The Rate Cutting Cycle Begins & Better to Look Stupid than be Stupid

Week in Review

Last week, the Federal Reserve made the important decision to lower its policy rate for the first time in four years. The 50bps cut (a fancy wall street way of saying 0.5%), which exceeded expectations of a 25 basis point cut, signals a crucial turning point in the focus from inflation to protecting job growth.

The Fed's approach increases the likelihood of a soft landing in our view, as the planned string of rate cuts will gradually lower borrowing costs for both consumers and businesses. This, in turn, is expected to help spur growth and lead to a reacceleration of the economy in 2025. As the market now expects about 1.5% in cuts by the end of next year.

Historically, when a rate-cutting cycle has begun without a recession, it has resulted in strong returns for the stock market. However, given the current elevated valuations, we anticipate the upside to be more modest than in previous soft-landing cycles.

Investors may see a shift in the market, with cyclical, mid-cap, and high-quality dividend-paying stocks potentially gaining ground on mega-cap tech companies. Bonds are also likely to benefit from the lower interest rates in the long run. As such, it is important for investors to pay attention to the risk of reinvesting in cash investments and not overallocate to mega cap stocks.

Better to Look Stupid than be Stupid

We made a strategic decision to include Progeny Inc. (PGNY), a healthcare company, in our portfolios last week. The company's focus on data and partnerships with fertility specialists, combined with its appealing valuation and positive revenue projections, presented immense potential for long-term growth in our client portfolios.

However, recent news of a significant customer loss, Amazon, has resulted in a sharp decline of over 25% in the company's stock value in the last few days. We recognize the importance of promptly reassessing our position in light of new developments that impact our portfolios. Prior to this, we viewed their relationship with Amazon as a positive.

The day wasn't without a large silver lining, when the stock dived on Thursday our equity portfolio was still outperforming the S&P 500 by over 1.5% in spite of the impact of Progeny, it was a small position.

It also came to our attention that Amazon has not eliminated the benefits of Progeny's IVF services for their employees, but rather, has chosen to switch to a different provider. This revelation raises several questions for us. Did Progeny not make a sufficient effort to retain their largest client? Were their services deemed inadequate in comparison to their private competitor, Maven? Given the slow pace of change in HR departments, what might have prompted this sudden switch?

At first, we were hesitant to make such a swift adjustment to our portfolios, concerned that it may reflect poorly on our decision-making process. However, we were reminded of some sage advice over the weekend - "better to look stupid than to be stupid". With this in mind, we will be making the necessary changes to our portfolios to ensure the best outcomes for our clients.

Earnings & Economic Calendar

Next week's economic calendar is light aside from some earnings reports, economic data, and the Fed’s preferred inflation measure PCE or the personal consumption expenditure index.

Kicking off the week on Tuesday, AutoZone will release its earnings report, followed by Cintas and Micron Technology on Wednesday. On Thursday, the spotlight turns to Accenture, CarMax, Costco Wholesale, and Vail Resorts as they report their results.

The highlight of the week will come on Friday with the release of the personal consumption expenditures price index for August from the Bureau of Economic Analysis. Economists are forecasting a 2.3% increase from the previous year.

In addition to these key events, the week will also see several Fed officials hitting the speaker circuit, providing commentary on the central bank's recent decision to cut interest rates on September 18th.

Chart of the Week: Top searched acronyms at work

Disclaimer: The author of this blog is a financial advisor but may not be the right advisor for you. In fact, the author may not even be the right advisor for themselves. Please consult a qualified professional before making any financial decisions based on the content of this blog. And remember, just because the author has a fancy title and a briefcase full of spreadsheets, doesn't mean they know what they're doing.