What Is True?
By Scott Poore, AIF, AWMA, APMA
Chief Investment Officer, Eudaimonia Group
We've entered a period in the markets where it's difficult to determine which way things may be headed. Market pundits, like many politicians, have their own version of the "truth" and often times, it doesn't match up with the data - which is always the best source of information. This week's musings is inspired by the 1983 hit song, "True" by Spandau Ballet. Here's some trivia about the song:
- This song was certified platinum in several countries and was the band's signature hit. It reached #4 in the U.S., but hit #1 in the U.K., Ireland, & Canada in 1983.
- The lyrics of the song were written by lead guitarist Gary Kemp and inspired by a crush he had on another musical artist, Clare Grogan from the band Gregory's Girl. At one point, Kemp actually went to Scotland to have tea with Grogan and her parents. While the feelings were unrequited, it was enough to create a song.
- The song was an '80s hit and appeared in John Hughes' "Sixteen Candles." The song has gone on to appear in multiple movies and has been covered by multiple artists.
- The music in the song was inspired by the soulful records of Marvin Gaye and Al Green.
"So true funny how it seems
Always in time, but never in line for dreams
Head over heels when toe to toe
This is the sound of my soul
This is the sound
I bought a ticket to the world
But now I've come back again
Why do I find it hard to write the next line?
Oh I want the truth to be said
Huh huh huh hu-uh huh
I know this much is true
Huh huh huh hu-uh huh
I know this much is true"
Here's what we've seen so far this week...
Why Do We Find It Hard To Write A Truthful Headline? I have found so much to laugh at this week, as our market pundits and politicians spin yarns that are easily disproved. 
I know this much is true - things are not what they seem. Just one month ago, multiple Fed speakers, including Chairman Powell, stated that the labor market was their primary barometer for future rate decision - not inflation. This week, the release of the August inflation numbers revealed that both Consumer Prices and Producer 
Prices declined on a year-over-year basis and are well below the historical average - indicating the Fed could have afforded to cut rates months ago. According to the Fed, the recent inflation release shouldn't have affected policy much as it's the labor market, right? Well, all of a sudden, everyone is now focused on "Core CPI" instead of headline CPI. Why? Because "Core CPI" strips out food and energy. Many of the energy components of CPI happened to have decreased in August, making Core CPI look worse than headline CPI. 
It's awful convenient for market pundits to pick and choose with data point they will focus in and promote depending upon the narrative. The reality is that "Core CPI" is still lower on a year-over-year basis and also lower than the historical average, just like headline CPI. One other thing to note, the the gap between Producer Prices and Consumer Prices has widened again over the past few months and indicates that not all savings are being passed along to the consumer. 
This is typically not sustainable and may force consumers to make more careful spending decisions going forward. All of this back-and-forth over inflation has apparently moved the market's prediction on next week's rate decision announcement by the Fed. Just one month ago, the probabilities of a 50 bps rate cut or a 25 bps rate cut were about even. Since then, the market moved more toward a 25 bps rate cut and now today we're at almost a 50:50 probability again. The reality is that no one knows what next week holds and the market is indicating that the Fed is behind the curve - again. The academic exercise of debating 25 or 50 bps really doesn't matter at this point. What's more important is whether the Fed can cut slowly or whether they have to speed up the pace at which they cut. The table shown here indicates that 12 months later, a slow rate cut pace leads to fewer losses than a fast rate cut pace. This table assumes a "slow" pace to be less than 5 cuts within a year, while a "fast" pace to be 5 or more cuts within a year. The difference between fast and slow rate cuts had been more than double-digit losses, on average. Twelve months is a long time, so it may take some time before those kind of losses materialize.
This Much Is True. One of the stories that has led markets all year is finally showing signs of weakness. The Mag 7 names are struggling after reaching a high on July 10th. Since then, they have traded lower and a bit sideways. 
The Mag 7 names lost more than 17% in the latter half of July and, while they have made up some ground, are flat since August 1st. The problem moving forward is that the Mag & are having trouble trading above the 50-day moving average and have not returned anywhere close to the July 10th peak. Meanwhile, the S&P 500 Equal-
Weighted Index, which is not nearly as exposed to the Mag 7 names as the traditional S&P 500 Cap-Weighted Index, is trading above the July 16th peak and has been trading above its 50-day moving average since August 13th. 
This makes the case that more well-rounded, diversified portfolios may out-perform concentrated portfolios moving forward. Time will tell. Global equities saw the largest monthly outflows last month since the first month of the year and the largest monthly outflows in the last 3 years. There's a case to be made that now might be the time to diversify into other asset classes if investors are concentrated in tech names or high growth/momentum. Over the different economic cycles, equities typically out-perform bonds, but the manner of out-performance differs, depending upon which economic cycle is considered. 
For example, early in an economic expansion, stocks far out-perform bonds as we are typically coming out of recession. By late expansion, the out-performance of stocks lessens to within about 100 basis points of one another. Then, by the time recession hits, bonds being the less volatile asset class, naturally far out-perform stocks. Bonds under-performed equities substantially in calendar years 2021 and 2023. So far this year, bonds are trialing equities by about 1300 basis points, but the gap has closed since the late July sell off in equities. Look for more turbulent trading in equities next week as the market is clearly undecided on either a 25 or 50 bps rate cut and any perceived surprise by the Fed could affect next week's returns.
This much is true...
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Disclosures
The information contained herein is for informational purposes only and is developed from sources believed to be providing accurate information. The opinions expressed are those of the author, are for general information, and should not be considered a solicitation for the purchase or sale of any security. The decision to review or consider the purchase or sell of any security should not be undertaken without consideration of your personal financial information, investment objectives and risk tolerance with your financial professional.
Forecasts or forward-looking statements are based on assumptions, may not materialize, and are subject to revision without notice.
Any market indexes discussed are unmanaged, and generally, considered representative of their respective markets. Index performance is not indicative of the past performance of a particular investment. Indexes do not incur management fees, costs, and expenses. Individuals cannot directly invest in unmanaged indexes. The S&P 500 Composite Index is an unmanaged group of securities that are considered to be representative of the stock market in general.
Past Performance does not guarantee future results.