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