Key Insights

### Tariff Fatigue Masks a Deeper Strategic Shift

Steve Pavlik explains that the market's muted reaction to recent tariff news stems from what didn't happen: a widely expected implementation of new tariffs was delayed again, with August 1st becoming the new deadline. This has created a "boy who cried wolf" scenario, leading many investors to dismiss the threats as mere negotiating tactics. However, Pavlik suggests a more complex game is afoot.

"If you want to take sort of the 4D chess approach to this... by all the attention being on the reciprocal tariffs, less attention is on the sectoral tariffs... Everything's on the country specific, not the sector specific. And so I think what you've seen is the administration signaling that the sector tariffs are going to remain in place."

This "4D chess" approach involves using the loud, public threats of broad reciprocal tariffs to distract from the quieter, more permanent implementation of targeted sectoral tariffs, like those impacting copper. As Jeff Degraff notes, copper prices broke out on the news, showing a direct impact even as the broader market shrugged. Pavlik also observes a growing, under-the-radar acceptance of a 10% baseline tariff, which now seems "relatively reasonable" compared to the more extreme threats, potentially resetting the global trade landscape permanently.

For investors, this means looking past the headline deadlines and focusing on specific sectors and commodities being targeted. The real story isn't the on-again, off-again threats, but the steady, strategic implementation of industry-specific trade barriers that are quietly reshaping supply chains and input costs.

### The Fed is Misreading a Fragile Labor Market

According to Neil Dutta, the Federal Reserve is basing its policy stance on a dangerously superficial view of the U.S. labor market. While the headline unemployment rate of 4.1% appears strong, Dutta argues it is "overstating the degree of health," causing the Fed to underestimate how restrictive its current policy truly is.

"If you look at a traditional Taylor rule, maybe things are fine, but when you look at some of these other data points, it suggests that the unemployment rate is overstating the degree of health in the labor market and therefore monetary policy is more restrictive than they currently think."

Dutta points to several underlying cracks in the foundation:

• Discouraged Workers: The unemployment rate fell partly because of a large number of people exiting the labor force entirely, not because they found jobs. The number of "discouraged workers"—those who want a job but have stopped looking—is rising.
• Wage Stagnation: An increasing share of workers are seeing no change in their wages year-over-year. This is often a precursor to layoffs, as employers freeze pay before cutting staff.
• Weak Income Growth: Gross labor income (a combination of jobs, hours, and earnings) is growing at a pace consistent with nominal GDP in the low 4% to high 3% range, which is not a sign of a robust economy.

This disconnect implies that a standard Taylor Rule model, which relies on the headline unemployment figure, is giving a false sense of security. If the labor market is weaker than it appears, policy is tighter than intended, increasing the risk of a policy error and making future rate cuts more likely than the Fed is currently signaling.

### A 65% Chance of a Government Shutdown Remains Unpriced by Markets

While investors focus on tariffs and the Fed, a significant political risk is flying under the radar. Steve Pavlik warns that the odds of a government shutdown at the end of September are elevated, placing them at 60-65%. This is not related to the recently passed "one big beautiful bill" (which used reconciliation) but to the separate annual appropriations process, which requires 60 votes in the Senate and bipartisan cooperation that is currently absent.

With Congress nearing its August adjournment, there is almost no time to pass the 12 required appropriations bills. Political dynamics have shifted since the last showdown in March, with Senate Minority Leader Chuck Schumer under pressure and House Speaker Mike Johnson potentially unable to unify Republicans without Democratic support.

Jeff Degraff confirms that this substantial risk "is not in the market." This creates a clear opportunity for investors. The predictable timeline—a quiet July and August followed by a "swampy" September—aligns perfectly with the shutdown deadline. Investors can use this foresight to position for a spike in volatility this fall. The most direct way to play this, Degraff suggests, is through options, which allow for precise timing to capitalize on a market event that is currently being ignored.

### The Market Leadership Transition from Beta to "True" Momentum is Underway

A critical factor rotation is happening that many investors are misinterpreting, according to Jeff Degraff. The high-beta trade, which rewards high-volatility stocks, has had a historic run, moving from the 0th percentile to the 100th percentile in 13-week performance. Degraff argues this trade is exhausted and vulnerable to a correction. The next leadership phase belongs to momentum.

However, Degraff stresses the importance of using a sophisticated definition of momentum. A recent dip in some "momentum" stocks was actually a decline in high-beta names that are often conflated with momentum. RenMac's methodology adjusts for volatility, creating a "true" momentum factor that behaves differently.

"We measure momentum by volatility adjusting or beta adjusting it. And so you don't have that crossover which is important to do... A lot of our momentum names are actually in financials right now which haven't been hit as bad in this, you know, quote unquote momentum decline that we've seen this this week."

Crucially, this volatility-adjusted momentum strategy is currently overweight financials. This is a contrarian position, as financials are not typically seen as momentum leaders. This makes the upcoming earnings reports from major banks a critical test for this thesis. If financials report robust results and continue to perform, it will validate the rotation away from pure beta and into this more nuanced version of momentum.

Quotes

Neil Dutta: "Yes, the unemployment rate is 4.1%, but if you ask consumers about the labor market, they tell you something that looks a lot worse than 4.1%... you had a lot of people going from unemployment straight to not in the labor force. Like, that's not... In other words, they gave up."

Jeff Degraff: "The beta trade, which I did not think was going to go to 100... has got to the 100th percentile... the expectations of that continuing or something even like that without some type of correction is very, very low. So that's why we've moved away from the beta trade."

Steve Pavlik: "Had Trump sort of proposed that [10% baseline tariff] originally, everybody would have rejected it. But you know, with respect to all the other tariffs he's throwing around, 10% seems relatively reasonable."

Market Implications

The discussion highlights a market that is complacent about several key risks and opportunities. To capitalize on these insights, investors should consider a multi-pronged strategy for the coming months.

First, the tariff situation calls for a granular, sector-specific approach rather than broad market bets. The real impact is in areas like industrial metals (copper) and other specific supply chains, not in the S&P 500's reaction to headline threats.

Second, the underlying weakness in the labor market suggests the Fed may be forced into a more dovish stance than currently priced. This could create opportunities in rate-sensitive assets if the economic data continues to soften, forcing the Fed's hand.

Third, the high probability of a government shutdown in September is a significant, unpriced catalyst for volatility. Jeff Degraff explicitly points to options as a tool to hedge portfolios or speculate on this event, given the fixed timeline.

Finally, the factor rotation from beta to momentum is a key strategic pivot. Investors should look to reduce exposure to high-volatility stocks that have had a massive run and rotate into volatility-adjusted momentum strategies. With financials identified as a key overweight in this factor, their upcoming earnings will be a crucial tell for the durability of this leadership transition. Exposure to non-dollar assets like Bitcoin and gold, which are in established uptrends, also serves as a valuable long-term hedge against ongoing policy uncertainty and geopolitical friction.