We could be in for a turbulent few months in the market. The Fed is predicted to cut rates next week and of course the Presidential election is less than two months away.
This week we're doing something different. I recently exchanged emails with Beachman to get his latest views on the markets and how he's positioning his portfolio. If you haven't read his work before, I encourage you to take a look. I always learn something new from him.
Behind the alias, Beachman is a retired former Fortune 5 senior executive that has been progressively developing a methodical approach to actively investing in markets across his taxable and retirement accounts over the past couple of decades. This approach allowed him to retire much earlier than planned two years ago, despite having two teenagers.
Beachman is a tech and growth investor who currently has a very large allocation in artificial intelligence stocks.
Our discussion, formatted for clarity, follows:
Market update interview with Beachman
Do you think the US Feds will cut short term interest rates in September and by how much?
Beachman: Yes, I do think the US Feds will cut short term rates at their September meeting next week. Contrary to market expectations, They will likely make a token 0.25% rate cut and will wait to do more as needed towards the end of the year.
Does this mean we are headed towards a recession?
Beachman: No, I do not think we are heading towards a recession.
The US economy is still relatively strong. In fact, it is the strongest economy in the world right now. With GDP growth of 3% in Q2, estimated at 2.5% in Q3 and 2% in Q4, how can we call this an economy in recession? The US consumer is still generally speaking, in a strong financial position. Recently we heard from retailers like Walmart and Target that retail spending was higher than expected. As per Yardeni, since 1945, the US economy has been in a recession about 14% of the time. Most of those nine recessions have been due to troubling economic conditions or geopolitical events. Today's economic situation is very different and one could argue that it is much more conducive to a possible soft landing. The US Feds are ahead of the curve today. Their first rate cut is meant to prevent a possible recession and they have more than 500 basis points (5%) of rate cut ammunition to stimulate the economy if needed.
That said, we have to be clear about a few things:
Consumers are getting more discerning with their spending. They are staying away from big ticket spending - cars, expensive vacations, appliances, even houses. They are more price conscious and seeking bargains in advance of the upcoming Holiday season. With the stock market being up for two straight years, the wealth effect is keeping consumers in a positive frame of mind. There are still more job openings as compared to unemployed people and the overall unemployment rate is still only 4.2%. As long as consumers remain employed, they have spending power to keep the US economy out of a recession.
Over the past 4 years, the US economy has been going through sector specific economic slowdowns in a cyclical manner. 2022 was a major slowdown for the tech industry with almost 250k layoffs. Then manufacturing started taking it on the chin, while tech recovered. Housing and real estate has been in multiple boom and bust cycles since the pandemic. The energy industry, automobiles, construction - all these sectors have seen ups and downs. The most recent economic reports show that US manufacturing is still in contraction.
Consumers are buying less cars, yet spending more on Uber and Doordash. They are buying less airline tickets, yet demand for concerts are at all time highs. The pandemic caused major economic disruptions and in many ways we are still normalizing out of it.
How do you think rate cuts will impact markets? Which stocks will benefit and which will be negatively impacted?
Beachman: High interest rates have been good for companies with healthy balance sheets because they have been earning 5% interest on their cash balances. It has, as expected, been challenging for small companies because it made it more expensive for them to access capital. As interest rates are lowered, this situation will start reversing.
The first few rate cuts will not have a significant impact, but over time:
1. The US dollar will go lower
2. Bond values will go up
3. Small market capitalization stocks will rise - will likely get an initial boost, followed by a drop and then a more sustainable rise in 2025
4. Certain rate sensitive sectors like housing, automobiles, construction etc. should benefit from rate cuts.
What about the election—what impact are you expecting and how are you preparing your portfolio for it?
Beachman: There seems to be increasing investor nervousness about the upcoming US election and justifiably so. Markets hate uncertainty and we could see some geopolitical volatility prior to and potentially even after the elections, if the results are delayed or challenged in any way. If you look back at the 2020 elections, the SP500 dropped about - 9% in the second half of Oct, but then recovered quickly after the results were announced.
I have started putting in place a geopolitical hedge in my portfolio using a combination of bitcoin, gold and cash. These assets have performed the best during such geopolitical black swan events or periods of uncertainty.
Trying to pick specific stocks based on which candidate one expects to win is a fool's errand. It is unclear who will win and markets tend to do well irrespective of who is in the White House...as long as we have clarity on the election results and there are no delays in acceptance of these results.
Want to follow Beachman's thoughts on markets and see his full portfolio? Visit his Substack and sign up for his email newsletter. You'll also get access to his exclusive chat community. You can also follow him on Threads.
