VIDEO: About That Market Rotation
Chris discusses how rate-cut expectations are powering our construction plays ahead of tomorrow's data.
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In today’s Daily Rundown video, Chris Versace discusses how the June Retail Sales report fits into the market narrative about rate cuts, and why we’re concerned the market could be getting ahead of itself once again in terms of monetary policy.
He then discusses the second-quarter smartphone figures from IDC and explains why reports out Wednesday and Thursday morning will be important for several portfolio holdings.
Transcript
CHRIS VERSACE: Hey, folks, Chris Versace here. It is Tuesday, July 16. As I look at the calendar, that means to you and me another day of economic data, but also market action and the start of Amazon's two-day 2024 Prime Day event. Out of the gate this morning, we got the retail sales that were better than expected for the month of June.
And in our note to you, we discussed how, while better than expected and especially benefiting the portfolio's positions in Amazon and Costco, when we look at the overall data compared to the month of May, it is a little bit slower. Our thinking is that this fits in with the recent economic data that we've gotten that showed that the June quarter is going to be a little slower as we move throughout. That's actually supportive for rate cuts.
And of course, the market over the last 24 hours has once again been fixated on what Fed Chair Powell had to say yesterday. Most of the headlines are focusing on him saying that, hey, the Fed is not going to wait to get to 2% to start cutting rates. But again, as we pointed out in our comments to you earlier this morning, Powell also was kind of a little more tepid in his comments about the amount of improvement seen in the June quarter.
Our thinking is, the Fed's going to continue to want to see more good data. But also, too, as we talked last week and earlier this week, I do think that the Fed is mindful of what it saw in the core PPI on a year-over-year basis that ticked higher. The concern that we have for this is that, as we look at the CME Fedwatch tool, the market is now pricing in not one, not two, but three rate cuts between now and the end of the year.
We talked about this potential risk and our concern about it, where the market might be getting a little bit ahead of itself. We'll continue to follow the data. But we need to be mindful of this. Really throughout the last two years on the topic of rate cuts, the market, again, just has continued to get ahead of itself. We want to make sure that it's not doing so yet again.
So we have a lot of data coming at us in the next couple of months ahead of the September policy meeting. We're going to have to drill down on each one of them. And what we will be looking for is pretty much across-the-board improvement in inflation for the month of July, month of August, compared to what we saw May, June. So a lot to go.
We do know that we're going to have a policy meeting at the end of July. The market doesn't expect a rate cut. We don't expect one. But again, it's what we have to look forward to in the second half of the year. We will continue to be mindful with the portfolio, collecting data and making our updated thoughts available to you and what that may or may not mean for the portfolio.
Case in point, though, we have seen, even again today, our shares of United Rentals, Builders FirstSource, and Vulcan Materials moving higher. I know there's some concern from folks about the market rotation. I would simply say this, that we know that the big tech and AI-related basket has really run. We are seeing more interest rate-sensitive areas, including those three positions I just mentioned, really start to take off of late, which, of course, is good for the portfolio.
But we will be mindful of how fast and how far they run just because of what I said a second ago, that while the market might expect three rate cuts before the end of the year, we're not necessarily saying that there's a high probability of that happening. We will need to see more good data.
A couple of other things just out in the last 24 hours. Obviously, earnings from Morgan Stanley, Bank of America clearly better than expected. We're waiting to get through the earnings conference calls. And once we do, we'll share our updated thoughts with you on that.
But just for what it's worth, asset management, wealth management, investment banking, just as results from JPMorgan, Goldman Sachs telegraphed, those were extremely strong at Morgan Stanley and Bank of America, really reaffirming our thesis. My suspicion is that we'll have to revise our price targets at least a little bit. But we'll be sharing more of those fleshed-out thoughts with you in a followup note this afternoon.
Also, too, I just want to talk a little bit. Last week, we got some very good data about the PC market rebound. Well, IDC came out with its own figures for the smartphone market for the second quarter. And they're saying that on a year-over-year basis, smartphone industry volumes across the globe rose 6 and 1/2% to about 285.4 million units, down a tick, if you will, compared to the March quarter, which tends to be the historical pattern that we see.
Remember, for us, the real point that we have to watch for is the second half of the year. Traditionally, that's when those volumes pick up. It's very important for our shares of Apple, but also Qualcomm and Universal Display. That means the next key data point for us will be quarterly results, and most important, guidance from Taiwan Semiconductor when it reports early Thursday morning.
Remember, TSM not only counts those companies and end markets for smartphone among their basket, but they also count very heavily for high-performance computing and data center and AI. So there's going to be a number readthroughs that we'll want to make on that report on Thursday.
One other thing I'll just quickly mention, as it relates to our shares of Builders FirstSource in particular, but indirectly for United Rentals, Vulcan Materials, and Waste Management. Tomorrow, Wednesday, we will get the June housing starts report. And we are going to focus in on non-seasonally adjusted single-family housing starts.
Why non-seasonally adjusted? Candidly, we want to see what the raw data is doing. We don't need any hocus pocus math from the Census Bureau, right? And when we look at the non-seasonally adjusted, single-family housing starts bottomed in December of 2023. And they've been steadily inching higher ever since. The most recent month was May. And when we look at the non-seasonally adjusted single-family housing starts, they were higher on a year-over-year basis.
If we see that continue in June, boy, that would be a very big positive for those four positions that I just mentioned. So we'll be tearing into that data. But remember, we've got much more coming your way today. So please be sure to check your emails, check your alerts. We want to make sure that you are getting our latest thoughts and any movement that we make with the portfolio or any price target adjustments that we might have to make. Thanks for watching.
