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Hello and welcome back to another episode of
blue Chip. Now you have
Daniel Do, CNN chief investment officer. I do
see your financial advisor. And
we have a nice slate for you all today. So, we
are going
to start off, talking about the Federal
Reserve and interest rates. After a
meeting last week, we’ll chat through some
developments in the US labor market.
We want to do a bit of a recap and some
commentary on
the second quarter earnings season,
specifically related to Big Tech. And then
round things
out, talking about the macro landscape,
specifically oil and the conflict in the
Middle East, and then stay till the end,
because we are going to
try to tie all this together, make some bottom
lines, and also point out
some of the specific items that we’re watching
in the very near future.
So without further ado, let’s talk about the
fed. So Federal
Reserve met last week. No decision was made.
Meaning I mean,
there was there was no change in the baseline
level of interest
rates. Target fed funds rate maintained at 3.5
to 3.75%. But
what was interesting about this meeting was
that the decision was
somewhat split in terms of those in favor of
maintaining the current
level of the fed funds rate and those that
were in
favor of increasing the baseline interest rate
by 25 basis points.
So the decision was split 9 to 3. It might not
seem like
a large dispersion, but the fact of the matter
is, you usually do
not get any difference. Usually the FOMC
voting members are generally speaking
on the same page. I think this is indicative
of the challenging environment
that the Federal Reserve is facing right now.
Inflation is still too high.
A lot of this is based on energy prices that
have been resultant of conflict
in the Middle East. But as as Matt will chat
through in a moment, you
are starting to see some conflicting evidence
from the labor market. So if the labor
market was kind of running gangbusters while
inflation was too high, it would be a
fairly easy decision for the Federal Reserve
to constrain the economy, meaning hike
interest rates.
But that is not the case. You have higher
inflation and a labor
market that’s showing some signs of weakness.
So you have new Fed Chair Kevin
Warsh and the rest of his, committee. They’re
left in a challenging position.
And and what that’s resulting in is investors
questioning is the next move
for interest rates still potentially higher,
and if so, when or is the economy
actually structurally weakening below the
surface enough to prevent an actual rate hike?
So unfortunately for market participants, the
answer kind of remains we have to
wait for the data. And that ultimately is
going to bring us to the
what is probably the biggest story of the last
week or two. And
that’s in the labor market. Yeah, it seems
like this happens every now and
then where, you know, the labor market just
delivers a really surprising report.
And this was certainly that, you know, it
showed the labor
market, you know, hitting the brakes. So
instead of adding roughly
80,000 jobs in July, the economy lost 23,000
jobs, and
the unemployment rate actually fell to 4.1% of
the payroll number
was dramatically weaker than economists
expected previous month. Employment figures
were
also revised lower, which is also kind of
another surprise, right?
Whenever you get a weak report. And then we
look back and you
say actually things were weaker than we
thought they were back then.
That’s never happened either. In the financial
markets, obviously digested. This is a
probability that was, you know, reduced on the
fed rate hike side.
So so that’s you know, great. When we think
about bad news is
good news for the right stocks rally bonds
rallied the dollar’s weaker gold
climbed obviously the all these things you
know playing with interest rates
and declining interest rates or the prospect
of steady or declining interest rates.
So, you know, the key takeaway isn’t simply
the job market’s weaker, it’s that the market
narrative
may be changing somewhat today. Yeah. You
know, we were what you were alluding to as we
kind of have this whole energy spike energy
surge inflation. And now we’re really looking
at the
labor market saying, oh, we’re getting a
completely different story that the fed has to
think about.
So this is the ultimate tug of war, right?
Yeah. And a couple
of points just to add on to that. So you know
Matt mentioned the
economy lost 23,000 jobs instead of adding
80,000 in July. And then the
prior two months. So May and June, instead of
being relatively strong months in
the labor market, in aggregate they revised
those numbers lower by 100,000 jobs.
So this is where, you know, I’ve come out and
said, whether you look at
my most recent quarterly edge or appearances
on this podcast, you know, it kind of
felt like the labor market relative to six,
nine, 12 months ago was on
a lot better footing, and we had a lot more
encouraging data. And all of
a sudden, you know, you kind of get the rug
ripped out from underneath you.
And if you were to zoom out and look at month
to month over the
last 12 months, the number of jobs that have
been added, all of a sudden
you kind of see this declining trend line
developing. And again, that’s just one of the
frustrating facets of being an investor is you
are kind of beholden to the data.
And if that data is actually incorrect, you
know, you’re you’re trusting
government data and you do run the risk of
having these things be
updated retroactively. So not overly
concerning at this juncture, but that tug of
war is going to cause some volatility in the
market, in my
view. The other thing I wanted to call out is
that you
know, Matt mentioned that the unemployment
rate actually fell to 4.1%, but it’s
important to understand that the majority of
this move lower in the unemployment
rate is not just because more people are able
to get jobs.
It’s actually because there’s a lot of people
looking for jobs. I think
it’s an interesting point, Randi. People hear
that. It doesn’t make sense. Hey,
we lost jobs, unemployment. Right. And it’s
it’s it’s been a trend
that has developed and actually intensified
this year. I think most people should
be familiar with the the demographic trends
that exist in the US today.
And that includes retiring baby boomer
population. And so what you’re seeing
reflected
in this unemployment rate moving lower is just
the simple fact that
there’s a fair amount of people retiring. So
your labor force participation rate
is is moving down towards levels that we
really haven’t seen since,
I guess, 2020. So this has been a structural
challenge since the pandemic.
And I do think it makes sense. Again, this is
not overly
alarming. It’s not some doomsday scenario, but
I think it’s just important that
people understand what this data is actually
showing you. Right. Okay. Let’s jump
over into the equity market a little bit
because we saw first
quarter, earnings in the US corporate
landscape has come out well above
expectations increase year over year for
companies in the S&P 500, about 26%.
And that was great. Markets obviously reacted
to that. And this is, you know,
back three plus months ago. So what that did
was set the bar
incredibly high for companies when they come
out and report second quarter results. And
so even with that high bar results have been
pretty darn encouraging. So
yes, there has been a lot of investor scrutiny
with that high bar, especially
around those folks involved in the AI cohort
that are spending a boatload
of, of of money on building out data centers
and, and the relevant components.
But, you know, when you look at companies like
a Microsoft or
like an Amazon who are both heavily involved
in spending money to
build out artificial intelligence capacity,
they have mature businesses in cloud
computing,
Microsoft Azure, Amazon Web Services that are
growing 40 plus percent year over
year, which is it’s kind of eye opening, when
you see those
types of figures for businesses that are
already massive, and the investor
scrutiny that you have seen, let’s take
Microsoft as a great example.
After reporting those results, shares jumped,
I don’t know, 15% or so
on July 30th that had $450 billion to its
market value
in just one day. And that is kind of
encapsulating what investors
are wrestling with right now. You’ve got a
company like Microsoft that’s
spending hundreds of billions of dollars this
year to build out
additional artificial intelligence capacity,
but investors still want to see results today.
Right. And be able to anticipate that these
results or I’m sorry, these investments are
going to actually be productive. So there was
a lot of pessimism around Microsoft coming
into
that most sort of most recent set of results.
And that’s why you see such
a big jump. So the reason I call out these two
is just because I think
this is these are two very relevant ones that
are reflective of that investor scrutiny.
I mean, you are seeing, I would say broad
based level of
earnings that are over and above the analyst
estimates. This is not
just isolated to the tech sector, to the point
where if if
the current figures hold as they’re kind of
moving around a trajectory basis
today, it will be the best quarter of year
over year earnings
growth since 2021, right when we were coming
out of the pandemic.
Yes. This does include some one off items from
big businesses
Amazon and Alphabet. But even so, I think it
it it’s
emblematic of yes, there are some concerns
that are relating
to this artificial intelligence build out from
a spending perspective. But
to have first quarter year over year earnings
growth at 26%,
and we’re tracking above 25% for the second
quarter as well.
I mean, I think it does it does give you some
some Intel
to maintain that that confidence in the market
right now and help explain why
the US market continues to push toward record
highs. I thought this was
interesting, too, because the, you know,
Amazon, Microsoft kind of an I guess
underperforming
the rest of their their cohort year to date up
to that point.
Microsoft is still think a 5% year to date
even with that that big trend and
Amazon’s off I think roughly 20. But a large
large amount of that return had come
from, you know. Oh yeah. It was interesting to
see these companies, you know, that
the as you described it, markets were kind of
tepid on these businesses, what they’re doing.
And then ultimate the results. And you know,
those earnings reports really I guess squashed
a
lot of investors concerns. And it’s so two
businesses that were, you know,
underperforming the market and
actually, you know, turned them positive and
you know start outperforming the market, which
was interesting. Yeah.
So you know this level of investor scrutiny is
not going to go away anytime soon.
And I think that’s warranted because I mean,
the last thing you want
to see in terms of the health of a, of a of a
market is that investors are just blindly
pushing names higher for no
real specific reason. Right. We’re lighting,
you know, hundreds of billion dollars of
CapEx. Right? Yeah. We’re in the show me
portion of this whole trade.
And I think that’s healthy. So again, like,
you know, there is a reason
that the US equity market continues to push
towards all time highs. And yes,
it’s going to be an even higher bar set now
for the next quarter. But
you know, again, the the market will look
through that when they when they
smell something that doesn’t feel right, you
know, that will be reflected in prices.
But realistically, it’s not going to be
surprising to see continued volatility around
some of these high flying names. But I would
say net net. Pretty
encouraging at least thus far in the second
quarter earnings season. Yeah no doubt.
So I guess you know, one of the themes this
year has been
the I trade the other themes than Iran and the
Strait of Hormuz.
And you know, we’ll talk about that next. So,
you know, oil prices have
been swinging absolutely violently as
investors try to figure out the day to day,
you know, whims of the Iran, US, us that Iran
conflict and what’s going
on with the strait. You know, we we go through
these periods of optimism
and pessimism and, you know, August 30th, some
crude crude oil fall around 7%.
You know, after Trump, President Trump called
off another attack and the
hopes for deals increase. And that relief
doesn’t last long. So negotiations
over reopening the strait remain uncertain.
Oil bounce back is traders
worried that the security of shipping, you
know through this important, you
know, energy way is just we’re we’re not sure
you know, obviously.
And then, you know, what goes on in the Strait
of Hormuz comes
to the US shores by way of gas prices and
higher oil means
inflation pressure, more inflation means, you
know, obviously more questions for the Federal
Reserve. And this is becoming again kind of
time’s back becoming a really
tough you know needle to thread here with
inflation in the job market.
So right now oil is effectively functioning as
the live inflation indicator for
the markets. And so much of the swing I would
say in in the
inflation numbers coming from what our energy
price is doing. Yeah. So if
the Strait of Hormuz can open and there can be
a successful deal negotiated,
you know, we probably start to look towards
the potential for rate cuts.
And if not, you know, the economy could be
forced to absorb
higher interest rates, higher energy in the
face of what is
ultimately a slowing economy. It’s like super
frustrating because you can
tell in day to day market action that
investors want to put
this behind them, like they want to look
through this. Any developments
in the Middle East right now, unless they are
absolutely necessary.
So the day to day dialog, for example, that’s
happening right now between Iran
and Oman, because the US is not involved and
it’s just the market
wants to focus on things that are probably
more important right now, aka the
actual company level productivity. What’s
going on in the US labor market? Is there
actually hiring happening or is there not
because we’re getting differing reads, but
the the the fact of the matter is they can’t
and completely ignore it.
It’s not behind us. There is still meaningful
tension that
exists. And so as long as that does your kind
of
chain reaction will continue to be if conflict
escalates or no
negotiations progress, that means higher oil
prices, which means potential
for higher inflation, which means higher
interest rates going to
be priced in the market, which can be
detrimental to stocks.
That’s like your your typical chain reaction.
And we’ve seen that play
out at many, many points through many, many
weeks so far this year.
So I would say you know, the number one kind
of consideration
right now to try to put this all together is
really the battle
between inflation and economic growth. So
we’re dealing with higher oil prices.
We’re we’re seeing that lead to potentially
persistent inflation. And that’s causing
higher
bond yields in anticipation for a fed that
will move the baseline
interest rates higher. That creates pressure
on stocks. And then you get this
jobs report that comes out and shows you well
in addition to
dealing with higher prices, we’re really not
in a position to hire robustly.
So what does that all mean? Well, again, we’re
kind of as
investors beholden to the data. And the most
updated piece of evidence
we’re going to get this week is with the July
inflation report.
So the consumer price index widely utilized as
the kind of baseline
indicator for inflation, CPI expected to rise
3.4% year over year. This
is off of a year to date high of of mid fours.
After you’ve seen some reprieve in the energy
markets. But here’s what the market
dilemma is. If inflation comes in, soft
investors can kind of conclude that the
fed can stay patient and that could be good
for stocks and bonds. But
if inflation comes in above that 3.4% year
over year number, particularly because
of energy prices, then the market is going to
have to probably revive the
possibility of another rate hike, which is bad
for bonds, probably bad for stocks.
And moves estimates higher for interest rates.
So any of that good news or
sorry, bad news is good news that we got out
of that bad jobs report
for the month of July. I think that’ll
probably end up getting unwound. So
again, we’re we’re kind of just speculating at
this point. But what we do know
is that we get that data this week and it will
be closely watched.
And it wouldn’t be surprising to see some
volatility as you lead
into that report. And immediately thereafter.
It was amazing to I mean,
I didn’t even notice it at the pump. You know,
as I’m
driving by various gas stations, I’ll see 20%
or 2027. Yeah. Differences.
You know it’s pretty amazing right, that that
easily. Yeah. And you
know, again, I think it’s more than just one
piece of spending.
Right. So you sees higher spending at, at gas
stations that’s been
resulting in lower spending elsewhere. So I
mean, the average person is
kind of thinking of this, this spending as
like one pot. And
so if you have to or you’re forced to elevate
one category, they
kind of inherently seem to be pulling back
elsewhere. And that was
something that was discussed at length through
first quarter management earnings reports.
And it has come up again, especially in your
real consumer facing
pieces of, of U.S businesses. So maybe just to
recap, walk
through interest rate considerations, the
Federal Reserve holding rates steady. But some
serious disagreement between Federal Open
Market Committee voting members talked through
some of the intricacies within the most recent
recent jobs market data,
discussed some of our takeaways from the most
recent round of
earnings specific to Big Tech, and some
companies like Microsoft and Amazon.
And then we worked into the macro picture and
talked about the continued tension
that exists between the US and Iran, and tried
to put all that together
as we start to look at, the next major test
being the consumer price index,
CPI coming out this week. So plenty to digest.
And, as we said before,
puts the Federal Reserve in a very challenging
position in this tug of war.
Yeah, Kevin. Good luck. Good luck. Godspeed.
Okay. Well, thank you
all, as always, for tuning in for another
episode of blue
Chip. Now, we look forward to speaking with
you again soon.
