Q4 Approaches: What's Been Happening In The Market And How To Position For It

seekingalpha09-12

The Fed is likely to cut rates soon due to declining inflation and a weakening macro-environment, which will pressure the USD and benefit large-cap US equities.The yield curve is normalizing, ...

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Position For It\n</h2>\n\n<h4 class=\"meta\">\n\n\n2024-09-12 20:00 GMT+8&nbsp;&nbsp;&nbsp;<a href=https://seekingalpha.com/article/4720449-q4-approaches-whats-been-happening-in-the-market-and-how-to-position-for-it><strong>seekingalpha</strong></a>\n\n\n</h4>\n\n</header>\n<article>\n<div>\n<p>The Fed is likely to cut rates soon due to declining inflation and a weakening macro-environment, which will pressure the USD and benefit large-cap US equities.The yield curve is normalizing, ...</p>\n\n<a href=\"https://seekingalpha.com/article/4720449-q4-approaches-whats-been-happening-in-the-market-and-how-to-position-for-it\">Source 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suggesti","collect":0,"end_time":0,"defaultTopTitle":"seekingalpha.com","property":[],"viewcount":null,"language":"en","relate_stocks":{"BK4115":"综合电信业务","LU1914381329.SGD":"Allianz Best Styles Global Equity Cl ET Acc H2-SGD","LU0320765646.SGD":"FTIF - Franklin Income A MDIS SGD-H1","LU2125154935.USD":"ALLSPRING (LUX) WF GLOBAL EQUITY ENHANCED INCOME \"I\" (USD) INC","FDN":"First Trust Dow Jones Internet I","WMT":"沃尔玛","LU2361044949.HKD":"WELLINGTON US QUALITY GROWTH \"A\" (HKD) ACC","IE00BZ1G4Q59.USD":"LEGG MASON CLEARBRIDGE US EQUITY SUSTAINABILITY LEADER \"A\"(USD) INC (A)","LU2384288077.EUR":"AZ EQUITY GLOBAL INFRASTRUCTURE \"A-INS\" (EUR) ACC","LU1621767737.EUR":"AZ EQUITY GLOBAL INFRASTRUCTURE \"AAZ\" (EUR) ACC","LU0106831901.USD":"贝莱德世界金融基金A2","JPM":"摩根大通","LU2361044865.SGD":"WELLINGTON US QUALITY GROWTH \"A\" (SGDHDG) ACC","VZ":"威瑞森","LU1621768206.USD":"AZ EQUITY GLOBAL INFRASTRUCTURE \"AAZ\" (USD) ACC","LU1621767810.EUR":"AZ EQUITY GLOBAL INFRASTRUCTURE \"A\" (EUR) 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including recession-proof stocks like Walmart and telecoms.Rate cuts aren't all positive; rising unemployment and slowing growth indicate potential volatility ahead, so maintain disciplined and risk-aware investment strategies.Act now to buy bonds before rate cuts occur to capitalize on potential capital appreciation, aiming to front-run the market for better returns.   Klaus Vedfelt/DigitalVision via Getty Images Main Thesis & Background The purpose of this article is to evaluate the broader market and how the macro-environment has shifted since the beginning of the year through now. There have been some ebbs and flows in the market, with equity markets across the developed world rising quite handsomely. However, there has been a recent uptick in volatility and that surely has readers on edge. Beyond that, with ongoing military conflicts in Eastern Europe, the Middle East, and a US presidential election in two months, plenty of geopolitical risk is evident. These factors and others have led the Federal Reserve to finally consider embarking on a rate cutting cycle, which the market has largely welcomed. In this review, I will consider the reasons behind why the Fed is likely to act, what it means for investors and the market, and how and why to begin positioning one's portfolio now. Fed Speak: Rate Cuts On Horizon One of the biggest developments over the past month or so has been regarding the Fed. As inflation has come down in the US, this has resulted in increased expectations for Fed rate cuts - beginning later this month. The net impact on the US dollar has been a steady decline in value. In fact, it has dropped in value against all major (G10) currencies in the short term: USD Drops In Value (S&P Global) The logic behind this should be fairly clear. When interest rates decline (as the market is expectation) that will pressure the value of the underlying currency against its peers. Given that the Fed has kept rates on hold for so long, a policy shift in September will be quite a shift. This is especially true if the Fed's first move is .50 basis points, as opposed to .25 basis points, which some are now predicting: Rate Cut Probabilities (CME FedWatch Tool) The broad takeaway here is that readers should recognize the USD is dropping in value, and that is likely to continue over the next few months. With the Fed looking to move and investors shifting to more dovish expectations, it will be difficult for the USD to rally from here. Keep this in mind when allocating cash into new positions in the coming weeks and months. **This is a positive for large-cap US equities in my view. That is because these are companies that generate a significant portion of their revenues (and profits) overseas. As those sales are converted back to USD, the number of dollars rises when the value of the dollar has dropped in relative terms in those foreign countries. This can give a boost to the bottom-lines of domestic companies simply due to this currency fluctuation. For this reason alone, I see little incentive to reduce my positioning in large-cap US funds, such as the Vanguard S&P 500 ETF (VOO), the Invesco QQQ ETF (QQQ), and the SPDR Dow Jones Industrial Average ETF Trust (DIA). These are all core holdings of mine and will certainly remain that way as we enter the final stretch of 2024. The Yield Curve Is Normalizing Another factor that is changing the investment landscape is the treasury yield curve. This is an extension of the prior paragraph because the reason for this shift is predominately based on rate cut expectations. Still, the two are not always directly related, so understanding the dynamic is important regardless of the reason behind it. What I am referring to is the normalization of the yield curve - which has been inverted fairly consistently for what seems like a longtime now. While we aren't quite back to \"normal\" yet, we can see there has been a major shift in recent months away from the sharp inversion of last year and early 2024: Treasury Yield Curve (Federal Reserve) This is a development that has two actionable implications to me that readers could capitalize on. The first is to look at longer-term bonds now. While the yield curve was inverted, short-term securities were offering higher yields than longer-term securities. This was a result of the inversion, and presented limited opportunity in terms of total return when investors look further out on the maturity spectrum. Now, with short-term rates in the decline (hence the normalization) that dynamic has shifted. So I would personally advocate looking at individual issues with longer maturity dates or longer-term bond funds. Two passive and low-cost examples would be the Vanguard Intermediate-Term Bond Index Fund ETF Shares (BIV) and the Vanguard Long-Term Bond Index Fund ETF Shares (BLV). To support this idea, we should remember that longer-dated securities tend to out-perform shorter-dated ones in terms of total return over time. This dynamic has not been the case while the yield curve was inverted, but as the curve normalizes, I would expect a return to that trend as well: Average Annual Returns (By Investment) (DWS Asset Management) The second opportunity to keep in mind is to use this as a signal to get more defensive in positioning. Of course, buying intermediate and long-term fixed-income is certainly defensive. But I would also advocate shifting to a more diverse equity portfolio as well. This could include buying developed non-US stocks and some recession-proof US plays like Walmart (WMT), Dollar General (DG), and telecoms (think AT&T (T), Verizon (VZ), etc.) The reason for this has to do with what the yield curve normalization often precedes. In this case, it is a recession. In past cycles where we saw a curve inversion, a recession would typically follow soon after the curve normalization has occurred: Yield Curve Change vs. Recession (US) (MetLife) The takeaway for me here is that if we use history as a guide, the recent development with the yield curve is a warning of more difficult times ahead. Is this a foregone conclusion? Of course not. Predictions, historical trends, and past performance doesn't always play out in the future. So we don't know for sure in this case what the yield curve normalization means. It could be good, bad, or neutral, and have broader implications than just a recession. But it does suggest to me that exercising some caution here is well-founded and likely to pay-off as we push towards 2025. If that ends up being the case, the time to prepare for it is now. **I own WMT. Rate Cuts Aren't All \"Good\" News I want to continue to touch on interest rate cuts from the Fed because that has been an over-riding theme for market headlines and is certainly one of the more pressing topics for the next couple of weeks. While rate cuts can be good news for equity and fixed-income investors, it really does depend on the reason behind the cuts. What I mean is, in this case, the reason for the Fed thinking cuts are necessary now has to do with weakening macro-environment - as evidenced by slowing growth and lower inflation. Beyond those statistics, another worrying trend is found within the labor market. After years of strength in this metric, we see now the US unemployment rate ticking higher:   Unemployment Rate (US) (US Bureau of Labor Statistics) I bring this up because I want readers to go into this new Fed cycle and Q4 more broadly with managed expectations. Yes, the market has been performing well and yes, that could continue with a lower rate environment. But we have to remember that low rate cuts don't just happen in isolation. They are often in response to market or geopolitical events, and those need to be considered before declaring a lower rate climate as \"good\" for equity investors. In this particular example, rising unemployment is not a good omen with response to forward GDP growth or consumer spending. While I am not trying to be overly alarmist here, I do want to make the point that my followers should remain disciplined and well within their own personal risk tolerance - because statistics like this one could suggest further volatility ahead. Buy Bonds Before The Cuts Happen My final word has to do with timing. I harped a lot on rate cuts, the reasons they are likely to occur, and how investors can position themselves for them. But I now want to emphasize the time to act is now - or very soon. The reason is that performance for bonds post-cut is well known. Bond prices rise as interest rates fall, so investors can earn a positive total return from capital appreciation in this regard. But the best returns come from front-running this reality. Don't wait until the cuts begin to start making moves, get in before those cuts happen. The logic is very simple and supported by history. Those who get in earlier tend to fare better - in terms of total return. While, again, there is never any guarantee in the market, this is a well-supported prediction:   Returns Pre & Post Fed Cuts (Core Bonds) (JPMorgan Asset Mgmt) The conclusion I draw here is a simple and straightforward one. The time to buy is now. Rate cuts are likely to begin in a few weeks and while that is not necessarily too late to start buying bonds, it may leave potential profit on the table. I see a rate cut as almost guaranteed, so why not jump in now and try to make that alpha! **I own individual muni issues from the state of North Carolina and individual issues from JPMorgan Chase (JPM). I am also long JPM's common stock. Bottom-line The market has taken away some of the gains from the recent record highs, and there are some headwinds on the horizon that suggest it won't necessarily be smooth-sailing through the end of the year. While we can fret about rate cuts, geopolitical events, and softening consumer trends, there is good news too that balances some of this out. For equity investors, corporate earnings are ultimately what drives stock prices long-term, and the fact is that American corporations keep on getting more efficient. One way to evidence this is to see that profits as a percent of sales continues to improve both here and in other developed markets:   Profits as a % of Sales (Select Markets) (Bloomberg) Metrics like this keep me focused on the long-term reasons for investing. I want to own quality companies that continue to grow with time and developed markets - especially in the US - keep on beating expectations in this regard. So while I wrote this review to provide some levelheadedness as we approach some potentially market-moving events - like the first Fed rate cut or the US presidential election - I am nowhere near being an outright bear at these levels.  The US economy remains resilient, US corporations remain ultra-competitive, and a lower rate environment could stave-off a hard landing, which would benefit everyone. I am hopeful this review gives my followers some food for thought on how to prepare for what comes next in 2024.","kind":null,"is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"Economic Data,analysis","news_rank":0,"symbols":[],"gpt_button":0},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.29.1","shortVersion":"4.29.1","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2466454277"}