Weekly Update (08/21 – 08/28): Market Breather

Hi all –

We hope you are enjoying what remains of the summer! We wanted to send out an update on what we are seeing in markets entering this week.

August is seasonally a very weak month for equity markets, with many traders and investment professionals taking holiday. Liquidity is typically weak and trading is light.

This month, seasonal weakness has also coincided with a very strong increase in 10-year US Treasury yields. Treasury yields going higher can often be a worrisome sign for equities, as many equities are valued using a 10-year treasury yield embedded within the discount rate.

Our viewpoint remains that the 10-year yield increase is healthy, and due to the underlying positive growth dynamics in the US driven by productivity gains. As of today, GDPnow is estimating a 5.8% nominal growth rate for the third quarter. This may, at the margin, make higher inflation a bit more likely. Simultaneously, the treasury yield curve is becoming less inverted.

However, we are not seeing “breakeven inflation,” a market-implied level of future inflation levels, going dramatically higher, so consumer expectations about inflation remain well-anchored.

One of our Macroeconomic research partners, Fundstrat, believes that this seasonal stock market weakness will end this week. There are two important data points, including Nvidia earnings mid-week, and the Fed’s annual Jackson Hole conference on Friday.

The Jackson Hole Conference last year proved to be an inflection point lower for markets. However, this year, with the recent banking crisis and subsequent run up in interest rates (similar in magnitude to the first run up in rates pre-March SVB Crisis), our viewpoint is that it would be embarrassing for Jay Powell to cause another banking crisis by a mixture of rate increases and hawkish rhetoric.

Over the short to medium term, saying things like “risks are now symmetrical” meaning the Fed is considering unemployment levels as well as (only) inflation, may prove to be the path to least resistance to maintaining financial stability, while allowing the high interest rate environment to bring down inflation naturally. It would signal an eye towards not causing a recession.

Fed Chair Jay Powell has already hinted that real interest rates are now well-into restrictive territory, he has acknowledged in the most recent Fed meeting that [it was always the Fed’s intention to] allow interest rates to fall before inflation itself got to 2%.

Many prominent investment banks now have floated the expectation that we are done with inerest rate hikes, including Goldman Sachs (who believes the Fed may be cutting rates by 2Q ’24.)

We’ve noticed from many of the releases of prominent hedge funds’ holdings, that many have been bullish on the tech sector and particularly around A.I. technology.

A non-exhaustive list of examples includes: Seth Klarman’s purchase of Amazon; David Tepper’s large purchases of Nvidia, Meta, Microsoft, AMD, Marvell, and Broadcom; Point72’s large purchases of Nvidia, Adobe, and Microsoft; Citadel’s large purchases of Amazon and Microsoft; Third Point’s recent purchases of Amazon, Microsoft, and Nvidia; even so-called quant firms like Renaissance Technologies have taken huge positions in Nvidia, Meta, and Google; Two Sigma’s large position in Nvidia. Many of these funds are self-described “value” managers.

The breadth of both discretionary and quant funds buying leads us to re-affirm our thesis that data is the new oil/ gold, AI chips from the likes of Nvidia are the picks and shovels, and Generative A.I. providers like Microsoft are the gold-mining companies pushing new frontiers.

As always, please do not hesitate to reach out to us with questions. Thank you for your trust and confidence.

John Bay, CFA, UCLA MBA

Chief Market Strategist

Meet the Marathon Team

Charles G Brown, IV | Chief Executive Officer, Financial Advisor | cgbrown@meetmarathon.com

Jacob Foley | Chief Operating Officer | jfoley@meetmarathon.com

Connor Gallivan | Financial Advisor | cgallivan@meetmarathon.com

Indrani Namilikonda | Client Services Coordinator | inamilikonda@meetmarathon.com

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