It feels like every Summer around this time we send out a quick note regarding normal seasonal volatility. This Summer is no different except that the reason the market is reversing the long bull trend is not the same as before.
After a long period of higher rates, the US economy is at last slowing as the Fed hoped, looking for lower rates of inflation, maybe even disinflation, while engineering a “soft landing” without a recession. The job and other economic numbers released yesterday showed slowing employment and economic activity (though you
might have missed this when traveling by airplane as it seems airports have never been busier!). Many market participants – including us- have noted this slowdown prior, but it has taken until this week for the Fed to really acknowledge it. The danger now is the dreaded Recession.
To avoid this, the Fed will once again ride to the rescue. It appears as though the Fed will lower rates in September despite this being an election year and a desire to appear NOT to be interfering in the outcome. Globally, other central banks are also easing...increasing liquidity... with Europe leading the way. Add in Janet Yellen and her Treasury Department releasing $1 Trillion of reserves from the Treasury General Account to fund Administration priorities including Federal industrial planning efforts under the oxymoronically titled “Inflation Reduction Act.” We believe these flows, along with other sources of global liquidity, will counteract this week’s down moves in equities and propel the market to new highs by year end.
We expect higher volatility and lower prices over the next few weeks over fears of a recession. The SPY (the S&P 500 index ETF) is currently trading at $541 and it would not surprise us if we correct down to the $510 - $500 range before the market rallies.
Indeed, we believe that the US will not see a true recession over the next 2-5 years due mainly to economic manipulation by the Fed. We expect periods of sluggishness, like what we are seeing now, which will provide the justification for the Fed to make the rates cuts we, and a growing consensus of the market, expect, now and in future.
We welcome this volatility and view this time as an opportunity to add to small cap stocks and to select AI focused companies.
Small Caps in particular have underperformed the market for a few years. Historically, Small Caps lead the market out of recessions. With the market acting like we are in the midst of a recession, we believe we’ll see a clear rotation to Small Cap stocks over the next few weeks.
AI names sold off over the last few weeks as the market stopped believing in the Exponential / AI revolution. NVDA, AMD, DELL and other hardware companies lost value. We however have a positive view over the longer-term and will stick with them as an investment. Indeed, this week we saw solid numbers from AMD, MSFT and AAPL.
Another opportunity for more risk-oriented investors are cryptocurrencies. Price action of late has been very normal following the Bitcoin “halving” and the launch of the various Bitcoin and now Ether ETFs. Crypto price movements are highly correlated with global liquidity. With our view of impending increases in levels of global liquidity, we expect higher crypto prices into year end.
And we continue to see great opportunities in private investments. Private credit continues to be a strong risk-adjusted return potential while we also continue to allocate to private equity and venture capital funds to capture value in the vast non-public markets. This month we are closing two really great investments:
a private credit seed fund, with favorable economics, and
the leading geosynchronous orbit satellite communications firm.
We’re always excited to have friends invest alongside us. This is, we believe, the long game for value and wealth creation for families.
In sum, we are not alarmed by this week’s market sell-off. We believe the Fed has indeed made a mistake not easing (lowering rates) at its last meeting(s), and expect it will play catchup in September and perhaps even with an interim move prior to the September meeting. Lowering rates will ease market fears of a recession and boost liquidity which in turn supports expanding economic activity and market gains.