Past performance does not predict future returns. You may get back less than you originally invested. Reference to specific securities is not intended as a recommendation to purchase or sell any investment.
I have been giving the latest move by the US Federal Reserve some thought, and I think a couple of comments and charts are helpful in framing where we are.
Firstly, for those watching carefully, the 50 basis points (bps) move was flagged through ‘official’ channels like the Wall Street Journal a few days ahead of the meeting. As it was so close to the event, economists remained stuck at 25 bps and so we had one of the most uncertain countdowns for several years. This led to raised volatility around the announcement and a very strong reactionary day, which pushed the S&P and Dow Jones to new highs. The Nasdaq remains slightly below highs because of the cooling off in the AI trade over the summer.
I think we can draw one clear conclusion from the Fed move: there is concern about the pace of slowdown and about the potential impact on employment, but the move is made with little data-backed certainty which is why Powell’s comments often seemed contradictory. He repeatedly stressed that the economy was strong, yet the 50 bps cut would suggest otherwise (the only other 50 bps cuts at the start of a cutting cycle were in 2001 and 2007!).
Powell talked about a ‘recalibration’, perhaps unsurprisingly so given the dislocation between the Fed rate and the two-year yield – rarely has the gap been so big. This can only mean the Fed is behind the curve. I felt Powell was floundering; caught offside and trying to find a way to put his hands up without causing undue alarm. Given what the market is telling us, 50bps was the right call and it certainly sets the hare running in a scramble to re-evaluate positioning into the year end.
At the end of last week, I was drawn to two charts that are guiding my thinking about how to set up positioning for the next three to six months.
The first – from Bernstein – shows the relationship between US interest rate changes and the relative performance of the S&P equal-weighted index versus the (market cap weighted) S&P 500.
Figure 1: Leadership within equities changes with the Fed rate cuts, typically in favour of S&P 500 equal-weighted over S&P 500
Source: Bernstein
This supports the view I put out there in July’s Quarterly Newsletter, that whatever markets do into year end, the trend is now likely away from concentrated names and trades and the market should broaden out. Here, that is represented by the S&P equal weighted opportunity but elsewhere I have seen it pitched as Russell 2000 v 1000 and the like. It supports an active approach and the representation of themes through a broader selection of names.
The second chart, from Goldman Sachs, explains the uncertainty that still prevails and shows why it is so hard to be bullish on the momentum trade. This illustrates the performance of the S&P 500 following the first rate cut in a cycle; it’s typically up 10-15% over the following 12 months if there is no recession and down 10-15% if there is a recession.
Equities typically rally following the first Fed cut if no recession, as of September 12 2024; price return
Source: Goldman Sachs Global Investment Research
The Fed commentary made clear that the economy is strong, yet the rate cut would suggest otherwise, so we must believe that the market is going to remain volatile around data points until the path of the economy is clear.
All of this is supportive of a broadening out in the market which should translate into a fertile time for stock/sector/theme pickers. Looking at the winning equities ‘baskets’ this month (according to Goldman Sach’s designations), the US is led by housing, non-profitable tech, ‘power up America’ and infrastructure – all lower rate beneficiaries.
Our base case remains that set out in July: alpha will be generated from a focus on a broadening out of market leadership and less so from betting on the absolute direction of markets. It’s time to think beyond the consensus trades of the last 12 months.
Understand common financial words and terms See our glossary
Read, watch and listen to more insights from Liontrust fund managers here >
KEY RISKS
Past performance is not a guide to future performance. The value of an investment and the income generated from it can fall as well as rise and is not guaranteed. You may get back less than you originally invested.
The issue of units/shares in Liontrust Funds may be subject to an initial charge, which will have an impact on the realisable value of the investment, particularly in the short term. Investments should always be considered as long term.
Overseas investments may carry a higher currency risk. They are valued by reference to their local currency which may move up or down when compared to the currency of the Fund. This Fund may have a concentrated portfolio, i.e. hold a limited number of investments. If one of these investments falls in value this can have a greater impact on the Fund's value than if it held a larger number of investments. The Fund may encounter liquidity constraints from time to time. The spread between the price you buy and sell shares will reflect the less liquid nature of the underlying holdings. Investments in emerging markets may involve a higher element of risk due to less well-regulated markets and political and economic instability. This may result in higher volatility and larger drops in the value of the fund over the short term. Outside of normal conditions, the Fund may hold higher levels of cash which may be deposited with several credit counterparties (e.g. international banks). A credit risk arises should one or more of these counterparties be unable to return the deposited cash. Counterparty Risk: any derivative contract, including FX hedging, may be at risk if the counterparty fails.
DISCLAIMER
This is a marketing communication. Before making an investment, you should read the relevant Prospectus and the Key Investor Information Document (KIID), which provide full product details including investment charges and risks. These documents can be obtained, free of charge, from www.liontrust.co.uk or direct from Liontrust. Always research your own investments. If you are not a professional investor please consult a regulated financial adviser regarding the suitability of such an investment for you and your personal circumstances.
This should not be construed as advice for investment in any product or security mentioned, an offer to buy or sell units/shares of Funds mentioned, or a solicitation to purchase securities in any company or investment product. Examples of stocks are provided for general information only to demonstrate our investment philosophy. The investment being promoted is for units in a fund, not directly in the underlying assets. It contains information and analysis that is believed to be accurate at the time of publication, but is subject to change without notice. Whilst care has been taken in compiling the content of this document, no representation or warranty, express or implied, is made by Liontrust as to its accuracy or completeness, including for external sources (which may have been used) which have not been verified. It should not be copied, forwarded, reproduced, divulged or otherwise distributed in any form whether by way of fax, email, oral or otherwise, in whole or in part without the express and prior written consent of Liontrust.
