Key Takeaways:
Fed raised core PCE inflation projections for 2026
Consumer spending accelerated during Middle East conflict
Household cash at 11.6% of assets enables rapid equity market recoveries
Market rebounds now average just 11 trading days from trough since 2020
New Fed Chair Warsh dropped forward guidance, increasing expected volatility
Warsh drops forward guidance and adds to hawkish signaling
Kevin Warsh's inaugural meeting as Fed Chair last week confirmed suspicions that forward guidance will play a significantly smaller role than in the past.
Forward guidance helps market participants price the future with more certainty, which has the effect of dampening volatility.
Removing forward guidance will likely have the opposite effect.
We expect a broad market, both in rates and equities, to potentially increase going forward.
Chair Warsh reiterated a commitment to price stability during the press conference.
With concerns around weakness in the labor market fading, Warsh and the Fed are turning their attention back towards reining in inflation.
Notably, the committee trimmed its 2026 growth forecast slightly but revised up their core PCE inflation expectations to 3.3% from 2026 from 2.7% prior.
As a result, nine of the 18 participants now expect higher rates by year end, a near full regime change from the March projections.
Bottom line: Chair Warsh and FOMC voters moved more hawkishly than markets initially anticipated.
Data signals a resilient macro backdrop
We will continue to assess the extent to which this hawkish repricing has more room to run, which could lead to a further dampening on risk appetite in global markets.
So much attention rests with the AI trade that we believe many investors may be missing broader signs of economic strength.
Notably, nominal same store sales growth continues to accelerate after averaging 5.5% across 2024 and 2025 and then opening 2026 at a fast 6.6% pace.
The strength held even as conditions in the Middle East escalated.
Gasoline prices surged, and inflation broadened.
However, consumer spending has accelerated.
Nominal same store sales growth has run at 7.8% since the Middle East conflict started, a pace we have not seen since 2022.
Additional evidence from small business hiring intentions, which have remained resilient, point to a healthy backdrop for growth.
That matters because most small companies lack the levers large firms can pull to manage higher prices or shifting technology.
Wages also reinforce the picture.
A net 31% of business owners raised wages in May on a seasonally adjusted basis, above long-term averages, supporting the spending we see in the data.
Bottom Line: Rising wages, resilient labor markets, and healthy spending support economic growth as we move into the second half of 2026.
Ample liquidity supportive of rebound speed and market durability
Cash on the sidelines has been a theme for most of the post-Global Financial Crisis (GFC) era, and it persists today.
Bank deposits, Treasury bills, and money market fund holdings sit at 11.6% of total household assets.
Investors reduced cash leading up to the equity market corrections in 2000 and during the GFC, but today, even as rising equity and home prices have lifted total assets, that cash as a share of those assets remains elevated.
This liquidity matters for how markets behave.
It provides a ready source of buying power, and in our view, it has underpinned the speed and intensity of recent equity rebounds.
The pattern is striking.
Since 2020, setting aside the 2022 bear market, seven of 11 drawdowns of 3% or more rebounded faster than they fell, with recoveries in those periods averaging just 11 trading days.
Across all of those episodes, the average rebound took 18 days, around three weeks.
Recoveries have become faster and less forgiving.
As a result, the window to re-risk has narrowed materially, and missed entry points have proven costly.
Sentiment adds to the picture.
The exuberance around hotly anticipated Initial Public Offerings (IPOs) signal broad bullishness, and the recent SpaceX listing is a vivid example.
The stock now carries three times the market cap of the largest company in the world by sales on roughly 3% of its revenue.
When enthusiasm clusters around a single idea, we keep our antennae up for air pockets.
This is awareness, not a forecast.
In an environment where liquidity stays high and rebounds keep compressing, waiting for extended weakness may prove impractical, so a more responsive approach in our view is adding risk.
We hold a strong conviction that equities will outperform bonds and prefer to express risk there.
Bottom line: Ample liquidity has allowed investors to step in fast, and that buying power continues to compress the length of market recoveries.
Assuming inflation does not accelerate meaningfully and trigger a more aggressive hiking cycle, our bias is to own more risk.
