Wall Street's "hottest phrase": Run it hot! Betting on "fiscal and monetary easing"

The hottest trading strategy on Wall Street, "Run it hot," is driving U.S. stocks to new highs.

The core logic of the "Run it hot" strategy is that tax cuts and interest rate cuts will jointly "heat up" the economy, thereby stimulating a new wave of growth. This week, the Federal Reserve is expected to cut interest rates, and Wall Street anticipates more easing policies in the coming months, further reinforcing the market's risk appetite.

Market performance confirms this enthusiasm. Last week, the Dow Jones Industrial Average broke through the 46,000-point mark for the first time, while the S&P 500 Index and the Nasdaq Composite Index also reached historic highs. Meanwhile, the yield on the two-year U.S. Treasury bonds, sensitive to interest rate prospects, fell to its lowest level in three years, reflecting strong market expectations for rate cuts.

However, this heightened optimism sharply contrasts with some concerns in the mainstream economic narrative. Traders seem to be ignoring the risks of weak employment reports and tariffs potentially dragging down economic growth, instead wholeheartedly embracing the prospect that rate cuts will boost corporate profits. This divergence has made the "Run it hot" strategy the most notable and controversial focus in the current market.

Betting on Dual Stimulus from Easing Policies

The core of "Run it hot" trading is to choose to believe in the supportive power of policies when the economy faces uncertainty. Bob Elliott, CEO of Unlimited Funds, who popularized this term, pointed out:

“The essence of 'Run it hot' trading is that the U.S. economy will perform strongly under the support of loose monetary and fiscal policies.”

This view suggests that even with some negative data, a strong policy toolbox is sufficient to smooth out short-term fluctuations.

Investor optimism is not unfounded. Nelson Yu, head of equities at Alliance Bernstein, stated:

“Our economy is still growing and has not fallen off a cliff. If the Federal Reserve can start cutting rates, I think it should actually be a pretty good environment for risk assets.”

Analysts Warn: Signs of Economic Rebound Are Not Yet Obvious

Despite the market's exuberance, not everyone agrees with this optimistic outlook.

Data is sending concerning signals. Employment revision data released last Tuesday showed that in the 12 months ending in March this year, the U.S. added 910,000 fewer jobs than initially reported.

Some analysts warn that investors may be "misreading" the current economic situation.

David Kelly, chief market strategist at JP Morgan Asset Management, believes there is evidence that the economy is gradually slowing down, which will put pressure on cyclical industries such as manufacturing or retail. In his view, rate cuts are unlikely to reverse this trend. Kelly stated:

“If the stock market thinks that rate cuts have any benefits for the overall economy and profitability, I think that is purely a misjudgment... When the Federal Reserve cuts rates, the signal it conveys is that the Fed is afraid of an economic recession, which in turn will make people start to fear a recession as well. **”

Bob Elliott himself is skeptical about this. He pointed out that while few people predict an economic recession, even a slowdown in economic growth could disappoint investors who had expected a significant increase in corporate profits. He stated:

“Bulls believe that weak employment data is a thing of the past, and the economy will rebound significantly in the second half of the year, but I see no evidence that this is happening.”

Beyond the optimism, the movements in the bond market reveal a more complex psychology among investors. Typically, when investors anticipate an economic slowdown, they buy bonds. The recent rise in U.S. Treasury yields aligns with this logic.

However, some traders are puzzled by the simultaneous rise in long-term bonds. They believe that if the economy truly rebounds as expected by “Run it hot,” then inflation and economic overheating issues will return to the forefront, which could push long-term interest rates back up.

Can the AI Boom Bring a New Economic Narrative?

For a long time, in the traditional understanding of the U.S. consumption-driven economy, it is hard to imagine that a strong economy and a weak labor market could coexist.

However, the rise of the AI boom may be reshaping this economic narrative.

Torsten Slok, Chief Economist at Apollo Global Management, wrote in a report on Thursday that many indicators measuring consumer strength, such as air travel and restaurant reservations, remain robust. This suggests that the weakness in the labor market may be more related to a decrease in immigration rather than an economic slowdown.

Additionally, lower borrowing costs may further fuel the investment boom in the AI sector. Last Wednesday, Oracle announced contracts worth billions of dollars with three clients, demonstrating its unexpectedly strong market position in the AI race, with its market value soaring by $247 billion that day.

Pimco economist Tiffany Wilding commented:

“We see that the technology investment cycle is providing support at the underlying level, so we still have ample reason to believe the economy will remain strong. However, our concerns about the labor market have indeed increased.”

Risk Warning and Disclaimer

Markets are risky, and investments should be made cautiously. This article does not constitute personal investment advice and does not take into account the individual user's specific investment goals, financial situation, or needs. Users should consider whether any opinions, views, or conclusions in this article align with their specific circumstances. Investing based on this is at one's own risk