Weekly Commentary
August 23, 2024
The bulls seem to be winning the argument again this week, as the hopes of a rate cut were confirmed on Friday morning by Powell at Jackson Hole, boosting stocks and bonds alike.? ?Following the announcement of "time has come" to lower rates, coupled with an economic scenario much less sanguine than previously thought, it was all but certain that the Fed was intent on cutting rates, but the market welcomed the affirmation at any rate.? Nevertheless,? we remain cautious in the short to medium term, and take a "buy on the rumor, sell on the news" approach to the investment environment for the next few weeks, as the rate cut euphoria is unlikely to sustain positive market sentiment post September FOMC meeting, especially given the revised employment data number pointing to a less robust labor market, and hence, overall economy.? We take a sell into strength approach for the equity market overall and would favor defensive sectors.
The Fed is cutting rates not merely because inflation has breached the 3% annualized level, but also (mostly) because rates have started to hit the real economy, and the data are starting to show that.? Next, we anticipate that earnings for Q3 will likely be an uphill battle, and the market will require more rate cuts that the Fed is unlikely to accommodate, setting up a more volatile investment outlook.? And with 10-year interest rates back to 3.80% today, we would also caution against raising duration as well.? We do feel that high yield continues to be an interesting asset class in a slower growth, disinflationary backdrop, and with spreads at reasonable levels, we like high yield as one of our most favored asset classes right now.? ? ?
Finally, the stage is set for the elections, as the Democrats formally nominated Kamala Harris for president.? Analysts noted that she took a moderate approach to her acceptance speech, and intended to appeal to middle-of-the-road voters in the battleground states.? Her campaign does have the momentum in its favor, but with more than two months until the election, it will be interesting to see whether she can sustain that or if her candidacy is peaking.? Perhaps the economic situation will also be a wild card, as well as any geopolitical event from now until November.? Please refer to our publication on the US election for more insight into this topic.? ?
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