The Heat Is On

This week has seemed as though there's pressure on the Fed to follow-through on rates, pressure on the market to continue to out-perform, and pressure on the

economy to continue growing. This week's inspiration for the musings is the 1984 song, "The Heat Is On" by Glenn Frey. Here’s some trivia about the song:

• This song written by the duo of Harold Faltermeyer and Keith Forsey. They had previously written songs for artist Donna Summer. It was written for the soundtrack to the film "Beverly Hills Cop."

• Glenn Frey had just signed on with MCA Records at the same time MCA was planning the "Beverly Hills Cop" soundtrack. Frey recalls, "Irving Azoff, my manager, calls me up and said, 'Glenn, you got to come to a screening. We're going to show this movie, this Eddie Murphy movie." He further added, "We're waiting for the movie to start, and I look over my shoulder – Quincy Jones. Okay. I look over my shoulder – Stevie Wonder. Look back over here, it's the Pointer Sisters. I'm sitting there going, 'I'm dead. There's no way I'm getting a song in Beverly Hills Cop.'"

• The music video, which regularly appeared on MTV, was the first to feature clips from the actual movie. This helped viewership, as anything with Eddie Murphy on TV was popular in the '80s.

• This song shows the musical distinction between the two former Eagles bandmates - Don Henley & Glenn Frey. Both had successful careers as solo acts after the Eagles. However, Henley's style was more infused with poetry or social commentary, while Frey preferred more straightforward lyrics, with influences of R&B, soul, and funk.

• The song reached No. 2 on the Billboard charts by March of 1985. The "Beverly Hills Cop" soundtrack when double platinum and had 3 top then hits - "The Heat Is On," "Neutron Dance," and "Axel F."

"The heat is on, on the street

Inside your head, on every beat

And the beat's so loud, deep inside

The pressure's high, just to stay alive

'Cause the heat is on

Oh-wo-ho, oh-wo-ho

Caught up in the action I've been looking out for you

Oh-wo-ho, oh-wo-ho

(Tell me can you feel it)

(Tell me can you feel it)

(Tell me can you feel it)

The heat is on, the heat is on, the heat is on

Oh it's on the street, the heat is on"

Here's what we've seen so far this week..

The Heat Is On...The Fed. We heard from Fed Chairman Powell for the first time since the Fed dropped interest rates last week. It's interesting how much things can change

in just a few days. While the health of the job market re-emerged in his comments, Powell made interesting remarks about tariffs. He stated, "Tariff passthrough has been less than we expected." In addition, Powell further stated, "We'll make sure tariffs don't drive ongoing inflation." We've pointed out several times over the past few months that not only are tariffs not affecting inflation (new vehicles, apparel, & auto parts) because those key goods haven't risen substantially, but also that the consumer continues to spend (see GDP revision later in this blog). The August report of Personal Income and Personal spending increased more than expected. Meanwhile, tariff revenue continues to come in strong. Just last night, however, the White House announced new tariffs - 100% on pharmaceuticals, 50% on kitchen cabinets, 50% on bathroom vanities & related products, 30% on upholstered furniture, and 25% on heavy trucks. Yet, most of these are exempted if the company has a manufacturing plant based in the U.S. So far, the market has largely shrugged off these new tariffs.

This week, the strong economic data has caused some to question the Fed's Dot-plot showing two more cuts in 2025. The futures have nearly doubled for the probability the Fed won't cut at the October meeting. The PCE Price Index numbers released this morning showed inflation at +0.3%, which was expected, and flat year-over-year. This has calmed rate expectations for the time being. While Powell acknowledged that job creation has dropped sharply, job losses have not materialized. Initial Claims fell to 6-week lows and Continuing Claims dropped to 9-week lows. And yet, Powell stated this week, "There is no risk-free policy path ahead." Well, that's true when we walk out the door everyday to go to work - everything involves some risk.

The Head Is On...The Market. No two markets are exactly alike, which is why comparing 2025 to 1999 is problematic. There are some similarities - stretched

valuations and markets making all-time-highs. However, there are other factors that are dissimilar. Volatility, as measured by the VIX Index, we picking up heading into the winter of 1999. The VIX spent more time above 20 in 1999 than it has in 2025 and the 12-month average was higher in 1999 than it is currently. Markets tend to get choppy when nearing a direction or trend change. That's more obvious in the following chart.

While the equity indices were making new all-time-highs in 1999, there was trouble brewing underneath. In December of 1999, at least 565 stocks on the New York Stock Exchange were making new lows. Today, that is not the case. Only 72 stocks out of the more than 2,200 stocks on the NYSE are making new lows this week. Does that mean that 2025 is a healthier stock market than 1999? Not necessarily. However, until more warning signs emerge, the comparison between '99 and '25 is spotty at best.

The Heat Is On...The Economy.  Economic health really shouldn't be in question at this point as the data has proven strong. In addition to a strong consumer, the risk metrics

just haven't presented themselves. The Chicago Fed's National Financial Conditions Index shows a "loose" environment. Since nearly turning positive in July of 2022, the index has steadily moved lower, meaning there is little risk. The index typically turns positive when recession nears.

A strong consumer once again showed up in the data as 2nd quarter GDP was revised higher. Originally, 2nd quarter GDP came in at +3.0%. Last month, the 1st revision

showed that GDP was actually +3.3%. Yesterday, the 2nd revision bumped the number up to +3.8%, which would indicate a fairly robust economy. The primary contributor to the upward revision was consumer spending. With a strong economic back drop and the potential for more rate cuts, equities should perform well into year-end. There's always the October volatility shock, which could be a potential government shutdown at the end of this month, but the economic fundamentals are strong enough to weather what would likely be a short-term event.

Enjoy a blast from the '80s...

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