Thierry Hasse: Cracks in the economy may prompt Fed to act


Presidential politics took center stage in last week’s news cycle, stirring the stock market into a game of forecasting the financial implications of a political shuffle. This chess match of predictions, we anticipate, could introduce a fresh wave of unpredictability for the markets.

Meanwhile, the “great rotation” continued last week with investors resuming the selling of mega cap technology shares and pivoting their investments into value and cyclical areas of the equity markets and the Russell 2000 index of U.S. small cap stocks, adding to its recent strength.

Chief Investment Officer Thierry Hasse

Increasing doubts about the outlook for the U.S. economy and a weakening American consumer are feeding speculation that the Federal Reserve might have to cut interest rates faster and to a greater extent than what was anticipated only a few weeks ago. At the same time, investors in large technology companies are growing impatient with the massive capital spending on the development of artificial intelligence with little returns on investment yet.

A case in point was the release of Google’s second quarter earnings on Tuesday evening after the market closed. Despite beating Wall Street estimates and showing solid top line growth, the stock fell sharply over the next two trading sessions. However, some of the negative market reaction surely can be attributed to profit-taking after a strong run for Google shares during the first six months of the year. After all, Google earned $23.6 billion in the second quarter – or a little over $10 million every single hour. That’s certainly a comforing financial performance for long-term investors. (Source: Alphabet investor relations.)

By close of business on Thursday the Nasdaq index was down 3.1% on the week while the Russell 2000 was up 1.7%, showing significant outperformance again for the second week in a row. (Source: CNBC.)

The week was not over though, and on Friday volatility returned – but to the upside this time. The Federal Reserve’s preferred inflation measure, the personal consumption expenditures or PCE, rose slightly in June. This reinforced the view that the first rate cut in over a year will come in September. Consequently all sectors of the S&P 500 Index rose sharply on Friday to close out an exhausting week.

This week will most likely be as interesting and full of excitement as investors will scrutinize Apple and Amazon earnings that will be released on Thursday. These two giant companies can stabilize and rekindle investors’ fervor for mega cap names with strong financial performance and a solid outlook for the balance of the year.

The Federal Open Markets Committee meeting on Wednesday and Thursday is still expected to be a prelude to the anticipated consequential rate cut in September. However, some market observers are now calling for a cut now. That would certainly take interest rate markets by surprise.


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