The Fed Went Big, Now What?
Plus fresh ripped from the headlines confirmation for our targeted exposure models
As you’ve probably seen the Fed delivered a 50-basis point rate cut yesterday and its updated set of economic projections suggest another 50-basis points in cuts are likely before the end of the year. Another 100-basis points are on the table for 2025, but as Fed Chair Powell reiterated during yesterday’s presser, the Fed will continue to react based on incoming data for the economy, inflation and jobs. Even through the market got most of what it was expecting, the post decision action in the market was mixed with the S&P 500, Nasdaq Composite, and the Dow finishing in the red.
Call it a delayed reaction to the Fed’s effort to extend the current economic cycle or the dollar weakening, but equity futures point to a rip, roaring market open with the Nasdaq and small-cap laden Russell 2000 set to blast off. With the August Existing Homes Sales data out later this morning the only economic data point until Monday’s September Flash PMI data, there is little in the way of economic data to question the Fed decision or its potential road map. Tomorrow, September 20, is a triple witching event and those tend to produce far greater volatility in the market than usual.
While some are quietly whispering “don’t fight the Fed”, others will be keeping a close eye technical levels for the S&P 500 and the Nasdaq Composite. Neither are overbought but both are well above key support levels, which means finding bargains in the market won’t be easy. This could lead to some “hold your nose” buying in the market in the near-term but following the almost 10% climb in the S&P 500 since early August we can’t rule out traders taking profits should the market punch its way higher.
Keep in mind, while the Fed has started its rate cutting cycle, geopolitical tensions persist, a US government shutdown is possible, and recent polling data suggest the 2024 presidential election somehow remains a tight race. In other words, uncertainties remain at time when the market is once again flashing “Greed.” Not exactly the best combination for rational thinking.
Model Musings:
Aging of the Population
“Social Security recipients are on track for a smaller cost-of-living adjustment next year. The cost-of-living adjustment, or COLA, that retirees receive each year is tied to the average inflation data for July, August and September, so the actual increase won’t be clear until October… As of now, the Senior Citizens League, which advocates to protect Social Security and Medicare, is forecasting a 2.5% COLA in 2025 for the nation’s 68 million Social Security recipients.” Read more here
Artificial Intelligence
“NVIDIA is collaborating with Salesforce to develop predictive and generative artificial intelligence (AI) workflows that provide autonomous agent and interactive avatar experiences to the latter’s Agentforce platform. Under the partnership, which was announced during Salesforce’s Dreamforce event on September 17 in San Francisco, the two companies will bring NVIDIA’s AI platform’s computing and AI software to the Salesforce and Agentforce platforms. This will enable Salesforce agents to get new insights and improve productivity.” Read more here
Artificial Intelligence, Digital Infrastructure
“BlackRock is preparing to launch a more than $30bn artificial intelligence investment fund with technology giant Microsoft to build data centres and energy projects to meet growing demands stemming from AI… The investment vehicle is aimed at addressing the staggering power and digital infrastructure demands of building AI products that are expected to face severe capacity bottlenecks in coming years.” Read more here
Cash-strapped Consumer
“Many consumers have been waiting for rates to come down before undertaking some of these expensive purchases, and the Fed’s action today may bring some of those shoppers off the sidelines, said John San Marco, portfolio manager at Neuberger Berman. That said, one cut will not bring about an immediate shift in the broader consumer environment” Read more here
Cloud Computing
“Public cloud has become the major underpinning of enterprise infrastructure strategies and innovation delivery. Cloud’s self-service access, elasticity, scalability, quick deployment, and access to new infrastructure and services with little up-front costs has brought about accelerated delivery to market and rapid uptake by enterprises.” Read more here
Digital Payments
“84% of U.S. consumers now prefer self-service kiosks, with 66% of them choosing these options over traditional staffed checkouts. While Generation Z (84%) and millennials (76%) lead in embracing these technologies, a significant number of Gen Xers and nearly half of baby boomers also favor self-service for its convenience and efficiency. As these statistics reveal, unattended payments have become a crucial component of modern retail strategies, driven by consumer demand for speed and ease.” Read more here
Homebuilding and Materials
“Construction of new homes rose 9.6% in August as builders ramped up new projects. Housing starts rose to a 1.36 million annual pace from 1.24 million in July, the government said Wednesday… The data exceeded what Wall Street was expecting, which was a 1.31 million pace. All numbers are seasonally adjusted.” Read more here
“Fannie Mae this month predicted mortgage rates would fall to 5.7% by the end of next year. Freddie Mac has forecast mortgage rates would “gradually decline” over the next few quarters. The mortgage market has already priced in expectations for the Fed to cut rates this year and next, so "any further decline in mortgage rates will be minimal," Read more here
Nuclear Energy & Uranium
“Teresa Ribera, the EU's likely next green chief, indicated on Tuesday that she would not oppose nuclear power expansion in Europe, comments likely to reassure those worried she may restrict atomic energy.” Read more here
“This year, nuclear power has generated more electricity in South Korea than either coal or natural gas for the first time ever, achieving a milestone in one of the world's top importers of fossil fuels.” Read more here
The Strategies Behind Our Thematic Models
Aging of the Population - Capturing the demographic wave of the aging population and the changing demands it brings with it.
Artificial Intelligence – Software, chips, and related companies that facilitate the collection and analysis of large data sets and autonomous generation of solutions given non-machine language prompts.
Cash Strapped Consumer - Companies poised to benefit as consumers stretch the disposable spending dollars they do have.CHIPs Act – Capturing the reshoring of the US semiconductor industry and the $52.7 billion poised to be spent on semiconductor manufacturing.
Cloud Computing – Companies that provide hardware and services that enhance the cloud computing experience for users, such as co-location, security, and edge computing.
Core Holdings – Companies that reflect economic activity and are large enough to not get pushed around by day-to-day market trends. Low-beta, large-cap names able to better withstand economic turmoil.
Cybersecurity - Companies that focus on protecting against the penetration of digital networks and the theft, ransom, corruption or destruction of data.
Data Privacy & Digital Identity - Companies providing the tools and services that verify authorized users and safeguard personal data privacy.
Digital Infrastructure & Connectivity -The buildout and upgrading of our Networks, Data Storage Facilities, and Equipment.
Digital Lifestyle - The companies behind our increasingly connected lives.
Digital Payments - This model focuses on companies benefitting from the accelerating structural adoption of digital payments and financial technology (FinTech).
EPS Diplomats - Profitable large capitalization companies proven to produce above-average EPS growth and provide investors with the benefit of multiple expansion.
EV Transition - Capturing the transition to EVs and related infrastructure from combustion engine vehicles.
Guilty Pleasure – Companies that produce/provide food and drink products that consumers tend to enjoy regardless of the economic environment and potential long-term health hazards associated with excessive consumption.
Homebuilding & Materials – Ranging from homebuilders to key building product companies that serve the housing market, this model looks to capture the rising demand for housing, one that should benefit as the Fed returns monetary policy to more normalized levels.
Luxury Buying Boom - Tapping into aspirational buying and affluent buyers amid rising global wealth.
Market Hedge Model – This basket of daily reset swap-based broad market inverse ETFs protects in the face of market pullbacks, overbought market technicals, and other drivers of market volatility.
Nuclear Energy & Uranium – Companies that either build and maintain nuclear power plants or are involved in the production of uranium.
Rebuilding America - Turning the focused spending on rebuilding US infrastructure into revenue and profits.
Safety & Security – Targeted exposure to companies that provide goods and services primarily to the Defense and security sectors of the economy.
Space Economy – Companies that focus on the launch and operation of satellite networks.
The Strategies Behind Our Dividend Income Models
Monthly Dividend Model – Pretty much what the name says – this model invests in companies that pay monthly dividends to shareholders.
ETF Dividend Model – High-yielding ETFs that provide a range of exposures from domestic equities, international equities, emerging market equities, MLPS, and REITs.
ETF Enhanced Dividend Model – A group of high-yielding ETFs that utilize options to enhance yield through collecting option income.
Don’t be a stranger
Thanks for reading and if you have a suggestion for an article or book we should read, or a stream we should catch, email us at info@tematicaresearch.com. The same email works if you want to know more about our thematic and targeted exposure models listed below.