Monthly Market Recap: Fed Soothes with Future Rate Cuts

Overview

Well, so much for a sleepy summer. High interest rates are hitting the U.S. economy, and the market is screaming. The Federal Reserve (Fed) heard the cries and reacted in typical “Fed fashion” by comforting the ailing markets with the soothing sounds of future rate cuts.

• Stocks
• Bonds
• Real Assets
• Digital Assets

The month started with a weak U.S. jobs report and news that Japan increased its interest rates to 0.25% from 0%. This sent the CBOE Volatility Index (“the Fear Index”) soaring from 16 to 38, and crowd favorites, such as the yen carry trade and the most important stock in the world, Nvidia, were down double digits.

During his Jackson Hole speech in late August, Fed Chair Jerome Powell signaled future rate cuts. He said: “The time has come for policy to adjust. The direction of travel is clear, and the timing and pace of rate cuts will depend on incoming data, the evolving outlook, and the balance of risks.” So, there you have it, folks. Rates are going lower, and the incoming data has been weak. The latest U.S. employment reports show that fewer people are hired, new job openings are sparse, and layoffs are becoming more frequent.  

A material downward shift in interest rates may fan the inflationary flames. Assuming that inflation is licked because it has trended downward recently with economic growth defies what history has taught us about the stubbornness of past inflationary cycles.

Stay diversified and consider stocks, bonds, real assets, and digital assets for your portfolio.

Stocks

Somehow, we have entered an alternative universe. In this universe, what never worked finally did, and what always worked finally didn’t. Starting in mid-July, value stocks outperformed growth stocks, small-cap outperformed large-cap, and international stocks outperformed U.S. stocks.

You didn’t need a crystal ball to know that Nvidia would correct. Nvidia’s move over the past year was too big and fast, and its impact on the overall market was astonishing. However, AI and the current importance of Nvidia are not simply hype stories like those in the “dash to trash” liquidity avalanche of 2020. AI is a wildly innovative and disruptive technology, and Nvidia, as a key component of that technology, is a $3+ trillion company growing earnings at a rate of over 130%. A continued slowdown in economic activity will undeniably lead to belt-tightening in corporate America. Investing in future growth through AI will likely slow as tough choices need to be made. However, if the AI thesis is right, and we believe that it is, then investors should eventually buy-the-dip “B-DIP” and not run for the hills.

Nvidia reported an impressive $32.5 billion in revenues, above the average forecast of $31.9 billion, but warned of manufacturing challenges with its new Blackwell processor. That was enough to pump the brakes on the Nvidia rally while other growth stocks continued their path higher. Falling interest rates are expected to support high-growth stocks. Lower interest rates benefit growth stocks because, in a lower interest rate environment, two birds in the bush may be worth more than one in the hand.

Bonds

Lately, it’s been a great time to be a long-term Treasury bond. Since June 30, long-term Treasuries are up over 7%, while the yields on those bonds have fallen from 4.73% to 4.17%. Increased concerns about future economic growth and decreased concerns about inflation push interest rates down at the long end of the curve.

The Fed controls the short end of the curve and, as we have noted, has communicated its intent to lower interest rates. Investors are advised to proceed with caution regarding credit risk going forward. Economic growth is slowing. Now is not the time to lend money to borrowers with questionable means to repay it.

Real Assets

Always remember the golden rule: He who has the gold makes the rules. Central banks are massive holders of gold reserves, have increased their gold reserves, and have communicated that they plan on purchasing more gold in the future. This is happening as the government attacks your savings through excessive spending, borrowing, and money printing. Fight back to protect your purchasing power. If you haven’t already, consider diversifying into gold.

Gold reached an all-time high of $2,500¹ in August, and we think it will go much higher in the years to come. There is a strong relationship between the price of gold and the money supply, with the supply of U.S. dollars rising and the supply of gold remaining relatively constant. The simple solution is to buy gold. The near-term catalysts for buying gold are falling interest rates, which makes gold relatively more attractive because it does not offer a yield and as protection against a looming recession and geopolitical risks. The medium- to long-term catalysts are currency debasement, financial instability, and inflation.

Digital Assets

There was considerable downside pressure on bitcoin and other digital assets during the month, driven by a significant upswing in broad market volatility. Bitcoin was down 11% in August. Yet, bitcoin maintained strong support above $50,000 during the month, supported by strong demand and reduced selling pressure from miners. Ethereum did not fare as well. It was down over 20% during the month.