Risk Assets Rebound, Lifting All Boats

By Scott Poore, AIF, AWMA, APMA
Chief Investment Officer, Eudaimonia Group

Risk assets were sold early last week as arbitrage trades were unwound. Equities improved later in the week as risk assets rebounded.  Fed Chairman Powell speaks at the Jackson Hole Symposium, which will make trading interesting this week.  With nearly 95% of S&P 500 companies having reported 2nd quarter earnings, the year-over-year earnings growth rate for those companies is 10.8%, which is the highest since the 4th quarter of 2021.  The inflation report came out last week and showed that inflation was flat or continuing to slow.  The Producer Price Index (PPI) was lower than expected for July and dropped from 2.7% to 2.2%, year-over-year.  Similarly, the Consumer Price Index (CPI) was flat for July, but also dropped from 3.0% to 2.9%, year-over-year.

However, since equities have recovered from the “carry trade” unwinding, the expectations for the first rate cut have dropped.  Just one month ago, the probability of a 50 basis point rate cut was greater than 50%.  Now, the expectation is greater than 70% for only a 25 basis point rate cut next month.  It’s possible that the Fed has waited too long to cut rates, as homes for sale has climbed to the highest since 2008.  Retail investors have now begun to buy nearly every dip in the market.  From the end of July to the first week in August, retail investors feared missing the bottom and inflows into equities were the highest in over a year.  Powell’s comments in Jackson Hole this week will be closely watched.

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