This Week in Review | The Fed, Stock Valuations, Chinese Real Estate (Aug. 29, 2025)

Transcript

Tim Schluter:

Hello, and welcome to This Week in Review. This weekly segment is designed to highlight a few important developments you may have missed this week, what they may mean for markets, and most importantly, the potential impact for investors.

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Now, let's review what happened this week:

First, an update on the Fed.

On Monday, President Trump announced he was firing Fed Governor Lisa Cook, citing allegations of mortgage fraud as justification. However, it's unclear whether President Trump has the authority to do so, and Cook has since responded by suing Trump, with many expecting the case to end up before the Supreme Court. We caution investors against letting personal political views impact how you assess the situation. Rather than getting caught up in the political noise, remember the Fed is just one factor influencing the US economy, and we think many overrate its market power. US monetary policy decisions are made by a 12-member group at the Fed. Regardless of whether the president appoints two or three members, you cannot predict with any certainty what the Fed will actually do. Fed actions only relate to short-term interest rates. Long rates are set by the market based on a variety of factors, including inflation and economic growth expectation. Now, we can see a case for the Federal Reserve cutting rates. Not because the US economy needs rescuing, but because cuts could help improve US lending conditions and better align them with the rest of the world. And a steeper yield curve could make it easier for banks to lend. But here's what's important to remember: lending and US economic growth have stayed strong even after the Fed paused rate hikes. Rate cuts can help when they make the yield curve steeper, but they're not a magic fix for everything. What really matters for lending and the broader economy is the overall shape of the yield curve and how healthy credit markets are, not just where short term interest rates sit.

Next, the latest on stock valuations.

With markets near all-time highs, some investors fear stocks may be overvalued and too expensive. They worry that high price to earnings, or P/E ratios, may signal a market peak or poor returns ahead. This thinking assumes stock valuations predict future returns, but history tells us otherwise. For every instance in which high P/E ratios are followed by poor stock returns, there are a similar number of times when strong stock returns follow. For example, P/E ratios were above average for much of the late 1990s, and markets continued to roar upwards until the eventual bear market began in February 2000. While overall global stock valuations today are above average, this is primarily due to higher valuations for US stocks. Many other markets around the world, such as Europe, have lower valuations today. We don't think investors should look solely to P/Es as near-term stock market timing tools. Instead, we believe investors should look at broader economic, political and sentiment factors when trying to assess markets.

Finally, a cautionary tale on Chinese real estate.

This week, China's Evergrande was delisted from the Hong Kong Stock Exchange, ending a years-long saga. We typically don't comment on individual securities, but we think Evergrande provides a good case study on false market fears. Now, back in mid-2021, investors were concerned Evergrande, China's largest real estate developer, was facing a debt crisis. Many feared an Evergrande default would be a "Lehman moment," which could trigger a broader financial crisis. We saw things differently, though. Evergrande is roughly 300 billion USD of outstanding debt was simply not large enough to bring down the global economy, particularly when considering little of it was owned by foreign investors. Evergrande's eventual default was followed by years of hardship in China's real estate sector. But no global financial crisis ensued, and China's economy continued expanding. While a bear market did occur in 2022, Chinese real estate had little to do with it. For investors, we believe the takeaway is to be skeptical when the media hypes up so-called "Lehman moments." While market wallops can happen, they are rare. For something to wallop stocks, it likely needs to cause multiple trillions of dollars' worth of disruption, occur rapidly and surprise markets. Few things fit that bill. Most are too slow moving or have been widely discussed for far too long to surprise stocks. That's it for this week. Thanks for tuning in to This Week in Review. If you're looking for more insights, then don't miss our other series, 3 Things You Need to Know This Week, released every Monday. You can also visit fisherinvestments.com anytime for our latest thoughts on markets. Thanks again for joining us and don't forget to hit like and subscribe!