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.