Brad Simpson On Rates, A Cautious Fed, And The Implications For Markets

Markets have been pushing to new highs amid signs that U.S. inflation is moving in the right direction. But will a more cautious approach on rate cuts from the U.S. Federal Reserve potentially impact that upward momentum? Brad Simpson, Chief Wealth Strategist with TD Wealth, discusses the outlook for rates, the economy, and markets.

Transcript

Greg Bonnell – We’ve got signs that US inflation is moving in the right direction, and major equity markets have been pushing to new highs. But you also have the Fed indicating that we may only get one rate cut from them this year. So can this run in equities continue in a backdrop like this?

Joining us now to discuss is Brad Simpson, Chief Wealth Strategist with TD Wealth. Brad, great to have you back on the show.

Brad Simpson – Greg. Great to be here.

Greg Bonnell – Interesting times whenever you and I get together to talk about what is happening out there. So give me your view on what is happening right now.

Brad Simpson – The irony is– and I think we’ll probably touch on this a little bit– if we rewound and look at an interview when I did back in January, the gist of it was we’re expecting six to eight rate cuts. And that’s what we were talking about. And you know, along the lines of, we started talking about, well, boy, what would it look like if there were none? And if we kind of look at that era in, going back in January, I think like a response– like, on a consensus, response would be, well, we would be in a very dire place indeed. And well, here we are in the second week of June. And we’re in a lot of places but dire isn’t one of them.

Greg Bonnell – Not by the look at the equity markets.

Brad Simpson – Yeah. So that’s why I think kind of the start of this is– I would look at it, is– a couple of nights ago, I had the privilege to get out and do some speaking with a bunch of our clients and answer questions. And one of the things was I said, like, let’s step back a little bit, and just let’s just do a run over the last couple of years and think of the things, like how we’ve had a war break out in Russia and Ukraine. We’ve had a war break out in Israel and Hamas. We have had runaway inflation, at one point at 9%. And of course, that’s now come off a bunch, but we’ll get to there.

We’re working our way out of a pandemic, where we know it stalled the economy, all of those things. And you would think, OK, well, where are we right now? Well, OK, we’re record highs, to your thing, on the S&P 500. And we’re in an environment where much of what we’ll talk today is about interest rate cuts to try to slow things down a little bit.

And so the remarkable place I think where we are right now, is if we added it up and said in an environment like this, which you’d map out– let’s just think about first in terms of volatility, things going up and down. We have understandably seen a lot of interest rate volatility. And check. And that makes a lot of sense with the inflation environment. The next one, equity volatility– there is none. I mean it oscillates between 12 and 16. Sometimes in a crazy day you’ll see 20, but then it’s back down to there.

And I think the messaging around that is that one of the things we’re going to continue to do, if we look at the years coming ahead of us– and you and I have talked a lot about this– there is going to be angst and anxiety. And there is more strain and pressure in this world right now. And if we look at commodities volatility, same piece. And so if you look– for example, we could look at right now as a thing that– because part of our job is to think about where the risks are and where volatility could come from, when we look at Russia, Ukraine, and we look at the activity in Russia, that we do these scenario analysis of where we think that is. And we haven’t increased that as an escalating part of an area in war.

But what we have seen in Russia is escalation of the use of tactics that are on the fringe but, as a whole, enables them to avoid using and drawing in NATO powers into that, into the war there. But it does have the process of escalating the activity that is happening geopolitically in the globe.

While that’s going on, volatility is just nonexistent. And I don’t need to dig into Israel and Hamas to go, they can look at them you can see that happening. So you have to step back for a minute and say, well, why isn’t there any? And because–

Greg Bonnell – Yeah, because the kind of thing– if you were sitting in a classroom two or three years ago and they said, if this was happening, this was happening, this was happening, what do you think would happen to the equity markets? And you probably would have got full points for saying, oh, it would be a choppy ride.

Brad Simpson – Right. And one of the things…