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He thinks so. The debate is to be had, for sure. It's come down considerably, but the core is higher than the Fed would like to see. Softening employment number on Friday is a bit of a concern for the market. To really crush inflation, you have to get wage demand down and that's not going away anytime soon. Going to see persistent demands for higher annual increases from employees, which will keep core inflation stickier and higher than we've been used to over the past decade of very low inflation.
For the last 30-40 years, we haven't had to worry about inflation in a big way. Going forward we do, and it matters a lot. Less globalization is one cause. We get some more numbers this week. If they're benign, equity markets will like it; if they surprise to the upside, look out for more volatility in equity markets.
Here's the debate. You get some good news, the Fed says positive things, and the market can rally off that. But as soon as you get a hint that the economy may be slowing down, especially on the labour side, that's when the end of the business cycle risk really kicks in. That matters for earnings, and markets are priced for perfection right now.
Broad consensus right now is that we're all good. But he looks for the worst-case scenario, because he wants to manage risk for clients off that analysis, rather than the most optimistic one.
With the end of the business cycle, the yield curve is starting to steepen. This means higher net interest margins and higher profitability for the banks. That's the trade, but how long does it last before a hard economic landing would necessitate higher loan loss provisions?
A trade now. You can buy the dips, but chasing these stocks higher makes no sense. We're not in the clear economically, by any stretch.
Exposure to private credit managers and private equity managers. Focus is on income generation. Credit risks are still there, but the public market volatility risks associated with interest rates are not. Likes them, but you need a diversified approach to private markets.
Bottom line is it doesn't work. You can't earn the illiquidity premium you're earning in the private markets, yet still have the liquidity of public markets if you want to sell and get your money back the next day.
Exposure to private credit managers and private equity managers. Focus is on income generation. Credit risks are still there, but the public market volatility risks associated with interest rates are not. Likes them, but you need a diversified approach to private markets.
Bottom line is it doesn't work. You can't earn the illiquidity premium you're earning in the private markets, yet still have the liquidity of public markets if you want to sell and get your money back the next day.
Recently, we saw yields go up and then invert, where the short-term rate is higher. Historically, that tells us of the likelihood of a recession. They have to slow the economy and fight inflation, which we saw the last couple of years. Now the expectation is for the easing cycle.
The reason the yield curve inverts is to slow things down, and we're starting to see that slowdown. But there's this concept of the delayed transmission of monetary policy. Takes a long time for loans (such as mortgages) taken out a while back to hit their reset dates.
By the time central banks actually start cutting, it means the economy's already sliding. So you're at the tail end of the business cycle. That's typically not bullish until markets price that in, and they haven't yet. This cycle's very different from previous cycles, mainly due to the upheaval of Covid where everything shut down and governments give everybody money.
We haven't had to worry about inflation, and now we do going forward.
All kinds of innovation coming to packaged solutions for investors, especially yield seekers. A way to get yield off some of these big stocks that don't pay much yield.
Remember that a covered call strategy in the very long run is going to underperform just being long the equity itself. If you're bullish on a name such as AMZN, just buy AMZN and hold it until you decide to sell.
Loves renewable energy, the future is going green. Didn't like it a few years ago when it was trading above $40 -- too risky, multiple too high. Loves it down here, great dividend, lots of value now. He's buying on weakness.
Who's going to win the election? Green movement is out of favour now. But that's where value comes in for a value-tilt investor like himself.
Trump will have better corporate tax policy and better individual tax-cutting compared to Harris. But the impact will be far worse for deficits going forward. This matters a lot. Because it's such a close race, this adds a lot of uncertainty over the next 2 months.
As always, it will come down to a couple of swing states. Most important one and closest race is Pennsylvania. US Steel takeover is a big focus there. It almost doesn't matter who wins the presidency, because tax policies get voted on by Congress. Whether we see a blue sweep or a red one, what does that mean?
According to polls, slight tilt now toward the GOP in Congress. Slight tilt toward Harris as President. Senate looking to be Republican. Likely going to be a split outcome, which is actually the best for equity markets based on the last 70 years. Until we get beyond the election, it really matters.
For the individual, everybody gets a tax cut under Trump. But do the top 10-20% need it? Vast majority of spending in his package will benefit the rich, by far. For Harris, the top 10% will pay a bit more, but the bottom half will be way better off.
At the end of the day when all's said and done, he thinks Harris will get the nod.
What does all this mean for equity markets as we head into the next couple of months? We've seen added volatility in markets since about mid-July, when Harris entered the race and Biden left. Favourable inflation numbers, but weakening labour situation. Worry in first days of August with Japanese carry trade, they changed policy, markets rallied but could not make a new high. 50-day MA was broken on Friday. Need to test support before we can rally, and support is about 3-4% below where the S&P 500 is sitting right now. Very high probability of testing that between now and the September 18 FOMC meeting.
If Fed does 50 bps, and is really worried about the economy, support will break and we'll come back down. If they do 25 bps, suspects we'll see a bit of a bounce, but ultimately don't expect new highs until US election results are in. Market's in a holding pattern, with volatility, between now and election day.
