Rough Week For Stocks As Credit Spreads Issue Warning | Lance Roberts & Adam Taggart
Jul 20, 2024
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Portfolio manager Lance Roberts discusses the recent stock market correction and warns about widening credit spreads in lower-quality bonds. Topics include economic implications of Trump's plan, potential Fed rate cuts, and latest market trends. Is a 'Great Rotation' happening?
Stocks experience significant correction due to overbought conditions.
Potential rate cut by Fed in September amid weakening economic indicators.
Challenges of reshoring jobs include higher labor costs and product prices.
Tariffs in economic policies may boost US companies but lead to inflation.
Portfolio adjustments made to rebalance positions and anticipate sector rotation.
Deep dives
Economic Indicators Signal Potential Rate Cut in September
The economic indicators are hinting at a potential rate cut by the Fed in September. With inflation data showing weakness and jobless claims on the rise, the Fed is under pressure to act. While the Fed fund futures currently don't predict a rate cut in July's meeting, the markets are signaling a green light for a September rate cut. If economic data continues to deteriorate, the Fed may not have a choice but to lower rates to prevent falling too far behind the economic curve.
Challenges of Bringing Jobs Back to America
The idea of reshoring jobs to America comes with significant challenges, notably in making American products more expensive due to higher labor costs. While there is a push to promote domestic manufacturing, the reality is that higher wages in the US may lead to cost increases for goods. The essence of achieving competitive wages while maintaining profitability remains a delicate balance in the reshoring initiative.
Potential Impact of Tariffs
The introduction of tariffs as part of economic policies to reshore manufacturing can have both positive and negative effects. While tariffs could strengthen American companies' competitive position, they may also result in inflationary pressures. Balancing the objective of boosting domestic production while keeping products affordable for consumers poses a challenge that requires careful economic management.
Fed's Rate Cut Dilemma Close to Election
The Federal Reserve faces a dilemma on potential rate cuts close to the election. Recent signals from Jerome Powell and market indicators suggest the possibility of a rate cut, but political considerations and the proximity to the election complicate the decision. The Fed's need to maintain economic stability while avoiding perceived political interference adds complexity to the rate policy decisions.
Portfolio Adjustments and Rationale
Recent portfolio adjustments included reducing weights in several positions due to overextension and selling down AMD and Nvidia to rebalance. Adding to XLE and Diamondback Energy in anticipation of a sector rotation. Cash holdings are at 16%, positioning the portfolio defensively.
Importance of Succession Planning
Emphasizes the critical need for succession planning in financial matters to ensure a smooth transition of control in case of unexpected events. Advocates for establishing a relationship with a trusted financial advisor for the surviving spouse to avoid potential financial disruptions post the primary financial manager's passing.
Significance of Communication with Financial Advisor
Highlights the necessity of having the surviving spouse acquainted with the financial advisor to facilitate a seamless handover of responsibilities. Underlines the risk of changing advisors post the primary manager's demise, urging proactive communication and relationship building to maintain continuity and financial stability.
Ensuring Preparedness Amid Market Volatility
Addresses the prevalent market volatility and emphasizes a cautious approach. Outlines strategies to stay proactive amidst diminishing market trends by adjusting target weights and potential increased cash allocation to safeguard against unpredictable market shifts. Encourages staying informed and prepared for potential market corrections.
Newsletter Updates and Premium Subscriber Benefits
Discusses the valuable insights and resources available to premium newsletter subscribers, including an exclusive live Q&A session with a former Fed executive and the quarterly letter by Lacey Hunt. Emphasizes the significance of being informed and accessing premium content for a deeper understanding of the economic landscape.
Well, portfolio manager Lance Roberts has been warning for a while now that stocks were materially overbought and due for a 5%+ correction.
And it looks like that started this week, with the S&P selling off 3% over the past 3 trading days.
Interestingly, it began with a massive flow of capital into small cap stocks, though that moderated a bit as the week progressed. Whether or not this is the beginning of a Great Rotation from Big Growth into Small Value remains to be seen.
But more interesting to Lance is that credit spreads are starting to widen in lower-quality bonds. This is the first rumblings of concern we've seen in the part of the market that truly matters.
Is a sleeping dragon awakening here?
Lance and I discuss that as well as the likely economic implications of Trump's economic plan, whether the Fed will really cut rates in September, and Lance's firm's latest trades.
For everything that mattered to markets, watch this Weekly Market Recap.
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