Interest Rate Cuts Coming Soon?

Talking Equities is a weekly newsletter that provides information regarding equity analysis, investor spotlights, market conditions, and investing strategies. All information provided in Talking Equities should be considered an opinion and not a fact. All information should also be considered as strictly educational. While I would love to claim I have all the answers to cracking the stock market, I simply do not. Invest at your own discretion!

Below is an actual representation of the Democratic party after the first presidential debate’s conclusion.

Happy Tuesday Investors,

I don’t want to jinx us, but we may have finally received information the investing community has been waiting for ever since interest rates hit their peak at the end of last year. New employment data signals that our market could finally be cooling, and with that, the possibility of one of the nine interest rate cuts that Chairman Powell had discussed at the beginning of the year.

In this week’s newsletter, we’ll dive deeper into why a rate cut could cause a significant shift in the stock market and your portfolio.

Moreover, we’ll discuss why everyone seems to think index funds are no longer diversified enough to decrease investors’ exposure to risk (spoiler alert, it has to do with AI).

Last, but certainly not least, the recent presidential debate has rocked the U.S. political landscape. With lofty claims of fixing interest rates, creating peace in foreign nations, and having the better golf handicap, investors have a lot to think about moving forward about where to allocate their money in the changing world markets. We’ll explore how the stock market typically reacts closer to an election and what you can do as an investor to be prepared.

Let’s get into it.

Index metrics are weekly values and based on 07/05/2024 data.
Economic metrics vary depending on release schedule.
For metric definitions reference this newsletter.

New market data released shows signs that our market could finally be cooling and that we are breaking out of this stagflation limbo that we’ve been in over the last year.

While hiring remains strong in the labor market, unemployment rates ticked up to 4.1%, which indicates a clear trend that companies are consolidating to adjust to economic contraction.

Unrelated to the job market, the 10-year treasury bond decreased from 4.346% to 4.202%. This indicates that the need to remove currency from the economy slightly lowered in light of this unemployment information.

With positive indicators from unemployment and the 10-year, investors are optimistic that we could see an interest rate cut before the Fed’s next meeting in September. CME Group data reveals that the likelihood of an interest rate cut has increased from 74% to 78%.

This reality exposes the inefficiency of the current economic metrics used to determine the state of the U.S. economy. Over the last year, basic metrics like unemployment, CPI, and CCI would indicate that no sign of economic disparity is being experienced by U.S. consumers. But is this really the reality?

While many successful entrepreneurs like the four venture capitalists from the “All-In” podcast have indicated that they don’t trust current economic metrics and have hypothesized consumers are feeling squeezed, it doesn’t take a genius to look around and notice how the economic landscape has changed.

Food prices have skyrocketed, housing prices accompanied by unfavorable mortgage rates remain high, gasoline prices are trending upwards, and many insurance rates have become unrealistic to participate in.

Meanwhile, the consumer confidence index wants us to believe that the common consumer thinks we are in a favorable economy. Right…

Here’s what a rate cut could mean for you moving forward. Expect a lot of volatility in the stock market over the next couple of months as we move closer to the election and in consideration of this new data. If we continue in this trend, companies are likely to fall short of revenue numbers and you can expect to see more news of layoffs and consumer tension. While everyone will be preaching doom and gloom, you must stay patient. Equities in sectors like Consumer Staples, Healthcare, and Finance are all great options to consider during this volatility.

The main opportunity however lies on the other end of this volatile rollercoaster. The theory is that equity prices will decrease to bargains that you won’t be able to refuse. By allocating some of your portfolio to cash you can be ready to hop on any opportunities you may see while many others will be riding this trend downwards from purchasing at all-time highs.

I highly recommend referencing the NAAIM Exposure Index moving forward, as it shows how much risk investors are exposing themselves to in U.S. Equities. As data continues to be released, pay close attention to whether investors are fully invested or have become liquid. It will be a good indicator of the perfect time to strike and start making some money moves.

“Your index fund is no longer diversified enough to minimize risk in your portfolio." I can’t stop seeing this title in every article I read. It seems that the Wall Street Journal and LinkedIn have managed to jump ship on this investing strategy in a matter of four to five months.

The main concern stems from the heavy shift towards the Tech and Finance sector in the S&P 500. The Magnificent 7, which comprises of Microsoft, NVIDIA, Apple, Alphabet, Amazon, Meta, and Tesla, are all tech-based companies. They make up a third of the overall S&P 500 index. To give you an idea of how big this is, these stocks combined are larger than any other nation’s economy in the world.

Over the last two decades, the tech and finance sectors have quickly gained dominance in the S&P, with the tech sector now comprising around 30% of the S&P 500 and the financial sector around 10%. Approximately 40% of the S&P 500 is comprised of these two sectors alone, but is that necessarily a bad thing?

From 1970 to 1990 a large shift occurred from the largest stocks originating in the industrial sector and moving into the tech sector. There is no doubt within me that this major shift occurred with the introduction of the internet and the surge of tech startups over the last two decades. The future clearly indicates that the development and advancement of humankind is highly dependent on the tech sector, at least that’s what investors think.

So is this bad for your portfolio in regards to management of risk? In my opinion, it depends on your goals as an investor. While it is true that the S&P 500 is largely dominated by two sectors I’d like to introduce a new topic to you.

If you were to zoom out from the last two decades and look at the overall growth of the stock market, every recession that we have experienced looks miniscule in the grand scheme of things. The S&P 500 indicates the largest cap stocks in the U.S. economy, so if index funds are tracking the S&P they would naturally be tracking the same thing.

My argument is that if the S&P is no longer diversified, and for some reason, the U.S. economy enters a large downturn, we have a much bigger problem on our hands. Regardless of all of the recessions and market movements that we’ve had in the past, none of this has ever mattered because there’s one consistent theory that has yet to be disproven, the S&P 500 always increases.

With this idea in mind, I still believe that index funds are a great way to continuously grow your money passively and diversely. Your index fund will adjust over time and that’s ok. It is adjusting with the times and will inevitably always increase, no matter the noise that you may be hearing on a day-to-day basis.

As investors, we should be conscious of the goals that we have in mind with our portfolios. It can be so easy to get wrapped up in the noise of videos, articles, and that one guy who seems to know everything about stocks. You should take special care to rise above those minuscule movements and realize that you’re in this for the long run. Index funds have never been an investment someone is making because they want to make money quickly, but rather it is an investment someone makes when they are bullish on the idea that U.S. companies will be more prosperous 30 years into the future.

Keep this idea in mind and continuously invest in your index funds! After all, if the S&P falls out from under itself the United States and the world have a much bigger problem on our hands.

The U.S. Presidential Debate between former President Donald Trump and current President Joe Biden sent shockwaves through the nation as both candidates debated who had the better golf handicap and who gave the United States the best economy it had ever seen. Biden had a difficult time forming coherent sentences, while Trump made lofty claims that if he were president, foreign wars in Ukraine and the Middle East would have never happened.

It was truly a historical (more like hysterical) debate, which now gives America a lot to think about moving forward regarding who they would like to see run the country for the next 4 years. With the economy being a major talking point during the debate, many investors are watching attentively and waiting to see what the future could hold for inflation and interest rates.

Here’s what you should know about how the stock market reacts as it gets closer to the presidential election period.

1. Expect to see volatility
   The reality is that the democratic party doesn’t even know what the future holds for them. Are they going to stick with Biden? Will they do a hot swap? Only time will tell, but until then many investors will feel uncertain about the future of the economy because of this.

2. The S&P 500 will likely perform positively
   History has shown that the S&P 500 has performed positively over the 6-months leading up to a presidential election. While there is a lot of volatility due to the uncertainty of who will lead the nation, the only time the S&P hasn’t resulted in a gain during this period was in 2008 accompanied by the events of the Great Recession.

3. Investors seem to be pro-Trump but are not fully drinking the Kool-aid
   The stock market ticked up slightly after the presidential election but has consistently been volatile over the week following. This is likely because Trump plans to use tariffs as a major tool in order to achieve many of the goals he has set for his campaign. If Trump does win this election, investors can be certain that these taxes will affect their portfolios. Whether this is a good thing or a bad thing has yet to be determined, hence more volatility.

By looking back at history, there doesn’t seem to be any real correlation between the obvious positive or negative effects of an election. Yes, the months prior typically result in a gain, but they are small in the grand scheme of things.

I’m going to sound like a broken record, but I will refer to the previous segment. We must zoom out and think about our portfolios from a wider perspective. Ultimately this volatility that we are seeing from the uncertainty of the market will pass and the market will continue to rise upwards in the long run.

To finish off this segment I would like to share a statistic that one of my really good friends sent me that I thought was very ironic considering America’s current candidates.

The average age of the founding fathers of the United States was 44 years old. Over a dozen of them were younger than 35 years old. The two candidates we currently have running for office are 78 and 81.

I guess people are living longer now, but what an insane turn of events.