether this proves to be another temporary flare-up or the start of something more persistent, and whether the Treasury Secretary is right that disinflation will follow.

Market-based inflation expectations have drifted higher, with three-year expectations at 2.80% and five-year at 2.60%, both notably above the roughly 2.25% level at the start of the year.¹⁰ These moves aren’t insignificant, but expectations still sit in a range that can broadly be described as consistent with price stability. At the same time, markets have begun to price in additional Fed tightening, with at least one rate hike expected between now and the spring of 2027.

I’m often asked what would make me more cautious about stocks. A sustained rise in inflation expectations alongside a more active Fed would be a clear starting point. We’re not there yet. For now, I’d still characterize the environment as one of relative stability, but the balance of risks becomes less favorable if inflation expectations continue to move higher from here.

Think/rethink

Think: Rising markets have diverged meaningfully from underlying fundamentals.

Rethink: Corporate earnings have been consistently strong. Companies in the S&P 500 Index have now delivered double-digit earnings growth for six consecutive quarters.¹¹ Importantly, the strength has been broad-based, with nine of 11 sectors exceeding expectations in the most recent reporting period.¹²

On the road again

My travel took me to Fort Lauderdale for the Barron’s Advisors Team Summit, where I had the opportunity to dine next to Roger Carstens, US Special Presidential Envoy for Hostage Affairs. His message was clear. In the highest stakes situations, success comes from discipline, patience, and perspective. Slow, deliberate decision-making beats emotional reactions, especially when uncertainty is high. The key is to understand the other side’s motivations, build trust before trying to influence, and stay calm when others cannot.

You can’t control the environment, but you can control your process, behavior, and preparation. Over time, information can improve, emotions fade, and better outcomes can become possible for those willing to listen, stay steady, and let time work in their favor.

It’s not hard to draw the connection to investing.