(Yahoo! Finance) - It's December, and markets have slowed to a familiar holiday cadence. Volume is predictably receding, and volatility barely stirs. Whispers of a "Santa Claus rally" are lulling investors into a fragile complacency.
Two catalysts threaten to upend the holiday detente. This morning's Consumer Price Index showed November 12-month inflation ticking up to 2.7% as core inflation, which strips out food and energy, is sticked stubbornly to 3.3%.
Meanwhile, next week's Federal Reserve meeting looms large, with policymakers debating whether to cut rates again — potentially stoking 2025 inflation — or hold firm.
Together, these forces underscore what RSM chief economist Joe Brusuelas describes as a "regime change" in economics.
“Twenty years of subdued inflation, low interest rates, a reduced cost of capital and financial leverage have given way to a new regime,” wrote Brusuelas in a note to investors, adding, "For many investors and firm managers, this era is unfamiliar."
Brusuelas recently joined Yahoo Finance's Stocks in Translation podcast to expand on his regime change thinking, which he notes is really about the post-pandemic economy.
"[The pandemic] wiped the slates clean," he said, ticking off a laundry list of changes that the shutdown and rejiggering of global supply chains have produced. Critically, when those supply chains reopened, they were vastly different, if not entirely new, he argued.
"We're in a very different cost environment," he said, "and we're going to get a very different set of politics." Thinking ahead, the American people and industry will likely face fewer regulations, higher tariffs, lower taxes, stricter immigration, and a ballooning trade deficit.
And while politicians typically jawbone a strong dollar, that strength tends to frustrate attempts to narrow a widening trade deficit — a key pillar of the incoming administration.
All of this sets the stage for higher interest rates and higher inflation, argues Brusuelas. Even if price increases slow or halt, they're not going to deflate back to pre-pandemic prices. "Those prices have gone up," he said. "They are not ever going to reset to 2019 levels."
While the cost of doing business might be heading higher, elevated interest rates could actually be a boon for economic stability.
Brusuelas argues that the US economy will be more resilient and less prone to bubble forces that arise from leverage fueled by cheap money. The gaps between winners and losers will also be more pronounced — both at the individual and business level. All of which, Brusuelas notes, introduces the possibility of "a very novel set of opportunities for forward-looking investors."
Where should investors look for clues as to how this all unfolds?
Brusuelas cites history, but with a rhyme. "The stock market has been the barometer of the first Trump administration. So the bond market's likely to be [that of] the second."
By Jared Blikre
