Don't Fade the Fed!

Hi All,

I’m sure many of you are shaking your heads thinking, “How on earth are we having yet another stellar year?”

There are a few moving parts to that answer, but historically, stock markets usually pull back for two main reasons:

1. Some kind of unpredictable “black swan” event, and

2. The Fed raising interest rates.

Right now, we’re on a very different runway.

You’ve probably heard the saying “Don’t fight the Fed.” That’s what people say when rates are going up, because rising rates are an awful environment for the stock market and make life harder for everyone - consumers have less to spend, and businesses have less to reinvest, pay down debt, or return to shareholders. That was the story back in 2022, and the markets hated it.

Today, we’re in the exact opposite spot - so the phrase I’m using now is: “Don’t fade the Fed!”

As interest rates come down, the U.S. dollar usually weakens, which tends to be good news for bonds, stocks, and commodities (as we can see with gold and silver). 

Now, a lot of people feel this pace can’t last forever... but history shows that when the Fed cuts rates near market highs, the S&P 500 has actually done quite well.

This chart shows how the S&P 500 has performed since 1980 when the Fed cut rates near all-time highs. On average, the index gained 3.3% over 3 months, 5.5% over 6 months, and 9.8% over the next year with markets higher 100% of the time after 1 year: 

I’ve also been getting a lot of questions about whether this is all sustainable as some asset classes are getting harder to purchase and especially with how high anything AI-related has gone. So, are we in a bubble?

At this point, I don’t "fully" think so. Many companies are actually making money from building the infrastructure that supports AI from hardware and software to physical data centers. This isn’t 2000 when companies that had never earned a red cent were going parabolic on hype alone. Today, this AI buildout is being funded with cash, not speculative debt and outside capital.

Now, I do agree with the other side of the argument that too much money is being thrown at a select few people and some very small firms, and these too have potential to fail. But we don’t own them or their debt. I will work my hardest to help ensure we are focused on quality companies that are positioned to earn real profits from this shift.

Take a look at this: This Meta alum has spent 10 months leading OpenAI’s nationwide hunt for its Stargate data centers

We’re really just at the beginning of a massive data center buildout that’s going to power the next wave of the internet. Companies we own are right in the mix: Celestica and Seagate in data centers and storage, Capital Power and Brookfield Infrastructure in data center power, Applovin using AI to streamline business operations. I could go on and on... Aecon (nuclear), Enbridge (power infrastructure), Amazon and Meta (sales and advertising). You get the idea.

And sentiment today is far from where it was in 1999: 

This is real, and it is still in its early days. The companies building and adopting AI stand to benefit massively, even though some will inevitably fail miserably along the way. We watch, and we learn. 

Another good read: The bubble in people searching for 'AI bubble' has burst - what that means for the stocks

And even if this were a bubble... should we not still profit until it shows signs of bursting?

In Alan Greenspan’s “Irrational Exuberance” speech in 1996 the Nasdaq went up another 500% before peaking in 1999-2000! Those who sold out and heeded his advice would've had many regrets (and a lot less cash) over the next 4 years! 

And guess what Jerome Powell just said: Markets sold off after Powell said six words investors don’t want to hear: ‘Equity prices are fairly highly valued’

So, I believe volatility is low for a reason. And the chart below highlights just how stable the markets have been: 

Volatility could be warranted to pick up a bit, but we’re in a very unique place right now. I’m thrilled we’re seeing back-to-back home run years, and I remain positive on our holdings until something new changes that outlook.

One last thing - the U.S. government shutdown is also on my radar. It might sound counterintuitive but is yet another bullish sign for the markets. Less spending will increase the odds of further deflation, job losses will increase, and rates will need to come down further and faster. This will not come without noise and volatility, but markets have typically shrugged these things off in the past.

Thanks, as always, for your trust and confidence. We’ll keep watching, adjusting, and making sure your portfolio stays positioned for both opportunity and protection.

Cheers,

Steve

This information has been prepared by Steve Switzer who is a Portfolio Manager for iA Private Wealth Inc. and does not necessarily reflect the opinion of iA Private Wealth. The information contained in this newsletter comes from sources we believe reliable, but we cannot guarantee its accuracy or reliability. The opinions expressed are based on an analysis and interpretation dating from the date of publication and are subject to change without notice. Furthermore, they do not constitute an offer or solicitation to buy or sell any of the securities mentioned. The information contained herein may not apply to all types of investors. The Portfolio Manager can open accounts only in the provinces in which they are registered. iA Private Wealth Inc. is a member of the Canadian Investor Protection Fund and the Investment Industry Regulatory Organization of Canada. iA Private Wealth is a trademark and business name under which iA Private Wealth Inc. operates. This content was fully or partially generated by artificial intelligence. The advisor reviewed the critical information independently.