US economy getting back to 'normal,' but Americans are 'uncomfortable': John Lynch

Stocks closing higher yesterday to kick off the second-half of the year. As you can see, Dow gained about 50, S&P up 14, NASDAQ up 146. It was about technology stocks yesterday. If you can't figure that out from looking at that screen markets are green across the board so far this year. Joining me now is Comerica Wealth Management chief investment officer, John Lynch. John, good morning. So we've been talking about this. We're now into the second day, the second-half of the year as far as trading goes. And this is kind of that pivot point where investors start to look at their portfolios and think about making maybe some changes. Good morning, Cheryl. Yes, absolutely. It was a great first half. We saw about a 15% return in the S&P 500. And what we're looking at going forward is we ran some numbers that since 1990, we identified ten periods where the S&P was up by 10% or more in the first half. And we found that we get an additional 10% over the ensuing 6 months and 14 or 15% over the ensuing 12 months. So using that data, I would encourage investors not to not to bail just yet. I think there's a little more room, but new money should be prudent and dollar cost average into the market at these levels. OK, Look, while I jump in here, how are you feeling about the second-half of the year? Well, it's interesting. I, I saw something happen yesterday that is very interesting. If you paid attention to just the stock market, I don't think you really would have noticed too much. If you paid attention to the bond market, I think it's telling of what's coming for the future. Two things actually. One, that a Trump presidency is more likely, but another, because it's more likely that the 10% tariffs he's been talking about is probably right around the corner, which is why you're seeing interest rate yields rise. So John, my question to you is, if you know Trump presidency is becoming more likely and people are pricing in that the tariffs are more inflationary, what does that mean for the future going forward in the second-half? And is it actually inflationary? I'm glad you brought that up. You know, we've been conditioned over the last couple of years that we can function in an inverted yield curve. And I would view a steepening of the yield curve actually as positive longer term for the economy and and frankly the financial markets. I think, you know, a steeper, steeper yield curve is not something we should fear. We did get a bit, well, obviously 15 basis points on the on the benchmark yesterday. But I do think it's important to really think about that steeper yield curve and what that means. I suspect the Fed is going to have to cut at least two times over the next 9 to 12 months. I'm not convinced it's going to all be done this year. We've got nominal GDP of about 5% and the federal funds rate is 50 basis points above that. So at a minimum, the Fed has to take rates, I believe down to pace of growth for nominal GDP in that 5% range. Do you think that's going to be a September cut that, you know, this week will help determine that, right? If we see a material weakening, we're looking for about 200,000 jobs on Friday. As you all know, the Fed has been solely focused on inflation over the last three years and that second part of their mandate I think is going to gain increased attention over the next few months. You know, we had AI guess a low of 3.5% on the unemployment rate several months back. We're at 4% print currently. I would view 3.5% as anomalous, but if we want to think about a move from 3.7% on the unemployment rate of of over the next couple of months, we get up to 4.2. the Fed will have to cut in September because anytime we've historically seen A50 basis point increase in the unemployment rate that's typically associated with recession. OK, well, and, and that's the thing. If, if we start to talk about rate cuts, you're, you're looking at an economy that underneath is, is weakening, which I guess it's the other side of the trade that we probably don't talk about enough. But I want to ask you about this. And this is in the jobs picture as well. There's this new Bank rate survey and it finds that Americans overall need an average annual income of more than $186,000 just to feel financially secure or comfortable in today's economy. And with all of the, the jobs data that we've got on deck this week, it, it makes you wonder if that is coming from lack of employment, lack of wage increases, lack of job security. Is that how you would read this report or? No, I'm, I'm not so sure about that. I, I think, you know, we're seeing businesses spend on capital, we're seeing businesses spend on labor, we're seeing incomes up. We see a fully employed consumer. I think that frankly, we're getting back to a more normal situation and maybe maybe many, many people are uncomfortable with that. Again, the steepening yield curve as an example. But if we still see income growth and employment growth, you know, we're, we're, we're, we're seeing a drawdown obviously in the saving rate from post pandemic savings. But if we can chug along in that 2% GDP hover in the four, 4.2% worst case in the, in the unemployment rate, I, I think incomes will follow. One of the things that you're right about is the sectors that you're looking at for the second-half and it's communication services, healthcare and technology, right? Well, yeah, no, no great insight there, right. You have to be part of telecom and communications anyway, Go ahead. I'm not going to win a Nobel Prize for that one. But I do think participation in those areas are great because I I think about over the course of my career, the way we've transitioned for technology and communications really as almost a defensive play in periods of weakness. And that's really been a fascinating development because you know, I looking at late 23 throughout most of 24, we've seen tech and communication services perform as though investors were discounting their future earnings AT0AS opposed to 5%. And even though the Fed brought rates up to 5%, these things still outperforms that. Clearly it is different this time, whether or not we want to admit that. And I think why we're doing that is because, you know, that 5% on the short end of the curve that these companies have ample cash cushions, right? So they're earning 5% on that. They're able to sell fund, you know that their discounted cash flow models all look very, very attractive. So there's a defensive and a growth aspect to them. So they're starting to get expensive. So I would not load the boat on them, but at a minimum participation, think good trade currently with some of the recent political developments would favor financials and energy as well. Yeah, Well, it's funny because Mark Tepper was on the show yesterday. He said there's two sectors that are very Republican friendly. If we do have a Republican again in the White House, which would be Donald Trump and it would be financials and energy. So there's a theme there. John Lynch, thank you very much for being here. Thank you, Cheryl.