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Rate Cuts May No Longer be Imminent and Investors are Treading Water: Market Commentary from Cabana’s CEO – February 8, 2024 

10 months ago

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The market cap-weighted stock indices continue to march higher after a brief pullback in early January. This continues to be led by technology stocks, while most other sectors are underperforming. Bonds, real estate, utilities, dividend paying stocks and other interest rate sensitive assets remain under pressure as yields have bounced above 4% again.  

Chairman Powell and other members of the Federal Reserve (the Fed) have essentially taken all prospects of a rate cut in March off the table. I read this week that one of the voting members forecast only two or three rate cuts this year compared to the seven priced in by the bond market at the end of 2023. That is a big difference and is why we are seeing the snap back higher in interest rates. The hawkish Fed is supported by better-than-expected data in the form of manufacturing, unemployment and consumer sentiment. To me, the message from the Fed meeting has been clear that rates aren’t coming down until it is confident that inflation is coming back down to the 2% target. Year-over-year Core PCE (the Fed’s preferred measure) is now 2.93% and falling. The month-over-month number is 0.2%, and results in an annualized number of 2.4%. This data seems to be a bit of a sticking point for the decision makers. This fact, coupled with the strong growth we continue to see as companies churn through earnings season, seems to suggest that investors shouldn’t get too optimistic that cuts are imminent. After all, why cut if you don’t have to, right? 

Well, the problem with that thinking is that real rates are way above inflation now and this will ultimately squeeze all parts of the economy. Incoming data lags and there is much debate about when these effects are going to show up. If the restrictive policy continues for too long, we get the recession and all that comes with it. Right now, we just appear to be treading water as fireworks go off around us in the form of war, spiraling debt, our government’s inability to function and more… 

So, what is an investor to do? At the moment, it looks like the default decision is to buy big tech and not worry about the rest. I see that in the charts, and I hear it from investors every day. This plan has worked well over the past year, and I am not going to be the one to say it won’t continue. I will say that the big tech trade looks awfully crowded. When things get too easy (or obvious), my experience has been that somebody is going to end up in pain. I will also say that having exposure (even overweight exposure) to technology makes sense, but let’s not forget the other side of that coin. When high beta investments fall, they can fall hard.  

I personally like staying well diversified and holding some of those out of favor sectors, which may seem awfully attractive when rates do come down, with or without an accompanying recession. 

At Cabana, we remain in our Transitional Bullish Scene and are allocated accordingly across all models.

Key terms: What does it mean to be hawkish? Hawks are seen as willing to allow interest rates to rise in order to keep inflation under control (Investopedia.com).  

Disclaimers

January 17, 2024

This material is prepared by Cabana LLC, dba Cabana Asset Management and/or its affiliates (together “Cabana”) for informational purposes only and is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. This material may only be distributed in its original format and may not be altered or reproduced without the prior written consent of Cabana. The opinions expressed reflect the judgement of the author, are as of the date of its publication and may change as subsequent conditions vary. The information and opinions contained in this material are derived from proprietary and nonproprietary sources deemed by Cabana to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. As such, no warranty of accuracy or reliability is given and no responsibility arising in any other way for errors and omissions (including responsibility to any person by reason of negligence) is accepted by Cabana, its officers, employees or agents.  

“CARA” is Cabana’s Cyclical Asset Reallocation Algorithm. Scenes assigned as per the judgment of The Cabana Group. Scene names and number of scenes have changed over time in an effort to obtain efficiencies and provide clarity of investment objective. 

This material may contain ‘forward looking’ information that is not purely historical in nature. Such information may include, among other things, projections and forecasts. There is no guarantee that any forecasts made will come to pass. Reliance upon information in this material is at the sole discretion of the reader. Past performance is not a reliable indicator of current or future results and should not be the sole factor of consideration when selecting a product or strategy. All investment strategies have the potential for profit or loss. All strategies have different degrees of risk. There is no guarantee that any specific investment or strategy will be suitable or profitable for a particular client. The information provided here is neither tax nor legal advice. Investors should speak to their tax professional for specific information regarding their tax situation. Investment involves risk including possible loss of principal.  

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Past performance is no guarantee of future results. All investment strategies have different degrees of risk and the corresponding potential for profit or loss. Asset allocation and diversification will not necessarily improve returns and cannot eliminate the risk of investment losses. “Target Drawdown” is merely a descriptive term used to describe the general strategy and objective of the portfolio, it is not a guarantee, nor should it be construed to suggest safety or protection from loss. There is no guarantee that portfolio performance will remain consistent with the targeted drawdown parameter. While risk tolerance and targeted “drawdown” are identified on the front end for each portfolio, Cabana’s algorithm does not take any one client’s situation into account and there is no guarantee that Cabana’s strategies will be suitable for any investor. Investors and advisors should not simply rely on the name of any portfolio to determine what is suitable. It is the responsibility of investment advisors to determine what is suitable for their clients. Cabana manages assets on multiple custodial platforms. Performance results for specific investors will vary based upon differences in associated costs and asset availability.  

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All recommendations made in the prior 12 months are available upon request. Cabana’s allocation history is available here. For additional information regarding our services, including performance disclosures and award methodology, please visit https://thecabanagroup.com/disclaimers/. 

Commonly used index/benchmark definitions:  

All indices and categories are unmanaged and an individual cannot invest directly in an index or category. Index returns do not include fees or expenses. Benchmark indices will likely materially differ from Cabana’s portfolio strategies. Detailed information as to how the returns are calculated can be obtained online from the following link: https://thecabanagroup.com/disclaimers/performance-reporting-methodology/. 

Morningstar’s Moderate Target Risk index  follows a moderate equity risk preference and is based on well-established asset allocation methodology from Ibbotson Associates, a Morningstar company.  

Morningstar’s Tactical Allocation category includes portfolios that seek to provide capital appreciation and income by actively shifting allocations across investments. These portfolios have material shifts across equity regions, and bond sectors on a frequent basis. 

The S&P 500 Index is a market-capitalization weighted stock market index of 500 widely held large-cap stocks often used as a proxy for the U.S. stock market.  

The Russell 2000 and 3000 indices are market-capitalization weighted stock market indices that include, respectively, 2000 and 3000 of the most widely-held stocks and are often used as proxies for the U.S. stock market. 

The Nasdaq Composite Index is a market-weight capitalization index that covers more than 3,000 stocks listed on the Nasdaq Stock Market. What is the Nasdaq Composite, and What Companies are in It? | Nasdaq