Welcome to the ‘Run-Hot’ Economy

The current political, social and economic milieu isn’t exactly conducive to those of us who advocate for laissez-faire capitalism. Indeed, the idea that government should just “leave us alone” when it comes to our economic lives seems to have evaporated into the philosophic ether, as neither Democrats nor Republicans embrace the notion that government isn’t the solution, it’s the problem.

Yet as citizens, and especially as citizen investors trying to make our way through the current reality of markets, we are constantly forced to navigate the challenging, turbulent undercurrents generated by government policies. This navigation challenge begins by recognizing what is going on, and then plotting a course to reach our destination — a destination of more money in pursuit of more freedom. Remember, money equals freedom, as the more money you have, the greater your freedom of choice.

A recent analysis by my partners at Sevens Report Research (I highly recommend all of their publications) dissected details of what has become known as the “run-hot” economy. But what is a run-hot economy, and how do you take advantage of it with your money?

Simply stated, a run-hot economy happens when too much stimulus is poured into the financial system. This can occur either all at once or consistently over a more extended period, but either way, the net result is solid economic growth but also higher prices and, wait for it, less “affordability.” Now, if this sounds familiar, it should, because that’s where we are right now.

“Since taking power a year ago, almost all of the Trump administration’s economic and trade policies have increased the chances we get a run-hot economy,” writes Tom Essaye, Founder and President of Sevens Report Research.

Essaye explains that the following policies are all forming this run-hot momentum:

• The One Big, Beautiful Bill Act (OBBBA) extended and increased tax cuts (which stimulates the economy) and increased Federal spending (which stimulates the economy).
• Deregulation across industries stimulates the economy.
• Enticing foreign investment into the country (think of the litany of foreign countries and companies that have pledged massive investments in the United States since last year) stimulates the economy.
• Fannie and Freddie Mac buying $200 billion of mortgages, to push mortgage rates lower, stimulates the economy.

• Pressuring the Federal Reserve to lower rates (and the Fed lowering rates 75 basis points last year) stimulates the economy.
• Instituting tariffs on virtually all trade partners boosts prices (how much can be debated, but there’s no doubt it does boost prices).

According to Tom Essaye, and I concur here, the net result of all of these policies is an economy that demonstrates solid growth (which is a good thing) but also one that comes with stubbornly high prices.

Those high prices lead to those “affordability” issues, because the cost of everything is so high that the lower-income/no-asset cohort of the economy gets squeezed while the middle class doesn’t feel any benefit from rising asset prices or higher wages.

“If that sounds familiar, it should, because that’s where we are,” explains Essaye. “Broadly speaking, the unfortunate reality is that focusing economic and trade policies exclusively on stimulus and better growth does have negative consequences in the form of stubborn inflation and affordability.”

Perhaps the wider point here is that there are always consequences to any government policy. However, the good news is that we, as investors, can take advantage of the circumstances with smart decision making. Moreover, the run-hot economy is by no means a negative for investors, as there is most-definitely a playbook here to take advantage of the circumstances.

So, how do we do just that? Well, we concentrate on small caps over large caps (e.g., the iShares Russell 2000 (IWM) versus the SPDR S&P 500 ETF (SPY)).

Also consider hard assets such as gold, silver or funds such as the FlexShares Morningstar Global Upstream Natural Resources Index Fund (GUNR) and the Invesco DB Commodity Index Tracking Fund (DBC).

“If we stay in a run-hot economy, that doesn’t mean sectors such as technology and Artificial Intelligence can’t continue to rally, but it does mean that cyclical sectors and hard assets should outperform,” said Essaye.

If we want to successfully navigate the run-hot market waters, we need to plan accordingly, so keep this in mind when you are contemplating new allocations to any of your portfolios.