Weekly Update (08-29 – 09-06): Jackson Hole

Hi all –

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

We’ve noticed that much of the bearish narrative percolating in the markets has come from two relatively self-interested camps, either the “product managers” or the “perma-bears.”

While any particular asset manager may have a whole host of reasons for holding a bearish or a bullish view on a particular issue, it is undeniable that conflicts of interest exist that may affect those views, and until we address that these exist, it is impossible to dismiss them from reality.

An example in the “product manager” camp would be $150 Bn hedge funds such as Bridgewater. Bridgewater is known for its focus as a macro hedge fund. They’ve been wrong in their assessment of the market and the economy this year, calling for a sharp contraction of 20% downside in earnings. In reality, the pain from earnings has not come close to approaching these levels.

However, even in the face of disconfirming facts, the path of least resistance for the “product manager” who caters to a select group of institutional managers (i.e. pensions, endowments), these managers are not flat out going for the “best return” all the time, but the best risk-adjusted return, in which risk is erroneously defined as standard deviation (volatility) of returns. In short, the goal of the “product manager” is not to produce the best outcome, but to differentiate themselves from the pack, even if the pure probability they claim to be assuming, is not the most likely path for the economy/ market.

The “perma-bear” camp might be adequately depicted by somebody like Mike Wilson, Morgan Stanley’s CIO and Chief Equity Strategist. In spite of market earnings outperforming expectations, MS remains very bearish on the market. In this case, the incentive may also be aligned with the assets under management of MS. Morgan Stanley is one of the largest asset managers with over $1.4 trillion of assets. Since MS is a publicly traded company, one of the goals of said banks in this situation is to “smooth out” earnings, or what they owe to shareholders. Since the owners of these companies are not always aligned with the underlying clients they supposedly represent, an argument could be made that the 5%-paying short term bonds and cash that Wilson & Co. advocate for could be more a function of the parent company wanting to decrease the volatility of its own earnings, rather than looking out for the best interest of its wealth management clients.

The Jackson Hole speech from Jay Powell did not bring much new information to the market. The Fed reiterated its focus on fighting inflation, warning more rate hikes could be in the cards. However, as we expected, the Fed did pay more attention to downside risks that could come from over-tightening the economy via the blunt instrument of rate hikes.

As we eclipse the tail end of earnings season, we’ve noticed that market volatility has taken a welcome breather. We can’t eliminate the possibility that much of this may hinge on the fact that NVDA, the undeniable bellwether and standard-bearer for all things A.I., crushed earnings.

Nonetheless, risk remains that many companies are “hoarding” Nvidia’s A.I. chips, making future extrapolations of their financial results tenuous. Especially given the fact that China-related sanctions around such chips are coming soon down the pipeline.

We expect tech and growth to continue to perform well. We expect “catch-up” trades from small and mid-cap stocks, large cap value stocks, the healthcare sector, and other select market participants, rather than a large downdraft in equity prices.

September remains a seasonally weak time, we view any weakness as a golden buying opportunity.

JOLTS – a measure of job openings, came in at 8.8 million, significantly lower than the 9.5 million expected, which has led to a lower expectation for future interest rates.

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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