The market received three important data points this week – inflation, wages and consumer spending – and it was mostly good news. First up, inflation continues to moderate. The Fed’s preferred inflation index – Core PCE – showed prices increased at a moderate pace for June— confirming excessively high inflation is behind us. However, prices are still ~30% higher than 3-years ago… they’re just rising at a slower pace. Whilst inflation is important – I wanted to know if consumers are still spending? The answer is they are – and by whatever means possible. They are drawing down on their savings and ramping the use of credit cards – which has seen card delinquencies hit decade highs. But from equities perspective – higher spending is good news. This feeds the ‘soft landing’ narrative….
"Inflation"
Cycles: Your Advantage over the Average Investor
I made a decision to reduce my exposure to large-cap tech a few months ago. The decision wasn’t an easy one… these are great stocks. For example, did I sell prematurely? The answer will be more obvious in 6-12 months when the cycle has had sufficient time to play out. For now (as was the case when I sold) – I think the downside risks meaningfully outweighed further upside gains. In this post, I explained how selling is a way of managing your risk. I was ensuring I banked the appreciable gains realized over the past few years. In light of the rotation out large-cap tech we’ve seen this week – I thought it was opportune to share some thoughts on (a) how I calibrate my portfolio in a changing environment; and (b) when to be aggressive and when to play defense. It all comes back to understand the economic cycle…
Is the Market About to Broaden Beyond Tech?
Has the market finally started to broaden beyond tech? Whilst it’s still too early to answer – there were signs of life this week in sectors which have failed to work this year. By way of example, the Russell 2000 and the Equal Weighted Index caught a bid – as the market started to price in at least one rate cut before the end of the year. And that makes sense. Companies that depend on leverage to supplement cash flows will stand to benefit more from rates cuts (vs their larger cap peers – who profit from higher rates due to cash hoards)
Is Momentum Waning? More on Why I’m Bullish Bonds into 2025
As part yesterday’s missive – I talked to why I think bond yields are too high. For example, I offered a chart showing the declining trend in nominal GDP growth vs what we see with the US 10-year yield. Economic growth is clearly slowing and yet yields are going the opposite way. Why? Therefore, investors should ask themselves what is the catalyst which will take us back to a 3.0% ‘growth’ mode (i.e. what we saw over Q3 and Q4 of 2023)? For example, is it the consumer? They make up ~70% of GDP with consumption – however they are mostly tapped out (as we have heard in the latest earnings reports). What will it be?
For a full list of posts from 2017…