Why a ‘crazy month of trading’ may lead to a more balanced market
Lightly edited transcript:
Kim Parlee: Let’s start with the fact that it was a crazy month of trading. We saw some pretty big sell-offs and some pretty big rebounds. Are we out of the volatility woods, so to speak?
Phil Davis: No, I don’t think so. The Magnificent 7, the tech stocks, the AI world – there are still a lot of huge overvaluations there. Not that they’re not going to make a lot of money, but the anticipation is ahead of the reality. We’re going to have that going on for a while. It’s going to take a long time to settle down. It’s like Google and Apple were great companies, they went up too much, came down, and now they’re 10 times where they were back then.
Kim: This always happens. It’s really easy to see when you look backwards in history, but sometimes harder when you’re in it. Let me ask you about sector rotation. We’ve seen some pretty interesting things. Some air came out of the AI world and AI-related stocks. We saw things like utilities and other things starting to pop up. Do you think the AI surge has run out of steam? Has it peaked?
Phil: It’s like the dot-com boom. There are going to be 90% busts and 10% that are going to make you a fortune. The trick is to figure out which are the ones that will make you a fortune over the long term. Mostly, this is a case of getting ahead of itself. The profits in AI are phenomenal. It’s the future, the same way the internet was the future, but it didn’t happen all at once. This rotation we’re seeing right now, where money’s coming out of the huge profits from the AI sector and the Magnificent 7 and going into other stocks, is very healthy. Money needs to go to other stocks to invest and build the economy so that we can support all this fantastic new stuff.
Kim: Let’s talk about the Fed. That’s coming up in September, and I know Jackson Hole is coming up ahead of that. We’ll talk about the US election after that. It’s pretty unusual to see a Fed move before a US election, but the markets are pricing in a move.
Phil: If you remember, Donald Trump threatened Jerry Powell that if he lowers rates before the election, he’s going to be fired because Trump sees it as helping the Democrats. If you take that out of the equation and say the Fed is data-driven, is the data consistent enough and pointing enough to give the Fed a reason to lower rates at the next meeting? I don’t think so. Most people, 80-90%, are saying “yes, they’re going to lower rates at least a quarter point at the next meeting.” I don’t think the data is there yet. That’s my take on it.
There’s a very big revision coming to non-farm payrolls in the US. They true up the non-farm payrolls for the past year, and the revision could be half a million or even more than half a million jobs, plus or minus, most likely minus. They don’t count immigrant labor in the annual report, and that makes a huge difference. That’s where you’re going to see a big revision, but I don’t think it’s going to be enough to move the Fed.
Kim: Let’s talk about the US election. For most people I’ve talked to over the past couple of months, there’s been a lot of focus on the Trump-Pence ticket. Up until Joe Biden resigned, people were kind of leaning more towards saying this is moving towards a coronation versus a race. Harris now is in the race with Tim Walz. It sounds like there is more of a race now. What happens if we see a President Harris come in and lead the way?
Phil: I think very much so that the conservative investors and conservative pundits are not accepting the fact that Trump has now lost his lead in the polls and is in big trouble. The implications for this are significant. You’ve got to look at factors like sector rotation. Harris is all for renewable energy, whereas Trump’s against it. Healthcare stocks – Trump is against universal healthcare, Harris is for it. Fiscal policy – Harris is going to want increased government spending, higher corporate taxes, higher personal taxes. These are big changes from where Trump is on these things. Trade relations with China – Harris is going to be a little bit more friendly and try to establish trade again, unlike Trump, who wants to put tariffs on everything and shut everything down. Regulations – Trump wants no regulations, and of course, Biden-Harris want to put more regulations on things, especially the financial sector and anything to do with global warming. Then you’ve got market volatility because as the race seesaws back and forth, people are going to change their bets in and out. It’s going to be like the Bugs Bunny audience that runs in and out of the theater – whatever the last poll is, everybody’s going to change their bets.
