It’s about time - how to trade this?

LC IDEAs: Views & Insights recently spoke with Sunil Garg, Managing Director, Chief Investment Officer at Lighthouse Canton on his views on equities as market prices in a rate cut from the Federal Reserve in September.

Views on equities with the recent volatility and Fed cuts in sight

In equity markets, the saying "stairs up, elevator down" highlights how markets can rise slowly but fall rapidly. Current market conditions reflect this trend.

Valuations alone don’t drive market movements—earnings and other factors do. Our shift to a more cautious stance is premised on expectations of weaker economic growth as consumption and labor markets soften.

If the biggest driver of high valuations was earnings growth, any softening in demand becomes problematic. This was evident when companies like McDonald's, Airbnb, Disney, and Domino's Pizza recently reported — demand is not as robust as expected, which will likely impact earnings.

So, if high valuations were supported by strong earnings, and those earnings are now under pressure, there’s a question mark over the market’s direction. This leads us to adopt a more cautious view.?Our model has been signaling a softening economy.

The consensus narrative remains one of a “soft landing”, notwithstanding a brief interlude with recessionary thoughts (early August). We find a disconnect between market expectations of a goldilocks economic outcome and an aggressive easing cycle (market pricing in 6 rate cuts over next 12 months).?

Read the full article here - www.lighthouse-canton.com/insights/its-about-time---how-to-trade-this

Also, do note that historically, when the Fed starts cutting rates, markets tend to decline and don't recover until the rate cuts are well underway. Just as rising rates have a lagged impact, so do falling rates. Moreover, central banks cut rates because they see a growth problem.?

Despite slowdown signs, equities have traded up post the early august swoon, comforted by better-than-expected retail sales. We are focused on trends, which suggest a continued slowdown in consumption and in the labor market.??

Despite the economic headwinds, both the narrative and price performance are a challenge to our cautious stance on equities. While it’s easy to dismiss price signals as temporary blips, ultimately price trends, a key pillar of our investment framework, need to converge with economic trends.?

As part of market signals, we should expect to see growth stocks responding positively to growth delivery and guidance, a feature that has been lacking in the recent reporting season. In fact, the asymmetric response to misses remains of concern.?

We are cognizant of anchoring behavior and biases (we are not immune to these). Our approach is to have a view but also identify milestones that indicate when we need to reassess that view. This is similar to the approach we took at the beginning of year (S&P was around 4800) when downside risks were giving rise to cautionary views, and we outlined data points that would lift our anchors, becoming more positive as the year progressed.?

Read the full article here - www.lighthouse-canton.com/insights/its-about-time---how-to-trade-this