Market Update: September 27th, 2024

Federal Reserve Actions

• Recent rate cut of 50 basis points

  • The cut was not due to poor economic conditions but because inflation has decreased significantly.

  • The Fed aims to reduce rates further toward a neutral rate of 3%, but some debate it could be closer to 4.5%.

• More rate cuts are expected through 2025, potentially lowering the Fed funds rate by 250 basis points in total.

• Ongoing inflation risks remain unclear, market confusion persists due to strong economic data combined with significant rate cuts.

Economic and Labor Market Data

• U.S. economy is not in a recession, despite a slight rise in unemployment.

  • Unemployment increases are due to immigration and labor supply growth, not mass layoffs.

• Positive indicators include low default rates, strong consumer spending, and robust corporate health.

• Credit markets remain stable, with defaults and bankruptcies declining.

• Potential labor market weakness:

  • August labor report showed significant full-time job losses but gains in part-time employment.

  • Unemployment expected to rise gradually due to weakening job quality.

Economic and Inflation Projections

• GDP growth is projected to slow to 2% in 2024.

• Inflation is expected to decline but may stay slightly above target levels.

• The Fed is focusing more on unemployment control than inflation, signaling a shift toward softer monetary policy.

  • Rate cuts could lift GDP by 2% and Inflation by 1%.

• Potential risk of reigniting inflation, especially in the housing market, as lower mortgage rates may drive demand.

Global and Domestic Trends

• China's monetary and fiscal stimulus (rate cuts and easing mortgage terms) should support its equity markets.

• U.S. commercial real estate may benefit from the Fed's rate cuts, easing refinancing conditions for the sector.

• "Soft-Landing" scenario most likely, where the economy may experience a period of light stagflation, where moderate growth continues but inflation remains higher than desired.

  • While the base case points to a soft landing, there is still a 30% risk of recession, so vigilance is necessary to protect against potential economic downturns.

Risks and Challenges

• Key risks include:

  • Continued job losses and private sector contraction, leading to a possible stagflation scenario (moderate growth with persistent inflation).

  • Fiscal dominance (where fiscal policy dictates monetary decisions) could increase inflationary pressures.

• Investors should remain prepared for elevated inflation and potential policy shifts that could impact financial conditions.

• Ongoing conflict in Ukraine and Israel.

• Ongoing political uncertainty amidst the U.S. election.

Portfolio Implications

• With inflation likely to stay elevated, we will stay focused on inflation-sensitive assets:

  • Bonds/Fixed Income:

    • Investment Grade Bonds, Floating Rate Notes, Real Estate Income, High-Yield Bonds.

    • Yields have potential to remain higher than during the 2008-2022 period, so it's important to keep portfolios positioned accordingly.

  • Equities:

    • Equities with strong free cash flow and established business models.

    • Mid- and small-cap equities continue to look promising.

  • Real assets & commodities:

    • Gold, Silver, Copper, & Natural Gas remain promising.

    • Real Estate/Income yields are above average.

If you have any questions or would like to discuss these updates further, please don’t hesitate to reach out. I look forward to continuing to guide you through these market changes and ensuring your portfolio is well-positioned for the future.

Chris Rasmussen, AAMS® CRPS®

Advisor/Owner, Cantorbridge Financial

Cantorbridge Weekly Update September 27", 2024

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Market Update, September 6th, 2024

Below is the updated weekly update from your advisor:

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MARKET UPDATE | September 6th, 2024

*Note -> [ Red=‘negative-leaning’ news, Green=‘positive-leaning’ news, Black=Neutral News ]

• Economic Weakness: Indicators like the manufacturing report show contraction in new orders and employment, signaling weakness in key sectors such as homebuilding, autos, and industrial production.

• Japanese Yen Carry Trade Update: The yen carry trade, estimated at $14 trillion by BIS economists, is gradually unwinding, putting more pressure on risk assets globally. If this continues, more liquidity from central banks may be needed to stabilize markets.

• Federal Reserve's Current Stance: FOMC minutes reveal that several members are leaning towards a rate cut, with the majority likely to vote for a rate cut in September. The Fed is increasingly prioritizing employment risks over inflation.

• Inflation Trade-off: While inflation measures like CPI and core CPI remain above historical averages, the Fed and other central banks seem to be compromising on inflation to prioritize employment.

• Unusual Fed Commentary on Equities: The Fed made unusual comments on the small and mid-cap equity markets, signaling a desire for capital to flow into these sectors, potentially to support employment and reduce unemployment risks.

• Expectation of September Rate Cuts: Rate cuts in September seem inevitable, with market participants pricing in a 100% chance of a 25-basis-point cut and a 43% chance of a 50-basis-point cut, depending on the upcoming payroll report and labor market data.

• Labor Market Cooling: Indicators like revisions in payroll numbers and a rising unemployment rate (currently at 4.3%, above the Fed’s target of 4%) signal a cooling labor market, adding pressure on the Fed to act by cutting rates.

• Weak Consumer Activity: Retail sales, adjusted for inflation, have contracted, with inflation-adjusted sales down 0.36% year-over-year. The consumer savings rate has also dropped to 2.9%, indicating increasing consumer reliance on credit and declining discretionary spending power.

• Fiscal Concerns and Deficit Growth: Fitch's downgrade of the U.S. to AA is due to the growing debt burden, failure to address deficits, and an aging population. Both political parties are expected to continue populist policies that may exacerbate the deficit, leading to longer-term inflation and weakening the dollar.

• Emerging Markets and Commodity Strength: A weakening dollar, particularly against commodities, is expected to benefit commodity producers and emerging markets. This is confirmed by recent strength in the Chinese yuan and the performance of gold over the last three years.

• Equity Market Valuations: The equity market, particularly the S&P 500, is highly valued, with a P/E multiple around 23–24, though the "Magnificent 7" stocks are skewing the overall average. In contrast, the other 493 S&P 500 companies trade closer to historical averages, offering better value.

• Mid-Cap and Small-Cap Rotation: There is a rotation into mid-caps and small-caps, especially in capital-intensive cyclical industries like infrastructure, manufacturing, and energy. These sectors are expected to benefit from government spending via programs like the CHIPS Act and the Inflation Reduction Act.

INVESTMENT IMPLICATIONS:

• Credit Markets (Bonds/Fixed Income):

• Investors in money market accounts and fixed-income deposits should consider extending duration to lock in higher rates.

• Increasing credit risk to lock in yield duration is attractive.

• Equity Markets (Stocks):

• Economic growth is expected to weaken in the second half of the year, which could impact revenue growth, earnings, margins, and P/E multiples.

• Small Cap and Mid Cap equities with lower P/E multiples are increasingly attractive.

• Real estate and regional banks are expected to see decreased stress in upcoming months. (due to rate cuts).

• Attractive Equity Sectors:

• Utilities, energy, infrastructure, manufacturing, materials, and select real estate sectors.

• Attractive Alternatives:

• Commodities like gold, silver, and other precious metals.

• Natural Gas, Copper, and battery component materials.

• Upcoming Political Uncertainty:

• The US November election adds quite a lot to the general feeling of investor uncertainty. Regardless of the outcome, the upcoming shift of power will leave many people pleased and many people fearful.

• Additionally, the incoming administration will have a new approach to international relations – which have big implications for the many active global conflicts (Russia/Ukraine, Israel/Gaza, etc.). I expect this to be positive.

As always, there’s a lot happening. This week, I introduced the idea of using Red/Green/Black bullet points to provide a clearer sense of the sentiment behind these headlines. At first glance, it may seem like there’s a lot of negativity, but you’ll notice that there’s actually quite a bit of green, which should help put things into better perspective.

I’ve observed a noticeable increase in the negative tone across various media platforms over the past few months. If you've noticed this too, you're not alone. It’s important to avoid getting caught up in this cycle. With AI playing an increasing role in marketing and content creation, there has been a surge in media content focused on fear-mongering, sowing division, and creating uncertainty about the economy and markets. This makes it important to understand how tech companies have trained their algorithms and how these may impact you. Platforms like YouTube, Reddit, Instagram, TikTok, and Facebook (among others) leverage algorithms designed to keep you engaged by amplifying fear or reinforcing your existing beliefs. This creates echo chambers of content that can be difficult to escape unless you are aware of them and how they operate. If you have any questions about this, please don’t hesitate to contact me.

I hope you have a wonderful weekend,

-Chris Rasmussen

Market Update: August 22nd, 2024

Below is your weekly market update from Cantorbridge:

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 MARKET UPDATE | AUGUST 22nd, 2024

• Federal Reserve's Current Stance:

• Fed likely reached the peak of the interest rate cycle; focus shifting to monetary easing.

• Inflation remains higher than desired; large deficits affecting consumption and unemployment.

• Other central banks prioritizing labor markets over inflation mandates.

• Interest Rates and Currency Dynamics:

• With interest rates peaking, the dollar has likely peaked as well. This shift has led to varying impacts across different currency baskets. Commodity producers and emerging markets are benefiting from higher commodity prices, while developed markets face more uncertainty due to large deficits and political instability.

• Possible rate cuts by the end of the year; could range from two to four cuts. Recommendation to extend duration on fixed income deposits to lock in yields.

• Dollar and Currency Comparison:

• Dollar has likely peaked; comparisons made with commodities, emerging market currencies, and developed market currencies.

• Mixed performance across these baskets; emerging market currencies generally holding up well.

• Commodities:

• Gold has performed well over the past three years, reflecting global currency debasement.

• Gold’s value is driven by monetary and fiscal policies, not industrial use.

• Other resources like copper and natural gas have significant growth (both in use and projected future use).

• Economic Growth and Emerging Risks:

• U.S. economic growth has slowed but remains in positive territory. However, there are rising concerns about unemployment and increasing delinquencies, particularly in credit card and auto loans. Additionally, the upcoming resumption of student loan payments could further strain consumer finances and increase defaults in other sectors.

• Payroll Data Revisions;

• BLS revised payroll numbers significantly downward, impacting perceptions of economic health.

• Adjustments indicate weaker job growth and highlight inconsistencies in previous data.

• Delinquency and Credit Trends:

• Increased delinquencies in credit cards and auto loans.

• Student loan repayments set to resume in November, potentially adding stress.

• Inflation and Market Outlook:  

• Although inflation data suggests that the overall rate may stabilize in the short term, there are factors—such as rising goods inflation—that could drive it higher again. As a result, the Fed is likely to pursue gradual rate cuts in upcoming cycles.

• Market Expectations and Federal Reserve Predictions:

• The bond market's expectations for rate cuts have fluctuated, reflecting the ongoing uncertainty. While a soft landing remains the most likely scenario, the risk of a hard landing is still significant, particularly if inflation remains stubbornly high or consumer stress escalates.

• Higher inflation leads to lower profit margins and P/E ratios.

• Preference for companies with strong cash flows and real assets, such as utilities, energy, materials, and select real estate sectors.

• Global Financial Dynamics:

• US Treasury increasing fiscal spending, leading to more dollar liquidity and rising equities.

• Unclear which force—Bank of Japan or US Treasury—will have a stronger influence on markets.

• Global Impact of the Bank of Japan:

• Recent changes in Bank of Japan's policy, including rate hikes and quantitative easing reductions.

• Effects include strengthening of yen and adjustments in global liquidity.

As you know, if you have any questions or would like to talk further about anything, don’t hesitate to give me a call!

-Chris Rasmussen

Market Update: August 15th, 2024

I am excited to announce that I will be starting a weekly market update email to all clients to keep you informed about the latest developments in the markets. Beginning today, you will receive a weekly update that will provide insights into market trends, key events, and potential opportunities.

In a world that seems littered with misinformation, having a weekly source of relevant information that you know and can trust seems very valuable and I am happy to do so. As such, these updates will be designed to help you stay informed about key things that you may hear about elsewhere – and I hope to be able to anticipate and address any questions or concerns you may have.

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 MARKET UPDATE | AUGUST 15TH, 2024

• Federal Reserve's Current Stance: The Fed has likely reached the peak of its interest rate cycle, with any future rate cuts contingent on economic data. Despite recent efforts, inflation remains higher than the target, and central banks may increasingly prioritize addressing unemployment over strictly adhering to inflation targets.

• Interest Rates and Currency Dynamics: With interest rates peaking, the dollar has likely peaked as well. This shift has led to varying impacts across different currency baskets. Commodity producers and emerging markets are benefiting from higher commodity prices, while developed markets face more uncertainty due to large deficits and political instability.

• Economic Growth and Emerging Risks: U.S. economic growth has slowed but remains in positive territory. However, there are rising concerns about unemployment and increasing delinquencies, particularly in credit card and auto loans. Additionally, the upcoming resumption of student loan payments could further strain consumer finances and increase defaults in other sectors.

• Inflation and Market Outlook:  Although inflation data suggests that the overall rate may stabilize in the short term, there are factors—such as rising goods inflation—that could drive it higher again. As a result, the Fed is likely to pursue gradual rate cuts in upcoming cycles.

• Market Expectations and Federal Reserve Predictions: The bond market's expectations for rate cuts have fluctuated, reflecting the ongoing uncertainty. While a soft landing remains the most likely scenario, the risk of a hard landing is still significant, particularly if inflation remains stubbornly high or consumer stress escalates.

• Global Impact of the Bank of Japan: The Bank of Japan's recent actions, including rate increases and reduced quantitative easing, are having a significant impact on global markets. A stronger yen and a weaker dollar are contributing to higher inflation expectations in the U.S., and the shrinking dollar liquidity is increasing volatility across global markets.

 Overall, I emphasize the complex and volatile nature of the current economic environment, we have a lot of line items on the table, including the ongoing conflicts in Europe & the Middle East, social unrest abroad, and the upcoming elections here in the US. Each of these things add to the volatility of market sentiment and are drivers of fear in the average investor. But, keep in mind that your financial plan, and the portfolios that are managed here at Cantorbridge, are built with these things all in mind. 

-Chris Rasmussen