- Fed: What’s the rush?
- Ok, how about the equity market?
- Positioning
Fed: What’s the rush?
As any athlete knows, it’s hard to change direction and to keep running. So, a pivot is fine, but it should come with a pause. When I think about the latest signals from the U.S. Federal Reserve (Fed), it’s this analogy that comes to mind. They seem to be moving in a firmly dovish direction, but quite frankly, I don’t see the need to rush. We are only just beginning to see inflation prints that are getting close to the 2% or so that central bankers target, but we must remember that inflation has been way above that key level for a very long time. Initially market commentators and economists pointed their fingers at supply chain issues, largely on the back of the war in Ukraine, but the truth is that the twin spigots of excessive fiscal and monetary stimuli were partly to blame too. But, what really puzzles me is why the urgency to move ahead of the election? I think November is going to be a seismic event in terms of its importance for fiscal policy, monetary policy, the deficit, foreign relationships, economic growth and the path of interest rates. So, although I can just about understand a more dovish pivot, I can’t understand the timing. The market seems to be pricing in a September cut as a near certainty now, but waiting until after the election makes far more sense to me given the signals about taxes or tariffs to come.
And there are other considerations too. It’s not just about the timing of a first cut, though that gets most of the attention, it’s also about how many. I suspect that if Trump wins there could be only one or two moves lower, and, if the Fed were to make the mistake of cutting prematurely, that could potentially make future rate-setting policy even trickier, if it were to unleash too much froth. There has always been, rightly, a focus on being “data dependent,” but what about “event dependent”! A September cut feels to me like moving because you have to, and, given the huge amount of uncertainty that November should at least start to clarify, I just don’t believe it makes sense. Pivot, but don’t run!
Ok, how about the equity market?
Well, to extend the pivot metaphor, I do think that investors should consider a run, or a jog, or perhaps just a brisk walk, away from the dominance of big tech. Their level of valuation, concentration, and momentum are topics that I have discussed here before, and I think they are worse than in 1999, and actually, not healthy. I am not saying abandon large, high-quality, tech names and go all in on small caps and value, but I am calling for a more balanced approach. Keep in mind that there has been a substantial shift in the U.S. over the last few weeks, from a likely blue sweep to now a far higher likelihood of a red sweep. In fact, forget the Olympics, this election is shaping up to be the more interesting summer games! If Biden were able to somehow navigate a return I think we could see higher corporate tax, higher capital gains taxes, and, potentially, a greater leftward shift than anticipated.
Positioning
So, with the lead and strong momentum that Trump has taken since the debate, and since Saturday’s tragic events in Pennsylvania, we suggest walking – perhaps briskly – into a new rotation within U.S. equities. What does that look like? Well, perhaps some more small cap and value stocks of high quality and reasonable valuation, but also sticking to some defensiveness within a U.S. equity portfolio especially into, and even after, the election. Also, while a Trump win is seen by some as more positive for U.S. stocks than foreign stocks, we still think the diversification of foreign stocks is attractive (though he might be better for Japan than Europe). This is a move that I have already started making, strolling into new leadership (I started a while back from extremely high price-to-earnings (PE) Tech – NVDA, TSLA). I’m also adding to cash, sticking with Healthcare, and taking up defensive positions like Utilities. Finally, I’m trimming Financials, and leaning more into Oil Services, Chemicals, and Machinery.
So, yes, athletes can pivot, but they shouldn’t run while changing direction, and, of course, they must properly time their run to the ball.
– David
