Newscasts - Market Insight: 'Soft landings almost never happen'

U-Haul Holding Co

30/08/2024 18:09

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Source: 'Reuters - Business videos'

Description: Global markets are nearing the end of a tumultuous month for
riskier assets as anxieties eased about an U.S. economic slowdown. But as bets
are reinforced of a Federal Reserve interest rate cut in September, Scharf
Investment's Brian Krawez told Reuters he sees a real risk of a recession.
Short Link: https://refini.tv/4dIFgq7

Video Transcript:

Mild gains for PCE closes out a rollercoaster month for Wall Street. Welcome
to Market Insight. I'm Peter Devlin. The Fed's preferred inflation rose at a
mild pace last month, August started with a bang as markets plummeted on US
growth fears and the unwinding of some crowded trades. For all the recent
volatility, the Dow S&P 500 looks set to end the month in the green. So, what
challenges lie ahead in September. So, joining me now to talk about all that
is Brian Krawez, Lead Portfolio Manager at Scharf Investments. Welcome, Brian.
To starting off with today the PCE data. Does this check the box for Fed cuts
in September?

Yes, I think it does. It was broadly in line with market expectations. There
was a speech this week by Fed Chairman Powell, where he said he had confidence
they were on path to 2%. And I think this helps support that.

So as well, dominating next week is the US job numbers. Could a weak figure
prompt a jumbo cut from the Fed? Or are you resolute in your 25-basis-point
cut?

Yes, I mean, if it was really weak, perhaps 50 basis points would be on the
table. But we think it's likely 25 and there's likely three more cuts this
year. There was nothing in this data or in Chairman Powell's speech that would
lead us to believe there's a need to panic that we don't think the Fed's going
to want to signal some markets that need to panic either. So, it's just
likely, regardless of the jobs number, that you're going to get 25 bps and
then to continue 25 bps from there.

So, with panic in mind, a Bank of America analysts say that stock market
volatility does tend to rise in September and October. Are we in for a bumpy
few months ahead?

Well, there is oftentimes some bumpiness in September, October, and right now
the markets have been pretty calm. But there is historically some bumpiness
that could be coming. It really will depend. I mean one thing we got is the
election and obviously there could be some stuff coming out of that. We'll see
how earnings are? And the end of the day what really matters to investors is
fundamentals. And so far, those have been coming in reasonably good.

Some markets as well have been long awaiting and interest rate cuts. Where
should investors now be looking ahead of the easing cycle?


You know, this has been a really concentrated market. The top 10 stocks have
been roughly 70% of the return of the S&P this year. And that's very, very
unusual because usually those large stocks were lagging by about 2% to 2.5%
per year. And so, as a result of that, you've now got 37% of the S&P 500 is
just in the top 10 stocks. This is well above the market peak of the bubble
even in 1999. So, I think there's some caution warranted in good news the
market seems to be broadening out 62% of the S&P 500 stocks have beaten the
S&P over the past month. That compares with only 15% that outperformed over
the past year. So, we think there's opportunities for investors willing to
look outside of those concentrated winners. One name we like is U-Haul trades
at only 1.5 times book. It's got a very dominant market position well-known
name brand in the United States, fantastic growth prospects as they're growing
that self-storage business. And on top of that, they're going to be a
beneficiary as the Fed eases rates, which will help the housing market and
help them as well.

So as well, the University of Michigan survey showed a modest improvement in
consumer sentiment this month. Will that translate to strength in retailers?

You know, you just saw Dollar General down 30% plus yesterday. One of the
things from the report this morning is that savings rates actually dip down to
2.9%, that's the lowest we've seen in several years. The consumer was fairly
strong because they got a lot of savings that was built up during the
pandemic. But what we've seen from the Dollar General report and some others,
is that particularly the low-end consumer, there's starting to be some stress
there. The areas that are doing well is more value. People are really looking
more for bargains now on the consumer side. And so, I think that will be a
much bigger driver going forward and we'll have to see if consumer sentiment
comes down as the labor market is softening.

The improvement in the consumer sentiment was also due to a shift in political
expectations. So, is it time to abandon the Trump trade, and is there a Kamala
Harris trade?

You know, it's hard to know who's going to win? And so, I think investors
probably are best off not putting too much stake in any one candidate winning
right now. Instead have a balance, stocks that can benefit. We like certain
stocks like Occidental Petroleum and Gentex that will probably benefit from a
Trump win. However, there's plenty of stocks that will do well regardless of
who wins. A name like U-Haul we think will do well regardless of who wins. And
so again, I think investors should really just focus on fundamental. There's
been a lot of optimism with the S&P 500 at 22 times right now, which puts it,
the top 10 percentile in terms of expensiveness. So, we think investors are
really quite giddy right now and seem to be betting on the Fed sticking a soft
landing. We actually think for our part that there is real risk of recession
because the fact of the matter is soft landings almost never happened. And so,
we think, investors right now should be focusing on those companies with
strong fundamentals regardless of who they think is going to win the election.

Brian Krawez of Scharf Investments, thank you very much for your thoughts. And
that's Market Insight