September: The Chair, the Oracle, and the (Not So) Magnificent Seven

"Ample room" to lower rates? During his latest Jackson Hole speech, Jay Powell stated, “the time has come for policy to adjust,” further commenting, “the direction of travel is clear, and the timing and pace of rate cuts will depend on incoming data, the evolving outlook, and the balance of risks.” Following Powell’s speech, the bond markets quickly priced in a total rate cut of 1% by the end of the year. However, as Powell emphasized, the pace of the cuts will depend on the story data will tell in the coming months. On August 30, the Fed’s preferred inflation indicator, the PCE Index (Personal Consumption Expenditures Price Index), came in as expected, up 0.2% in July, and 2.5% year-over-year. The CME FedWatch tool now places the odds of a rate cut at the next FOMC meeting on September 17-18 at 100%.

What does the Oracle say? Lowering interest rates is the good news and is exactly what investors searching for the immaculate soft landing of the economy have been yearning for. However, here’s the not-so-good news: Warren Buffett is continuing to add to his cash hoard. On August 3, Berkshire Hathaway released its second quarter earnings that revealed the company slashed its Apple stake by almost 50%, from 790 million shares to 400 million shares, during the quarter. In recent weeks, Buffett also sold over $6 billion of his Bank of America position. Berkshire Hathaway reported cash holdings of $277 billion at the end of the second quarter, up from $189 billion in the first quarter, marking the largest cash position in the company’s history – by a wide margin.

How should investors interpret Warren’s rising cash pile? Here are three potential reasonings behind his actions:

1. He is de-risking by reducing exposure to his largest position (Apple),
2. He expects a buying opportunity to add back market exposure at lower prices in the future, and/or
3. He is “saving up” to make a major asset purchase (less likely).

Buffett’s cash holdings reflect his cautious yet opportunistic investment philosophy. He tends to be conservative with cash during periods of high market uncertainty or inflated valuations, ensuring that Berkshire Hathaway is well-positioned to take advantage of future opportunities and/or weather economic storms. Keep in mind that Buffett’s strategies, while valuable, are tailored for a multi-billion-dollar corporation; you should consider his cash moves in the context of your own portfolio, risk tolerance, and time horizon.

A changing of the guard? Since 2017, the S&P 500’s performance has been predominantly driven by mega-cap companies. As of August 31, 2024, the top 10 stocks in the S&P 500 account for 35.5% of the index, compared to approximately 18% in 2017. These top 10 are dominated by big tech names, which have been in a secular rally for the last seven years. Although we did see sell-offs in mega-cap tech along the way, each period of weakness was short-lived and followed by strong recovery rallies, leading the major indices to new highs.

At least temporarily, leadership has shifted. Quarter-to-date (through August 31), the S&P 500 is up 3.7%, marking a solid start to the third quarter. However, the path to this gain has changed significantly. Since July 1, the leading sectors have been real estate (up 13.3%), utilities (up 12.0%), financials (up 11.3%), consumer staples (up 8.0%), healthcare (up 7.9%), industrials (up 7.9%), and materials (up 6.9%). In contrast, the two worst-performing sectors since July 1 have been communication services (down 2.8%) and technology (down 0.9%) – two sectors that hold a few of the Magnificent Seven names.

It’s too early to determine if the recent rally in the broader investment universe signals a change in market leadership or is simply another breather – and reality check – for the mega-cap tech names. Nonetheless, one thing is different this time: We are entering an era of easing monetary policy. What has been a headwind for interest-rate-sensitive sectors will now become a tailwind.

Final Thoughts

Economic indicators such as GDP growth, unemployment rates, and inflation will be pivotal in shaping investor sentiment and market performance for the rest of 2024. The Federal Reserve’s decisions on interest rates will significantly influence borrowing costs and investment flows, with investors likely to react to any faster-or-slower-than anticipated rate cuts. Strong earnings growth and increased guidance in interest-rate-sensitive sectors could suggest that the short-term rotation in market leadership may evolve into a more secular shift. Inflation trends and consumer spending patterns will remain critical, as will the geopolitical environment and general market volatility. Given the numerous uncertainties in the months ahead, investor sentiment is expected to be highly reactive.

As always, please reach out with your questions, and we will keep you updated throughout these final months of the year.