TOM LEE: While markets churn in Sept, a "max hawkish" Fed is creating positive risk/reward transcript

Hi there, this is Tom Lee. I'm the chief investment officer [clears throat] of Funstrap Capital and the lead portfolio manager for Funstrap Capital's family of ETFs, Granny Shots. This is our update for the week of September 21st. First, let me go over some particulars. As of September 18th, Granny Shots, the large cap ETF ticker GRNY, had a price of $27.88. 88 and total assets of 4.475 billion. This midcap granny or granny j ticker grj had a price of 28.96 and total assets of 5485 million and granny I or the income granny had a price of 2112 and total assets of 59 million.

Let me go over performance over the past week. Over the past week, GRNY, the large cap granny, was up.35% compared to a flat S&P or outperformance of 40 basis points. Granny J, this midcap granny was down.57% compared to a 1.39% decline for the Russell 2500 or roughly 82 basis points of relative outperformance. and the income granny gained 39% compared to a flat S&P or roughly 45 basis points of outperformance. On a year-to-ate basis, uh the large cap granny is up [clears throat] 12.77% compared to 12.71% for the S&P 500 or relative outperformance of six basis points.

Granny J is up 13.5% while the Russell 2500 is up 17.3 or roughly 378 basis points of relative underperformance. The income granny is up 11.74% compared to 12.71 for the S&P 500 or roughly 97 basis points of underperformance. Let's talk about the macro because it's been a very turbulent September, but actually I think things are looking quite bullish. Let me explain. Since June 2026, the S&P 500 had been churning from June to August.

And of course, as you know, people don't like markets that churn. But then we had a breakout in August and stocks made a new high. But then in the month of September so far we've again again entered a period of churning and in the midst of this uh we got a Fed rate hike. Last week in the September FOMC rates position Fed chair Walsh chose to raise interest rates for the first time in three years. So basically he chose violence.

Now he gave his three reasons for why he chose violence. Number one, he said it to strengthen the economy, that it strengthened and the committee um deemed it necessary to raise rates. Here's the thing. Let's keep in mind just because the economy is strong doesn't mean there's inflation. Of course, there's a risk of inflation, but the Fed, Cleveland Fed wrote this more than um almost 30 years ago. Economic growth is not the enemy of low inflation, and expanding employment and income do not in of themselves threaten the Federal Reserve's legit legitimate role in protecting the purchasing power of money.

Contrary to popular wisdom, it's quite possible to have a booming economy without an acceleration in the price level. And earlier this year, the Kansas City Fed said growth led by increased supply, perhaps on account of AIE advances in productivity, can boost output and lower inflation. That's a winning combination. Simply put it, it's dis disinflationary. And Kevin Worsh, while he was Fed governor, said growth doesn't require the Fed to raise rates.

It's inflation they need to keep their eye on. So that's a little confusing. The second reason they cited was that inflation summer trends weren't passing his test to moving towards 2%. Clearly and at sufficient speed. Now, here is something that's interesting. At the um end of September, the BEA is going to adjust their methodology for PCE. And it looks like the Fed did not take this into account. According to many economists, this could actually take out 20 to 40 basis points of year-over-year inflation.

That's a big deal because that would take the 3.4% to 3%. In fact, Goldman Sachs highlighted this um effect. They said that there are four things keeping inflation high that are essentially one-offs. And in 6 months, this is going to drop by 100 basis points. So if it's 34 now and it gets revised to three, I mean I mean it's a pretty big drop. Okay. The effects that they're highlighting is the stock market effect. I think we've talked about this before that whenever the stock market goes up, asset management fees because quantity is not changed is treated as inflation.

That's kind of an error. There's also this issue with flash memory which is showing up in software and accessories and that's nine standard deviations and it's a huge contributor to inflation right now and of course we have the effect from iron war and the tariff effects but all these are beginning to fade so to us in some ways fed war saying it's not falling fast enough is the economy is bullying bullying the fed the third factor is geopolitical and of course this is kind of fair is know when the war is going to end and people are going to be freaking out about oil.

But the problem is oil is a supply shock. Okay? And Fed Chair Powell says when you have a supply chock, our tools doesn't have meaningful shorter term effects on supply. Energy shocks have tended to come and go pretty quickly. Monetary policy works with long and variable lags. So by the time the effects of a tightening in moni mon monetary policy take place, the oil shock is probably long gone and you're weighing on the economy at a time when it's not appropriate.

It's standard learning that you look through energy shocks. Okay? Now, keep in mind it's going to take 6 months for these hikes to have any effect. And if we're right, inflation is already going to drop because of those one-off effects fading. So I'm confused. But in any case, after a period of market turnurning, the Fed chose violence and of course investors are expecting the stock market to weaken. Okay, but I have a contrarian take.

These are the six reasons why I think the Fed hike sets up for a rally. Number one, we are now experiencing the peak hawkish Fed. They can't get any more hawkish than this. In fact, if we're correct, the there are going to be incrementally dovish data points ahead. So, the Fed can now walk back from a very hawkish, hawkish stance. In fact, we're going to get Fed speak in the next few weeks. A lot of these Fed governors will explain how they went from neutral to hawkish in just four weeks.

I think there's going to be many that are going to walk back their hawkishness. And on September 30th, the new core PCE methodology will be reflect and show new results and it's expected to reduce core PCE from 3.4% to something maybe even close to 3%. That's a big drop. I think market's going to react. And then early in October, we get the September jobs report. Finally, I think it's interesting and I don't know what exactly means, but President Trump didn't get angry about this rate decision.

It's a contrast to how he reacted to Fed Chair Powell. So, is this maybe just positioning where the Fed wants to be maximish? Cuz this is what President Trump said. He says interest should be 1% or less. We are the best credit in the world by far. If we stopped our countries booming, if we stopped trading with every country that we have a def deficit with, we could make one and a half trillion a year. The word deficit is nothing more than a fancy word for loss.

We're carrying almost every country in the world and that cannot go any lower. Lower the interest rate for the federal for the United States America and fast. By contrast, he would just refer to Jerome Powell as too late. Okay. And I think something else you have to keep in mind in case you're getting really bearish, 50 basis points is not enough to kill the economy or the stock market. So the Fed raised 25 and if they raise another 25, it's not going to kill the economy.

And moreover, the stock market is oversold. We had a waterfall decline um especially on the heels of the Fed reaction at a time when you can see the relative strength is actually rising. This is exactly what happened in August. and uh and stocks rallied from there. Also, just in terms of earnings, next week uh this coming week, sorry, Costco uh which is a granny shot is reporting. Now, let's go over individual stock performance.

Let's start with the large scap granny. The top five performers are crypto among the top five are cryptoreated, strategy.com and Robin Hood. And these are the AI trades on the bottom five. You know, it's uh some of the financials because of the Fed hike on Junior Granny. These are the top five performers. There's biotech leadership and crypto which is Riot. And on the bottom five, um they're listed here. This is a performance of themes.

And again, as you can see, the themes really um uh traded relatively flat. So, I think the market, of course, is just digesting the new Fed hikes. That's it for now. Thanks for listening and I'll speak to you soon.