TIS Corp founder is cautious about stocks after their significant rise in the past year

As bond yields soar after the US Federal Reserve cut interest rates despite a strong economy and the looming presidential election, Larry Jeddeloh has become cautious about stocks.

The Institutional Strategist editor and TIS Corp founder Larry Jeddeloh. Picture: Michele Mossop

As the US election looms and bond yields rise sharply amid inflation risks, Larry Jeddeloh has turned cautious on stocks after a massive rise in the past 12 months.

Of course much depends on monetary and fiscal policy but the influential founder of TIS Corp and editor of The Institutional Strategist doesn’t see a repeat of the strong rise in stocks he predicted last November. He’s bullish about AI and is overweight on precious metals, energy stocks and cash.

Jeddeloh thinks the current US monetary policy cycle is more like 1995 when the Fed cut three times, rather than the eight (25 basis point equivalent) cuts the market now expects.

Despite a calming of inflation jitters in recent months he expects it to bottom out as the Fed has “left the fight”, and US fiscal policy is set to remain inflationary although a Trump administration could have both inflationary and deflationary impacts based on Trump’s policy goals.

On the US Presidential election, he is concerned about a “contested” result, where the outcome may not be known for months. That wouldn’t be a surprise but could make markets uneasy.

Jeddeloh was in Sydney this week to talk with UBS clients.

A year ago the S&P 500 was about to end a three-month correction.

It went on to rise 43 per cent from 4103.8 points to a record high of 5878 hit this month.

The 10-year Treasury yield had just peaked at a 16-year high of 5.02 per cent.

With the Fed hinting at interest rate cuts and the AI boom ongoing, stocks took off.

Inflation came down, and with aggressive rate cuts expected, the 10-year Treasury yield hit a 16-month low of 3.60 per cent last month.

But in the past five weeks it has soared above 4.2 per cent despite the Fed’s rate cut. The 5 per cent level may be retested if inflation bottoms out.

On Jeddeloh’s numbers the S&P 500 is now trading on a 12-month forward price-to-earnings multiple of about 21 times which is “getting a little bit expensive”.

He says Goldman Sachs’ forecast of a 3 per cent annualised return for the S&P 500 over the next decade, “makes bonds look much more competitive for the first time in a number of years”.

And he has an alternative view on why the Federal Reserve cut rates by 50 points last month.

Although US non-farm payrolls data for July and August had rung recession bells, Jeddeloh claimed there was an ulterior motive behind the 50 basis point cut from the Fed.

“That’s when they gave up (on inflation),” he says. “I actually think they were responding to the fiscal problem that the US has.

“They pushed rates down in order to help refinance the debt at lower costs, because they’ve been pushing more and more of the debt into the short end of the curve where they can control it.

“If you look from the day they cut rates by 50 points through to today, the 10-year Treasury yield is up 60 points, and the 30-year mortgage yield is up 100 which is unusual in a Fed rate cutting cycle. I don’t think that was the plan.”

On that front he expects the 10-year Treasury yield to stay elevated in a 4 to 5 per cent range, with the downside limited by inflation and limited scope for rate cuts, and the upside limited by the sensitivity of the housing market.

Not that he thinks the primary reason was to help the housing sector necessarily or to boost the economy. He says it was meant to accommodate that debt by reducing the interest expense.

“Whoever is in power next year will have this problem of budget deficits and the cost of financing that,” Jeddeloh says.

Globally he points to other inflationary forces, including interest rate cuts, wars in the Middle East and Ukraine, and the ongoing impact of the so-called Inflation Reduction Act.

“There’s certain items they really can’t do much about, and some of the stuff is already set in the system now, like the Inflation Reduction Act – that’s actually an automatic inflation accelerator with all the spending that’s unlimited and just kicks in,” he says.

“The other thing that’s already been sent into the system are all these wage agreements, particularly with unions, which had been high single digits, and they’re there now for three or four years. So that’s not going to go away.”

But the greatest upside risk to inflation would come from aggressive tariffs on China.

“I think that’s probably the greatest risk there is if you have some US companies, some key US companies like Walmart that get as much as 75 per cent of the goods they sell from China,” he says.

But while he sees enough to think inflation bottoms here, he expects some wildcards.

One is what happens to the oil price. The other one is whether or not AI is actually deflationary or not. On the latter point, he thinks the impact will be known in a year or two.

A Trump administration may take a hard-line approach on Iran, but would also boost US supply.

“That could happen (a hard line on Iran) but if Trump wins, there’s going to be a major push to try and increase US supply of oil and gas production. They have quite aggressive numbers that they would like to get down to in terms of crude oil prices, which would be highly deflationary, but also very good for the consumer as the gas pump is the big marginal expenditure in the US.”

On monetary policy, he says that with Trump’s team targeting a 3 per cent real growth “I don’t see how you cut rates in an environment”, while on the other side he believes a Harris administration would have “high tax, high regulation, and high growth”.

As for the election, Jeddeloh says Trump now has considerable momentum.

But whatever the outcome he is expecting a contested result.

Originally published as TIS Corp founder is cautious about stocks after their significant rise in the past year