THE MARKETS

The rate cut stars are aligning.

For the last year, borrowing costs in the United States have remained relatively high as the U.S. Federal Reserve (Fed) waited for economic data to show that inflation was on track to reach the Fed’s two percent target. Now, we may finally be on the cusp of lower rates.

“The Fed’s preferred inflation gauge has eased to 2.6 [percent], not far off its 2 [percent] target, and the once overheated labor market has cooled to pre-pandemic levels. The rebalancing has been accompanied by moderation in consumer spending, as high prices and borrowing costs tamp demand and thus price pressures,” reported Victoria Cavaliere of Bloomberg.

Last week, Fed Chair Jerome Powell told the Economic Club of Washington D.C., “…if you wait until inflation gets all the way down to 2 [percent], you probably waited too long…Our test has been that we wanted to have greater confidence that inflation was moving sustainably down toward our 2 percent target. What increases that confidence is more good inflation data and, lately here, we have been getting some of that.”

Few anticipate the Fed will lower the federal funds rate at its July meeting, but the outlook for September is good. The probability of a September rate cut was above 90 percent last week, according to the CME FedWatch.

Changing rate expectations disrupted stock markets, last week. Investors moved from big technology firms into smaller companies that tend to perform better when rates are lower. Rita Nazareth of Bloomberg explained that the market experienced, “a ‘rotation’ that saw investors trimming positions on this year’s winners in favor of laggards. Underpinning that trade were bets the 2024 rally would broaden out of megacaps as the Federal Reserve cuts rates.”

By the end of the week, the Standard & Poor’s 500 Index was down about 2.0 percent and the Nasdaq Composite had fallen about 3.7 percent. The Dow Jones Industrial Average fared better, finishing the week in positive territory, reported Alex Harring and Jesse Pound of CNBC. Yields on U.S. Treasuries were mixed over the week.

Data as of 7/19/24 1-Week Y-T-D 1-Year 3-Year 5-Year 10-Year
Standard & Poor’s 500 (Domestic Stocks) -2.0% 15.4% 20.6% 8.9% 13.1% 10.8%
Dow Jones Global ex-U.S. -2.3% 5.6% 7.6% -1.0% 3.4% 1.7%
10-year Treasury Note (Yield Only) 4.2% N/A 3.7% 1.2% 2.1% 2.5%
Gold (per ounce) -0.1% 15.6% 21.7% 9.8% 10.8% 6.2%
Bloomberg Commodity Index -3.2% -1.2% -7.6% 1.9% 4.3% -2.8%

S&P 500, Dow Jones Global ex-US, Gold, Bloomberg Commodity Index returns exclude reinvested dividends (gold does not pay a dividend) and the three-, five-, and 10-year returns are annualized; and the 10-year Treasury Note is simply the yield at the close of the day on each of the historical time periods.
Sources: Yahoo! Finance; MarketWatch; djindexes.com; U.S. Treasury; London Bullion Market Association.
Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly. N/A means not applicable.

MICROCHIP COMPANIES STUMBLED OVER GOVERNMENT POLICY.

In general, one aim of governments in democratic countries is to implement policies that promote solid and sustainable economic growth. Sometimes, a policy change—or the possibility of one—will ripple through financial markets. Last week, we saw two examples of this as companies that have benefited from enthusiasm around artificial intelligence saw their share prices drop sharply when it appeared that U.S. government policy might change.

  1. Stricter limits could be imposed on some exports to China. In one case, a potential change in government policy caused the share price of a Dutch company to drop, reported Adam Clark of Barron’s. The company produces lithography machines that are necessary for semiconductor manufacturing. The company’s solid second quarter earnings report was overshadowed by news that President Biden may impose new restrictions on exports to China. Clark reported that the administration:

    “…is considering more severe trade restrictions on exports to China if companies…continue selling chip-making machinery to the country. While the [lithography machinery] company is already restricted from selling its most advanced machines to Chinese customers, [the company] still generated 49% of its revenue from China in the second quarter, as buyers looked to stock up on older machinery.”

  2. The United States’ relationship with Taiwan may change. In an interview with Bloomberg Businessweek, presidential candidate Donald Trump was asked about the United States’ relationship with Taiwan. He answered, “They did take about 100 [percent] of our chip business. I think, Taiwan should pay us for defense.”

After the remarks became public, the share price of Taiwan’s largest company—the world’s largest maker of advanced chips—tumbled, reported George Glover of Barron’s. The share price fell even though the company had beaten quarterly estimates and lifted 2024 revenue projections, reported Jane Lanhee Lee of Bloomberg.

Other chip companies’ stocks moved lower, too, on concerns that a change in U.S. policy could result in new supply chain disruptions. “China’s ruling Communist Party has vowed to ‘reunify’ with Taiwan and has refused to rule out using military force to take back control of the country,” reported Glover.

It can be dismaying when the value of a stock or stock market index moves lower. However, falling share prices sometimes have silver linings. They sometimes create opportunities to invest in companies with solid fundamentals at attractive prices.

Weekly Focus – Think About It

“It’s not what you look at that matters, it’s what you see.”

―Henry David Thoreau, author

Securities offered through American Portfolios Financial Services, Inc. (APFS), Member FINRA, SIPC. Advisory services offered through American Portfolios Advisors, Inc. (APA) and/or Novem Group, SEC-Registered Investment Advisers. Novem Group is independent of APFS and APA. Please refer to your representative’s FINRA BrokerCheck for firm affiliations. Any opinions expressed in this forum are not the opinion or view of Novem Group, APFS, or APA and have not been reviewed for completeness or accuracy. Any comments or postings are for informational purposes only and do not constitute an offer or a recommendation to buy or sell securities or other financial instruments. Readers should conduct their own review and exercise judgment prior to investing. Investments are not guaranteed, involve risk, may result in a loss of principal, and are not suitable for all types of investors. Past performance does not guarantee future results.


* These views are those of Carson Group Coaching, and not the presenting Representative or the Representative’s Broker/Dealer, and should not be construed as investment advice.
* This newsletter was prepared by Carson Group Coaching. Carson Group Coaching is not affiliated with the named broker/dealer.
* Government bonds and Treasury Bills are guaranteed by the U.S. government as to the timely payment of principal and interest and, if held to maturity, offer a fixed rate of return and fixed principal value. However, the value of fund shares is not guaranteed and will fluctuate.
* Corporate bonds are considered higher risk than government bonds but normally offer a higher yield and are subject to market, interest rate and credit risk as well as additional risks based on the quality of issuer coupon rate, price, yield, maturity, and redemption features.
* The Standard & Poor’s 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general. You cannot invest directly in this index.
* All indexes referenced are unmanaged. Unmanaged index returns do not reflect fees, expenses, or sales charges. Index performance is not indicative of the performance of any investment.
* The Dow Jones Global ex-U.S. Index covers approximately 95% of the market capitalization of the 45 developed and emerging countries included in the Index.
* The 10-year Treasury Note represents debt owed by the United States Treasury to the public. Since the U.S. Government is seen as a risk-free borrower, investors use the 10-year Treasury Note as a benchmark for the long-term bond market.
* Gold represents the afternoon gold price as reported by the London Bullion Market Association. The gold price is set twice daily by the London Gold Fixing Company at 10:30 and 15:00 and is expressed in U.S. dollars per fine troy ounce.
* The Bloomberg Commodity Index is designed to be a highly liquid and diversified benchmark for the commodity futures market. The Index is composed of futures contracts on 19 physical commodities and was launched on July 14, 1998.
* The DJ Equity All REIT Total Return Index measures the total return performance of the equity subcategory of the Real Estate Investment Trust (REIT) industry as calculated by Dow Jones.
* Yahoo! Finance is the source for any reference to the performance of an index between two specific periods.
* Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance.
* Economic forecasts set forth may not develop as predicted and there can be no guarantee that strategies promoted will be successful.
* Past performance does not guarantee future results. Investing involves risk, including loss of principal.
* You cannot invest directly in an index.
* Stock investing involves risk including loss of principal.
* Consult your financial professional before making any investment decision.

Sources:

https://www.cnbc.com/2024/07/15/powell-indicates-fed-wont-wait-until-inflation-is-down-to-2percent-before-cutting-rates.html Or go to:
https://resources.carsongroup.com/hubfs/WMC-Source/2024/07-22-24_Bloomberg_Economists%20Warn%20Trump%20Policies%20Would%20Stoke%20Inflation_1.pdf
https://www.cnbc.com/2024/07/15/powell-indicates-fed-wont-wait-until-inflation-is-down-to-2percent-before-cutting-rates.html [Video]
https://www.cmegroup.com/markets/interest-rates/cme-fedwatch-tool.html Or go to:
https://resources.carsongroup.com/hubfs/WMC-Source/2024/07-22-24_CME%20Group_FedWatch_FOMC%20Rate%20Moves_3.pdf
https://www.bloomberg.com/news/articles/2024-07-18/stock-market-today-dow-s-p-live-updates?srnd=phx-markets Or go to:
https://resources.carsongroup.com/hubfs/WMC-Source/2024/07-22-24_Bloomberg_Stocks%20Slide%20Before%20High-Stakes%20Megacap%20Earnings_4.pdf
https://www.cnbc.com/2024/07/18/stock-market-today-live-updates.html
https://home.treasury.gov/resource-center/data-chart-center/interest-rates/TextView?type=daily_treasury_yield_curve&field_tdr_date_value_month=202407
https://www.imf.org/en/Publications/fandd/issues/Series/Back-to-Basics/Fiscal-Policy
https://www.barrons.com/articles/asml-stock-drop-price-buy-sell-79d71cc3?mod=hp_LEAD_1_B_3 Or go to:
https://resources.carsongroup.com/hubfs/WMC-Source/2024/07-22-24_Barrons_ASML%20Stock%20is%20a%20Buying%20Opportunity%20After%20Tumble_8.pdf
https://www.bloomberg.com/features/2024-trump-interview-transcript/ Or go to:
https://resources.carsongroup.com/hubfs/WMC-Source/2024/07-22-24_Bloomberg_The%20Donald%20Trump%20Interview%20Transcript_9.pdf
https://www.barrons.com/articles/tsmc-stock-price-taiwan-semi-e70d6c61?mod=article_inline Or go to:
https://resources.carsongroup.com/hubfs/WMC-Source/2024/07-22-24_Barrons_TSMC%20Stock%20Falls_10.pdf
https://www.bloomberg.com/news/articles/2024-07-18/tsmc-s-profit-surpasses-estimates-after-ai-investment-surges Or go to:
https://resources.carsongroup.com/hubfs/WMC-Source/2024/07-22-24_Bloomberg_TSMC%20Hikes%20Revenue%20Outlook%20to%20Reflect%20Heated%20AI%20Demand_11.pdf
https://www.brainyquote.com/quotes/henry_david_thoreau_106041