Core Viewpoint - The potential interest rate cut by the Federal Reserve may be perceived as a concession to political pressure, which could increase risks for the stock market, bond market, and the US dollar [1] Group 1: Market Reactions and Predictions - Investors have been anticipating a rate cut after a 9-month pause, with expectations solidifying for a 25 basis point cut this month due to signs of a weakening labor market [1] - The yield on the 10-year US Treasury bond has decreased from nearly 5% to around 4% as market conditions shift [1] - The stock market has seen a significant increase, with a market capitalization growth of $14 trillion and major indices reaching historical highs this month [1][4] Group 2: Investment Strategies and Returns - The "60/40 investment strategy" has yielded approximately 20% returns since the market rebound following Trump's tariff announcement [4] - US Treasury bonds have appreciated by 5.6% year-to-date, while the Bloomberg Dollar Index has stabilized after hitting a low in July [4] Group 3: Economic Forecasts and Federal Reserve Insights - Analysts, including Kelly, express skepticism about the Federal Reserve's ability to justify a rate cut given the projected inflation rate exceeding the 2% target until 2027 [5] - Kelly anticipates that inflation may be 1.2 percentage points above the Fed's target by Q4, while the unemployment rate remains only 0.3 percentage points above the target [5] - There is concern that if the Federal Open Market Committee (FOMC) ignores external pressures, the decision to cut rates could provoke significant opposition [5]

Group 1 - The 60/40 investment strategy, traditionally recommended for balancing risk and stable income, is experiencing a revival due to the restoration of the traditional inverse relationship between stocks and bonds [1][6] - As of mid-May, a 60/40 portfolio indicator in the U.S. has returned approximately 1.6% this year, outperforming the S&P 500 index with lower volatility [1][6] - The recent significant drop in the price of 30-year U.S. Treasury bonds, with yields surpassing 5%, has raised investor caution regarding long-term U.S. debt [1][2] Group 2 - Concerns over rising deficits and the impact of Trump's tax plan have led to a downgrade of the U.S. credit rating by Moody's, contributing to increased long-term bond yields [2] - The performance of long-term bonds is increasingly resembling that of risk assets rather than typical defensive assets, as noted by PGIM's Chief Investment Officer [2][6] - Short-term bonds are currently favored over long-term bonds, as investors seek higher yields to compensate for deficit risks, leading to a steepening yield curve [6][9] Group 3 - The Bloomberg U.S. Treasury Index remains negatively correlated with stocks, with an average duration of approximately 5.7, indicating lower interest rate risk compared to 30-year bonds [9] - The S&P 500 index has seen a recovery, pushing its valuation close to historical highs, while its earnings yield has dropped to 3.95%, about half a percentage point lower than the 10-year Treasury yield [9][12] - Given and other investors prefer mid-term bonds, such as five-year Treasuries, over long-term bonds due to rising debt levels and associated risks [11][12]