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Steve Matthews, Bloomberg Federal Reserve Reporter, discusses an economist survey that sees the Fed rejecting calls for a jumbo rate cut. Adam Coons, Chief Portfolio Manager at Winthrop Capital Management, discusses the latest on the markets. Dan Ives, Managing Director and Senior Equity Analyst at Wedbush Securities, discusses a Reuters report on Cisco job cuts, and TSMC earnings. Shawn Donnan, Bloomberg News Senior Economics Writer discusses the Bloomberg Big Take story: “The Swing-State Economic Realities Shaping the US Election.” Erika Maschmeyer, Portfolio Manager at Columbia Threadneedle Investments, discusses her outlook for the markets.
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The other main mover of this week is what's going to be happening with the Fed. We got Jackson Hall in a couple weeks, FED Susan Collins coming out today saying that rakecuts could be soon if inflation keeps falling. She says, my outlook for continued gradual reduction back to our two percent target amid a healthy labor market. That doesn't says to me. That does not say to me a fifty basis point cut in September or an emergency rate cut. So let's go to Steve Matthews Bloomberg, a Federal Preserve reporter. Steve, are we still thinking about a fifty basis point cut or an inter meeting cut because I have not seen the information from the FED to back that up.
Yeah, you are exactly correct. I mean the markets are pricing in the likelihood of a fifty basis point cut in September. We have heard from you know, the Kansas City FED president last night, the Chicago FED president, Boston FED President Richmond. None of them are saying, you know, anything that would indicate that we're going to get fifty basis points.
And of course there is a lot of data.
We get CPI next week, we'll have another I mean, the meeting is not until mid September. We'll get another jobs report, We'll get another CPI report. I mean, we'll get two CPI reports. So there's a lot of data that could sway things. But from what we've been hearing so far, there's no indication that the Fed is interested. And in fact, what Powell said Chair Powell at the last press conference, which was just last week, was that they were not thinking about fifty basis points, and there's no reason to believe that that's changed.
I found that fascinating the extent to which the calls for fifty basis points developed their own momentum. But it's interesting now to see this survey that really sort of puts that to rest in a certain sort of way. But I guess I wondered if you could talk a little bit about the remarks from the Fed recently that they're going to be putting increased weight on the full employment mandate. What does that mean as a practical matter, and what should investors be looking for between now and the meeting.
Well, what that means is really for the last two years. I mean, inflation peaked two years ago at if you look at CPI, it was over nine percent. By the Fed's measure, it was over seven percent. And at that point they were focused strictly on what can they do to bring inflation down? And you also had the unemployment rate under four percent. Now you have the unemployment rate which has risen to four point three percent and has been rising, you know, somewhat unexpectedly more than the Fed expected anyway, And therefore they're saying, we're going to be paying attention to both sides or our mandate. We're not just focused on inflation, even though inflation hasn't quite come down to two percent. So it's not just the inflation figures it will matter. It will be the employment figures it will matter. And those that are predicting fifty basis points. And they change a couple of big firms, JP Morgan's City Corp City Group changed their calls to fifty basis points after the last jobs report, and that was because the job's report was very disappointing.
But they're kind of making the.
Assumption that that is not just an outlier, that that's going to continue.
So we'll see if they're right.
So to that point, we only have about a minute left. But if the Fed wants to walk back market expectations while also acknowledging they're going to have to cut in the econ of he's not as great, how do they do that.
Well, you've seen pushback from a bunch of FED presidents. In two weeks we will get presumably it's not been formally announced, but every year Jerome Powell speaks at Jackson Hole, so presumably he will be speaking and in two weeks at the king City FED conference in Jackson Hole, and that will be a key event where he can push back against expectations if he chooses to, and if not, you know, you have Vice Jared Jefferson. It's like sometimes he will come out and give speeches or TV interviews, and you.
Also have a Chris Waller, the governor is very.
Influential and you could hear him be speaking between now and then as well.
All right, we appreciate that, Thank you very much. Joining us with Steve Matthews, a Bloomberg a Federal Reserve reporter. So I have to wonder, Jen, is it just going to be like sit tight see you and Jack? Is that what we're dealing with here?
You say sit tight, but I mean anyone who was on their quote unquote vacation this week will come back to find that there had been a nasty market surprise come back.
They came back already and there were definitely us sitting in there desk training there at that point.
It's true.
We do get CPI next week, so let's not totally forget about that. Plus retail earnings, which should be quite fun.
You're listening to the Bloomberg Intelligence Podcast. Catch us live weekdays at ten am Eastern on applecar Play and Android Auto with the Bloomberg Business Act. You can also listen live on Amazon Alexa from our flagship New York station Just Say Alexa playing Bloomberg eleven thirty.
All right, this was quite a week in the market. Here's some superlatives for you. The SMP has now fallen for four weeks in a row, the longest weeks since September of twenty twenty three, the Nasdaq one hundred is down five weeks, the work Streek since May of twenty twenty two. I could do this for a while, So let's just get to someone professional here, Adam Kuhne's chief portfolio manager. I went through a capital manager joins us. Now, hey, Adam, what has How do you categorize Maybe this is a better question, how do you categorize the last week in the market chaotic?
I mean, you know, I think the market has spent the last year or so trying to look into a crystal ball and determine what the FED is going to do, and they keep getting it wrong. I think this is probably another case where a little bit of a knee jerk reaction to just a couple of data points, and I think we're going to need to see a lot more for the FED to really take any action to decrease interest rates at this point.
So what's your call on how people should be thinking about this? Is it something where people should just sit tight, or is there some positioning recommendations you've got?
Well, I mean, the data is still real least showing that things are slowing and things are deteriorating to a degree. I think just the you know, magnitude of it is still uncertain. And really it's the point about the determining what the FED is going to do with the data in the next couple of months. And so I think when you look at how to position a portfolio right now, it is still wise to start to.
You know, position more defensively.
You've got to look at maybe not necessarily decreasing your equity allocation, but maybe increasing to things like quality. You know, if you're looking at the factor exposures, you're increasing quality, You're decreasing some of your high beta growth, maybe looking at you know, more dividend paying type stocks, and maybe even looking at some value. So I think you want to start to just start to tilt towards what what most would kind of consider lower vall you know, somewhat defensive names within an equity strategy. But ultimately, I mean, I think the best trade right now still are long duration bonds. I mean, no matter what the FED does, I think when you look at, you know, what trade has an asymmetric restor reward profile, it's still that very seemingly boring trade. Because if the FED sits tight. Most likely they're going to really kind of push the economy to further downside because they've held off too long. But then if they do start to decrease rates, you'll start to see interest rates come down and you'll benefit from that too. So I think those are two different ways, whether you're in the fixed income space or whether you're in the equity space.
How we're playing it right now, is.
It also an opportunity to buy the dip? I mean, I mentioned that the Nastaq one hundred has its worst streak now since May of twenty twenty two, because it's down about five straight weeks. A truist said, look, you know there's a double dig percentage sell off. Let's go buy some technology sector. Let's move it to overweight. Is that all supposed to ategy here?
I do, And it's kind of in that same category.
Is I would buy the dip, especially in tech, but particularly in the higher quality tech. And once again it probably is more of a you know, somewhat of a boring trade. But looking at your names like Alphabet, Meta, Microsoft, that's where you.
Want to buy the dip. Where I wouldn't buy the dip.
Up our names like Tesla, I'd still be cautious on the video here, even though there is still momentum. I'd really look at the companies that have a strong business model that can sustain some level of growth, some level of free cash flow, even if we do see the economy rollover. So I think would be particular in where you're buying the dip and not just outright buying you know, the market or just buying the Nasdaq.
You want to find, you know, pockets of value.
Within the SMP or you know, where you're looking to buy stocks.
Can you talk a little bit more, just to dig in a bit to your views on in Vidio, because I remember the last quarter when I was on this show and we spoke so much about Invidia and they were just such a bell weather for the AI mania, for the enthusiasm for tech. You know there's still to come. What is your read on what we're going to see from them?
Yeah, I mean I think, look, big tech is starting to decelerate their spend on things like semiconductors and so that it will be somewhat of a weight headwind per se to the substantial growth at Navidia scene. So I think this earnings will be a little bit of a tell of what we're going to see in the next few quarters.
This quarter will probably be just fined. I don't think you're going to see the results of that.
It's really the go for the four guidance kind of how the conversation goes with management on what they're seeing coming up. And I think we're going to see some level of deceleration. And unfortunately, because of the way Navidia's price the high valuation, that sets it up for potentially a bigger downside. We obviously saw it with Intel, and I think that's a little bit of a different story. That's just a mess altogether. But the fact that you could see a name like Intel down twenty five percent in one day on earnings, I don't think Navidia is at least they're not immune from that. If the growth story shows some level of slowing, I think you can see investors move away from that type of name really quickly.
Yeah, those ticks aren't supposed to move like that, and that was a really intense move. So we're definitely setting ourselves up for a very big last week of August, that's for sure. There's been some question over the last couple of days as to if the sell off we saw was technical in nature, spurred buy were overbought, the carrier trades unwinding a little bit, We triggered some technical levels versus an actual growth scare.
Where do you come down on that?
And I asked that because it also depends on how you look at things like bonds, how you look at things like corporate credit.
Yeah, so I think you want to look a little bit deeper than just what the market did. And you got to look at what volatility did and the volatility of that volatility. So you know, when you look at the Vicks spiking the way it did, or if you look at you know, if you're a bond trader, if you're looking at the move indection, you look at interest rate volatility. Both had significant moves to the upside. And that tells me this was more than just a technical trade. This was this was really people starting to become fearful of because this market has had so much much, so much momentum to the upside, and because valuations are somewhat stretched, you know, it's hard to know where the bottom is, and so investors tend to during those periods of time, they tend to be more reactive, and I think that's what we saw last week, was it was more that kind of emotional reaction to Okay, is this, it is this? And I think everyone's still a little bit scarred from you know, seven o eight and how destructive that was. And by no means is this that type of scenario. But I think you see investors that are quick to want to get out of harm's way, you know, when they start to see the data or the markets somewhat deteriorate, they they're quicker to get out.
I think that's what we saw.
So there's probably a technical piece of it, but I do think it was emotional somewhat fundamental, because people are just scared of, you know, where it could go, and especially if the FED. You know, if the FED is going to be slow to react, I think that will increase the fears even more because we have seen a FED that's somewhat you know, they were slow to increase interest rates on the bat, you know, at the front end of the cycle, when we start it was queer that inflation was picking up, and they used the transitory narratives, they were slow to increase interest rates. There is a fear that they're going to be slow to decrease interest rates, and maybe they wait too long.
And so that's what we're.
Starting to see, that the market trying to just digest all of that information coming to them at once, and that's why you saw such a big reaction just on a couple of data voids.
Can we shift the conversation a little bit over to corporate credit and other areas of the credit markets, because I've been looking at this over the whole year, and we've just seen corporate spreads grind tighter and tighter and tighter, but also at the same time, a lot of money go into other safety plays like mortgage backed securities. So can you talk a little bit about what the relative value is there though, because I was looking at a chart earlier this week and the returns for corporate credit have just absolutely fallen off a cliff, whereas more have really held up.
Yeah, So I mean part of that is that's the risk portion of where you are in the kind of bond spectrum, whether you're in a treasury or mortgage or just flat out credit. And I think what we've seen what you're seeing with like you said, credit returns falling off a cliff really is that they're not immune to the reactions of the market like you saw in the equity markets, especially in high yield bonds. They become quite correlated when things are moving to the downside and volatility picks up. So it's no different here when you're looking at a mortgage backed security. These are still very high quality assets. They don't have the duration moves that like a treasury would, but they tend to be very stable during periods like this where there is heightened volatility. So that's why we like these in a portfolio because you pick up that additional yield coupon over a treasury, but you have more stability like you would see out of a treasury.
All right, Adam, golly it there, thanks a lot. Appreciate it.
Adam Kuhn's chief portfolio manager. When Thrope Capital Management.
You're listening to the Bloomberg Intelligence Podcast. Catch us live weekdays at ten am Eastern on Affo card playing Android Auto with the Bloomberg Business app. Listen on demand wherever you get your podcasts, or watch us live on YouTube.
Let's get to the tech news here. So Cisco potentially laying off thousands of workers. This is reporting from Reuters. It could look very similar to what we heard back earlier in this year when they laid off about five percent of its workforce. Dan, I've stand up leaf for us managing director and senior equity analyst at Wedbush Securities. He's in Tokyo. He's been a real trooper, staying up quite late. Hey Dan, what do you make of this headline from Reiters that Cisco could lay off thousands in their second job cut this year.
Look, I mean they continue to have struggles Somewhere's what we see with Intel, and I think you're really seeing almost a have and a have nots in tech and I think Cisco is struggling and this just speaks to some of the I think issues they're gonna have a Look, you cannot cut your way to growth, and that's going to be the issue for Cisco going forward.
Well, you know, just looking a little bit more at that point that you can't cut your way to growth. I mean, this is not obviously the only company that's doing job cuts. I mean, what's your Alex was just talking about this at the start of the hour. What's your take on how what the legs are, what the momentum is for job cuts in the industry. Are these all one offs? Or is this something that we're going to be seeing more of.
Look, Cisco is in the right lane going to forty five miles an hour, and so many of the rest of tech and AI they're in Bugatti going one hundred miles an hour in the left lane. And I think what's going to happen here is you'll continue to see a layouts being Look, if you looked up disaster and the dictionary, see Intel, look at Cisco. It's having to have nots. There's actually a lot of growth that's happening in tech in terms of what we're seeing from hiring, but it's really the strong they're getting stronger. But look, that's why Cisco did Spunk acquisition. They're gonna have to really do that through M and A.
Well to that point, then, is this just basically companies are diverting a lot of their spending to AI stuff, so their other stuff is not being spent on, which hurts guys like Cisco. You can also make an argument that it hurt five to nine, for example, the software company, Like is that what we're seeing?
Look, I think to some extent, book. Cisco's had struggles for decades. I mean, it's really been on the wrong side of trends. They're trying to get into the right side of the trend. Book AI is disrupting sales, it's taking spending from other areas. And that's why the strength we see in Microsoft and now bat Amazon of course godfather of AI, Jensen Navinni and others, you also see weakness in others and that's why intact, it's really you're either on one side or the other, and right now, unfortunately Cisco's on the outside looking in.
Can you talk a little bit about the equity sell off, and you know, I've seen some comments that this is remove some of the froth in big tech and maybe it's a time to get back in. What do you make that.
I think this is a golden fine opportune. I mean that's always been our view in terms of these macro fear white knockle events. The AI party is still nine pm in a part that goes to four am, and we're gonna have scares. I'm not gonna say it's gonna be one hundred percent smooth, but everything we're seeing fundamentally and what we're seeing from our chests continue to show growth is gonna be there, and I think we're gonna see this technical market it has sea legs, but look the bears they've been rought. You know, bears have been and obviously has it on this and they'll continue to come out. In terms of fears like we saw this week.
Do you think what kind of risk event do you think in video earnings at the end of the month is going to because I think we have Jackson Hole in the same week, so it's gonna be a lot. Plus it's the last week in August right into Labor Day weekend. What risk event are we set.
Up for here?
I think that's again at the popcorn moment in terms in video. I mean, even if you have a TSMC in some the breadcrumbs going on to this robust demand in terms of what we see and I think right now the street needs to see that to just give further creates what we saw in Microsoft Polunteer Alphabet Service now and others in terms of monization happen AI. But that's me one of the most anticipated earnings calls for hearing from Jensen and Nvidio probably in the last four or five years, So.
Let's look past that earning call and we're looking at late September. We've had perhaps of twenty five basis point fed Reid cut, maybe even fifty. But what we're also going to be seeing is probably more evidence that the economy is slowing. So what does that do to the demand story for all of this AI?
Look but right now, I mean balance treat is healthy is they probably have ever been. I mean if you go back to the last decade or more and you look at a once in a forty year cycle in terms of AI spend, and as this sort of colm as a Goldilock scenario plays out, we get through September, I think twenty twenty five numbers come up in terms of tech, and you're gonna have more and more investors needing to play these names going into the next year because of where the growth is. And I think that continues to be the issue. Growth is in tech and that's why I'd rather pay up to play these names that continue to outperform.
Let's go to TSMC.
You mentioned that so sales sord forty five percent in July, accelerating his pace of growth from that June quarter, and that's all about this on demands for AI. Just walk me through when you see these kind of numbers, like what goes through your head?
Look, it goes back to any of the bears that have been sitting in those caves in hibernation mode the last eighteen months when they say AI is hype, Look at those numbers. It goes these sacktops and then I think we'll see the same with Nvidia. We saw Microsoft and others. That is eye popping growth. That speaks to the demand story that's happening. You contrast that with Cisco and others. That's where the growth is. That just gets further in further credence to the AI revolution playing out.
So looking further ahead, Oh, she's like going like twenty twenty five.
No, No, you went to the ray gut.
I went to the cut. No, there's one more event into twenty four that I would like to discuss. Presidential election. Is this something that the AI play even cares about or is it just kind of let's just make sure everything goes smoothly and then we can continue with business as normal.
Well, I think it does because ultimately if a Trump you know, presidency, if that ultimately happened, I mean that you could argue that would be maybe negative for the AI trade in terms the tariffs. What that could do China US China could tech war. A Harris ticket getting in would probably be more bullish for tech and especially even on tech M and A. I think it would be probably positive there. And depending what happens a FTC and CON So you could argue that that's something that the mark is trying to figure out in terms of there's Trump trade tension reversing and now what that means A Harris in terms of AI, the biggest issue comes down to China. Harris ultimately would probably be a little more bullish relative to that some of what we've seen Trump would be negative.
Before I let you go down when you take a look at the winners, right just hit me up with some of the losers right now.
I mean losers are Intel, m H, Cisco. I think a lot of the legacy tech You could argue, like even some of the IT services are probably net losers here. And in terms of the winners, I think that's clear. But that's why it's a having to have nots and I think it's becoming more and more evident. And also just could you say Ai forty times in our conference calls. I mean you're an AII.
Player, right right, And I feel like we learned that soon. I feel like the first quarter when in video had that breakout. Okay, if you said the word Ai, that was cool, and after that we changed.
Dan. Another question, do you sleep when you're there?
Because I say that because I've seen you on TV at like six am and then I've seen you on the clothes with me at like four pm and you're in Tokyo and there's a time change, Like do you sleep when you're there or what happens?
I do sleep. It's been an unusual week, given you know what's happened here in Tokyo and across the markets. But yeah, I do sleep, and I'll be sleeping a lot this week.
Okay, that you will?
All right?
Damn we appreciate it. Dan, i'ves joining us from Tokyo, joined us from Webbush.
There you're listening to the Bloomberg Intelligence Podcast. Catch us live weekdays at ten am Eastern on applecar Play and Android Auto with a Bloomberg Business Act. You can also listen live on Amazon Alexa from our flagship New York station. Just say Alexa play he Bloomberg eleven.
I'm Alex Steele alongside Jen Ryan. Paul Sweeney is non sunning himself on the beach on this Friday. This is Bloomberg Intelligence Radio. We bring you all the news in business, economic and finance through our lens of our Bloomberg Intelligence folks. They cover two thousand companies and one hundred and thirty industries worldwide. We also love checking with Bloomberg News. They do amazing work, in particular the Big Take. They really go deep into stories that we need to know that are really important, whether you're in the markets or whether you just live in the world as a person. And one of them really deals with the election here in the United States, but from an economic point of view. Shaan don and Bloomberg News senior economics writer is joining us and this Big Take is the swing state economic realities shaping the US election. We can talk about the drama that's unfolded over the last month all we want, but the economics are going to win. Sean, what did you guys find in this exploration for the Big Take?
Yeah, look, poll after poll shows the economy is the top issue on voters' minds, even as we're talking all the turmoil in the candidate ranks in recent weeks, So we took a deep dive into the seven swing states that are really going to decide a selection and look at the economy there, and what you find is that as a group, that battleground economy as we call it, has been growing more slowly than the rest of the United States since twenty nineteen. Effectively, in other words, as a group, it's had a slower recovery from the pandemic recession than the rest of the United States. Now there are outliers within that. Arizona is a much happier story on the economy than a place like Wisconsin. But really, when we think about what we get from voters is that they care about the economy. We look at the states that are going to matter most in the election, these swing states, and we look at what's happening in the economy there, and the reality is it's a different economic picture than what you've seen in the rest of the United States. And that could be an obstacle for Kamala Harris Vice President Harris as she kind of wears the legacy of the Biden administration in the last few years in the economy and takes that into November.
Are there any common threads that tie these swing states together that would explain why it is that they're struggling so much with growth versus the rest of the nation. I mean, they'll all have their own unique stories, but is there anything that they've got in common.
Look, I mean the thing that they have in common this year is simply politics, right. I mean, these are for different reasons. These are the seven swinging states that both sides see as the real battleground. But if you can split the states into the seven into two different groups, you have what are called the Blue All States, the old industrial states, and the common theme there is a higher dependency on manufacturing. They have not seen the big boost in manufacturing jobs that some other states have seen in recent years, and they've seen much lower growth as a group. In fact, that those Blue Wall states grew at just a third of the rate of the rest of the United States when you count for population changes and inflation changes and look at what we call real GDP per capita. On the other side, you have the Sun Belt states like Arizona and Nevada and places like North Carolina and Georgia, which have seen a much happier story in terms of manufacturing employment. We've seen semiconductor plants go into Arizona. We've seen new manufacturing jobs go into Nevada and North Carolina and Georgia, which is a big beneficiary of big electric vehicle investments. But you see another thing dragging on the economies. There are certainly on voters' mines there and that is housing prices in those places are really going for crazy. We went to Washoe County, Nevada, which is up where Reno is and Nevada is a state where you would spend a medium household in Nevada would spend nineteen percent of its inc come on a median house in twenty nineteen. That's now up close to thirty seven percent, wow of m And that's just a huge change in people's realities. Rents are higher, it's just a whole different level of problems. Those are very different from what you see in the Blue Wall states. But the you know, again, these are states that have been brought together and that really are a group only because they're the ones that matter in this election.
So Georgia in particular, it's focused there. For a second.
You write in the article that nominal GDP has grown almost twenty five percent since twenty nineteen, but in real per capita terms, the economy has grown by just two and a half percent in that time. Now, some of the things like the Chips Act, Infrastructure Act, even the IRA a lot of like Georgia, for example, is getting some of that money. Is that like a good thing or bad thing short term because it's going to bring more people to the state, But is that helpful for those that actually still live there now?
Well, I think the way to think about what's happening in Georgia is there's a bigger pie in terms of the GDP in Georgia, but there's more people to share that pie, which means that the slice that everyone's getting is only a tiny bit bigger two and a half percent bigger than it was in twenty nineteen. And you see when you go to a place like Atlanta and drive through cyburbs, you see, you know, the housing price issues that I was talking about with Nevada, but you also see any traffic, you see other issues. And I went out to Jackson County, which is on the kind of eastern fringe of Metro Atlanta. It's one of the fastest growing counties, both in terms of population and in terms of economic growth.
In the county.
It used to be a largely rural place. It's gotten a big battery plant, Korean owned battery plant that's moved in that's making batteries for Ford and Volkswagen. You but you talk to you know, I sat down with a guy called Jim Shaw. He's a former banker who runs the local Chamber of Commerce and does economic development for the county, and he says, you know, we're kind of chasing our tails here because we're creating jobs in this county, not for people who are here, but for people who need to come here to fill those jobs. And there's a lot of resentment locally about that growth. What's happening with housing prices, what's happening with traffic. And you're starting to see local communities put the pap the brakes, and and and put new residential developments on hold, and and and and take a pause really to kind of think about the type of growth that they want. You know, that's a that's in some ways that's a great position to be in. You've got this incredible growth, but you're starting to see a real kind of you know, some real questions creep in about on the ground in these places about that growth.
Hey, John, we really appreciate it. Thank you so much.
Shawn Don and Bloomberg News senior economics writer joining us on The Big Take, and you can read more of this story on the Bloomberg and at Bloomberg dot com slash Big Take.
You're listening to the Bloomberg Intelligence Podcast. Catch us live weekdays at ten am Eastern on applecar Play and Android Auto with the Bloomberg Business App. You can also listen live on Amazon Alexa from our flagship New York station, Just Say Alexa Play Bloomberg eleven.
Thirty from Alex Stee alongside Jen Ryan. This is Bloomberg Intelligence Radio. We bring you the top news and business, economics and finance through our lens of our Bloomberg Intelligence Team. They cover two thousand companies and one hundred and thirty industries worldwide. Paul Sweeny is off setting himself. It's actually a little lighter out. I don't think it's raining, and he is at the beach.
I don't know, I can't really see some blue sky from here, but I don't think I could anyway, Yeah, fair.
Enough, right, Well, Jen and I are here. We are holding down the Ford. It was a week, obviously, a week that was. Here's some stats for you. The S and p's falling now for four stree week's longest streaks and September twenty twenty three nas Tek one hundred down five weeks worth streak since May of twenty twenty two. A real divide happening within tech and the have and have nots Ack of my Technology the best performing stock on the S and P up by almost ten percent, and Intel one of the worst, down by about four percent. Obviously Cisco and the crosshairs there with those reports of layoffs of thousands in a second job round, What do you do?
How much risk do you take on?
Erica Mashmeyer is portfolio manager at Columbia thread Needle Investments. She joins US now from Chicago, Illinois. Erica, how much risk should one have on right now?
I think we are still in a place where you benefit from having a relatively balanced portfolio, profitable companies with good competitive positions growing. That said, historically, when the VIX has been high, it has been a good time to start to layer on risk, and I think you can do that in a couple of different ways, right through your growth company's software company is that have been more ignored at the expense of AI hardware, and then also with more cyclical construction housing related names.
But before this market craziness started this week, I mean, the market was already looking really quite frothy. So it's been a dip for sure, but it hasn't been enough of a dip that some of that froth has been removed and there's really some decent room for people to get in.
Well. I think the.
Froth was really more on the megacaps, right, the part of the market that admittedly is the biggest part of the market, and it was larger than many countries.
But it was a pretty bifurcated market. There was an easy trade, right The easy trade was by US large cap tech and short everything else out there. We started to see that dispersion pick up last quarter, which I think is fair because we had earnings potentially decelerating for that group. I think a lot of the outperformance was fair because you know, the large cap stocks were growing faster.
But there are more more cracks in that, and I think that there are plenty of areas that don't have froth at all.
What do you buy then if there's the there's no froth. We kind of been through it.
Maybe the rotation into say Smiths are still still up for grabs. I mean the Russell has underperformed and then Slash outperformed when we had to sell off over the last couple of days.
But nonetheless, yeah, I mean I think, right, the valuation advantage for for small caps has you know, small mid has has been there for a while, right, the table's been set for a while, uh for for for there to be a rotation there.
It hasn't happened for good reasons.
Right.
You need, I think a macro to be study, and you need the earnings growth. We have been living through this choppier macro. I you know, from our team has been paying attention to the economy from a rolling recession recession perspective ever since we had COVID which led to big booms and bus So you know, from here we think that in small mids software there are some interesting, interesting names. You know, that's a group that has been more ignored at the expense of AI hardware areas.
They've you know, admittedly.
Had some weaker some some weaker sales cycles because the CFOs of the world are looking to get rid of software at this point and not add more. But I think that we're going to hit the point where, you know, there are a lot of these companies that are adding real value and growing. You know, we own Zeta Global, which is a small cap stock that is actually up over one hundred and sixty percent year to date, but is still relatively cheap versus other software names. I think at the same time, you have pretty much anything short cycle manufacturing, industrial construction that has a lot of opportunity and potential for upside as we start to get rate cuts. We own top Build, which is a company that is an insulation insulation distributor and supplier, and they just reported this week and still a relatively inexpensive stock. They missed slightly, gave a slightly worse guidance range, but stock got hit.
But this is one they'll.
Continue to take share, executing very well, and as soon as we get rate cuts, some of these projects that have been delayed will will start to actually happen.
You know, I did want to ask you about rate cuts because you're mentioning a number of sectors that have been overlooked and could benefit from rate cuts. But how big a rate cut do they need at this point? Is twenty five basis points going to be the start of a firing gun that gets things moving again? Or do they need the fifty basis points that some big players have been calling for.
I don't think that we need a fifty basis point cut, and frankly, I think it's low probability, and I think if that happened, it would be more likely to spook.
The market from a macro perspective.
Right.
The Fed only does that when you have something really really wrong, and so I think that would be a sign that the economy is broken, which I just don't think that it is. We haven't gotten that sign right where everything we see says that we are in a downturn, we're in a period of slow growth, we're reacting to rates that are higher. All very normal things and essentially what the Fed intended to do with higher rates. There's nothing that's saying that, Okay, this is a disaster, we need to cut fifty basis points to get things moving. I think if we get a twenty five basis point cut, and the path is clear. I think it's the path that matters more than the magnitude.
To the inside. Erica, I know it's been a very long week.
Eric Mshmeyer, portfolio manager at Columbia Threadneedle Investments, giving us her outlook on this very confusing market.
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