Is the AI Bubble About To Pop? And, How a Rate Cut Will Affect Your Portfolio with Josh Brown
In this episode of the Money Rehab podcast, Nicole Lapin is joined by Josh Brown to discuss the latest market trends and strategies for navigating volatility. They explore the upcoming interest rate decision by the Federal Reserve and how a potential rate cut could impact portfolios, depending on whether it is seen as a preventive or reactionary move.
Brown and Lapin also analyze the current performance of various sectors, highlighting unexpected outperformers. Through their discussion, they emphasize the importance of diversification and a disciplined, long-term approach to investing, avoiding knee-jerk reactions to market fluctuations. The conversation offers valuable insights for investors seeking to navigate the ever-changing financial landscape.
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1-Page Summary
The Upcoming Fed Meeting and Interest Rate Decisions
Experts anticipate a 25 basis point rate cut at the Fed's upcoming meeting, barring a significant jobs downturn.
Nicole points out the high expectations for a rate cut, as Brown confirms a likely 25 basis point decrease unless a major unexpected job market decline occurs, which he deems improbable. A more aggressive 50 basis point cut would only happen in the event of catastrophic jobs numbers.
The market's reaction will depend on whether the cut is seen as "celebratory" or "emergency."
Lapin highlights the importance of understanding the rationale behind the cut. Brown and Cox describe it as a "celebratory" move amid moderate inflation and a strong labor market, historically leading to positive market reactions. However, an "emergency" cut to stave off recession could spark a more negative response, though Brown indicates conditions aren't dire enough to warrant that.
The Current State of the Markets and Investment Sectors
While certain tech sectors have surged, blindly chasing "hot" stories often backfires. A diversified approach is prudent.
Brown discusses trimming Nvidia holdings despite rising prices, warning against getting swept up in AI/machine learning crazes that can quickly turn, as with Supermicro. Rather than timing the market, he advocates a diversified portfolio to mitigate risk.
Outperformance has come from unexpected areas, highlighting the value of diversification.
Lapin suggests looking at utilities, while Brown cites staples and pharma hitting new highs. Surprisingly, utilities and financials have topped S&P 500 sectors this year, per Brown, showcasing the unpredictability of sector performance.
Strategies for Navigating Market Volatility and Uncertainty
Historical data shows annual highs often in December and volatility peaking in August, though not guaranteed patterns.
Lapin and Rabe note December has seen yearly highs around 50% of the time historically, but caution against banking on it. Brown points to August volatility spikes like this year's 65 VIX reading, which can signal buying opportunities if driven by panic rather than fundamentals.
A disciplined, diversified approach avoiding knee-jerk reactions is crucial for long-term investing success.
Brown emphasizes asset allocation, accepting downturns, and rebalancing into dips. His firm doesn't sell during volatility. For investors still accumulating assets, continuously contributing allows buying more when markets fall. Having a balanced allocation lets retirees rebalance into downturns.
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Additional Materials
Counterarguments
- While experts anticipate a 25 basis point rate cut, it's possible that the Fed may decide to hold rates steady if they perceive the economy to be more resilient than expected.
- A 50 basis point cut, while seen as unlikely, could be considered if there are other signs of economic weakness beyond the job market.
- The market's reaction to a rate cut could be mixed or neutral, as some investors might have already priced in the cut or may be concerned about underlying economic issues that prompted the cut.
- An "emergency" cut might be viewed positively if investors believe it will effectively support the economy and prevent a recession.
- While diversification is generally prudent, there may be periods where concentrated investments in certain sectors or themes outperform a diversified approach.
- The success of utilities and financials may not be as unpredictable as suggested if there were underlying economic or regulatory changes that favored these sectors.
- Historical patterns, such as highs in December, may not hold in the future due to changing market dynamics and external factors.
- Volatility spikes, like a 65 VIX reading, could also be indicative of fundamental issues in the market, not just panic-driven opportunities.
- A disciplined, diversified approach may not always lead to success if it fails to adapt to changing market conditions or ignores new investment opportunities.
- Asset allocation strategies may need to be more dynamic to respond to rapid changes in the market rather than simply rebalancing into dips.
- Continuously contributing to falling markets can be problematic if the market downturn reflects long-term structural issues rather than short-term fluctuations.
- Retirees rebalancing into downturns may face sequence of returns risk, which could jeopardize their retirement funds if not carefully managed.
Actionables
- You can create a "market mood" journal to track your emotional responses to financial news and learn to distinguish between panic-driven and fundamental-driven market movements. Start by noting down how you feel when you hear about market changes, like interest rate cuts or sector surges. Over time, you'll be able to see patterns in your reactions and compare them to actual market outcomes, helping you make more informed decisions rather than knee-jerk reactions.
- Set up automatic monthly contributions to your investment accounts to take advantage of dollar-cost averaging. By consistently investing a fixed amount, you'll purchase more shares when prices are low and fewer when they're high, which can help mitigate the risk of market timing and potentially lower the average cost per share over time.
- Develop a simple rebalancing alert system using a spreadsheet or financial app that tracks your asset allocation. Input your desired allocation percentages for different asset classes (like stocks, bonds, and cash) and set alerts for when your portfolio deviates from these targets by a predetermined threshold, such as 5%. This system will prompt you to rebalance your investments, ensuring you stick to a disciplined strategy and potentially buy low during market dips.
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The Upcoming Fed Meeting and Interest Rate Decisions
Financial experts eagerly await the Federal Reserve's meeting to see how they will adjust interest rates to guide the economy.
The Federal Reserve is widely expected to implement a 25 basis point rate cut at their upcoming meeting.
Nicole points out the upcoming Fed meeting with high expectations for a rate cut, while Brown confirms there will likely be a 25 basis point decrease. He assures that unless a significant downturn occurs in the jobs market, an aggressive 50 basis point cut is improbable.
Based on the current economic data, a more aggressive 50 basis point cut is unlikely to be necessary unless there is a major unexpected downturn in the jobs market.
Brown further stresses that a 50 basis point reduction would only be considered if there was a catastrophic jobs number, which he strongly believes is unlikely to happen.
The context and reasoning behind the rate cut will determine how the markets react.
Lapin underscores the significance of understanding why the cut is happening and how this knowledge will shape market reactions.
If the cut is viewed as a "celebratory" move due to tame inflation and a solid labor market, the markets may respond positively.
Brown and Cox describe the anticipatory rate cut as "celebratory." This perspectiv ...
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The Upcoming Fed Meeting and Interest Rate Decisions
Additional Materials
Clarifications
- A 25 basis point rate cut is a reduction in interest rates by 0.25%. It is a common adjustment made by central banks like the Federal Reserve to influence borrowing costs and stimulate or cool down economic activity. In this context, a 25 basis point rate cut indicates a relatively modest adjustment to monetary policy.
- A 50 basis point cut in the context of interest rates means a reduction of 0.50%, where one basis point is equal to 0.01%. It signifies a more significant decrease compared to a standard 25 basis point cut. This type of cut is considered more aggressive and is typically implemented in response to more severe economic conditions or to provide a stronger stimulus to the economy.
- The context and reasoning behind a rate cut by the Federal Reserve typically involve assessing economic conditions like inflation, employment trends, and overall economic growth. The Fed may lower interest rates to stimulate borrowing and spending when the economy needs a boost or to prevent a potential recession. Understanding why the rate cut is being considered helps investors and analysts anticipate how the markets might react to the Fed's decision. The Fed's communication about the rationale behind the rate cut is crucial for shaping market expectations and reactions.
- A "celebratory" rate cut typically occurs when the central bank reduces interest rates in response to positive economic indicators like low inflation and a strong job market. This type of rate cut is viewed as a proactive measure to sustain economic growth and is often met with optimism by investors and markets. It signifies that the central bank is confident in the economy's resilience and aims to support continued expansion without any imminent threats of recession.
- An "emergency" measure ...
Counterarguments
- The expectation of a 25 basis point rate cut may not fully account for last-minute economic data or global events that could influence the Fed's decision.
- The assumption that a 50 basis point cut is unlikely may be too rigid, as economic indicators can change rapidly, necessitating a different response than currently anticipated.
- The belief that a catastrophic jobs number is improbable may underestimate the volatility of the job market and external factors that could impact employment.
- Market reactions to rate cuts can be unpredictable, and even a cut seen as "celebratory" could be met with negative responses if investors interpret it differently.
- The dichotomy between "celebratory" and "emergency" rate cuts may b ...
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The Current State of the Markets and Investment Sectors
Josh Brown and Nicole Lapin engage in a spirited discussion about investment strategies, warning against getting too caught up in sector hype and advocating for diversification.
Certain sectors and stocks have seen significant runups in recent years, leading to concerns about potential bubbles.
Josh Brown discusses his experience with Nvidia stock, describing how he's been trimming his holdings even as prices rose. This approach might seem counterintuitive, but Brown is cautious about blindly following "hot" sectors driven by technologies like AI and machine learning. These have led to strong returns for companies like Nvidia. However, Brown indicates that chasing these stories might lead to disappointment, as seen with companies such as Supermicro, which experienced more than a 50% drop from its high amid scrutiny.
While technologies like AI and machine learning have driven strong returns in stocks like Nvidia, blindly chasing those "hot" sectors and stories often leads to disappointment.
Brown expresses skepticism about jumping into technology stocks just because they've been strong performers in recent years. He warns that the AI sector has already seen turbulence, and investors should take caution.
Rather than trying to time the market or identify the next big winner, a diversified portfolio approach is generally more prudent.
Brown suggests that a diversified portfolio is a more sensible approach than trying to time the market or pinpoint the next big winner. This strategy helps mitigate risk and prevents overcommitment to a particular sector based on its recent performance, which may not predict future success.
Despite the hype around certain industries, there are solid investment opportunities in more traditional sectors as well.
Nicole Lapin draws attention to the potential in more traditional sectors by suggesting investors look at utilities.
Stocks in utilities, financials, and other "boring" areas have outperformed this year, demonstrating the unpredictability of sector performance.
Ec ...
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The Current State of the Markets and Investment Sectors
Additional Materials
Clarifications
- The "52-week high" of a stock is the highest price it has traded at over the past year, indicating recent performance. The "S&P 500" is a stock market index that measures the performance of 500 large companies listed on stock exchanges in the United States. A "diversified portfolio" is a collection of investments across different asset classes to spread risk and potentially increase returns.
- Certain sectors are labeled as "hot" when they are experiencing significant growth, attracting a lot of investor attention and showing strong performance. On the other hand, sectors considered "boring" are often stable, mature industries that may not have the same level of excitement or rapid growth potential as the "hot" sectors. The classification of sectors as "hot" or "boring" can change over time based on market trends, investor sentiment, and economic conditions. It's important for investors to understand these distinctions to make informed decisions about where to allocate their funds.
- "Chasing stories" in investment sectors refers to investors following trends or narratives surrounding specific industries or technologies without fully understanding the risks or fundamentals behind them. It involves investing based on hype or popular narratives rather than thorough research or analysis. This behavior can lead to buying into sectors solely because they are currently performing well, without considering the long-term sustainability of those gains. Ultimately ...
Counterarguments
- While diversification is generally prudent, over-diversification can dilute potential gains and may not always lead to better outcomes than a more focused strategy.
- Sector-specific investing can yield significant returns if an investor has specialized knowledge or insights into the growth potential of that sector.
- The success of "boring" sectors like utilities and financials in a given year does not necessarily indicate a trend or predict future performance; it could be an anomaly.
- Timing the market is difficult, but not impossible, and some investors have been successful with this strategy, especially when using sophisticated algorithms and data analysis.
- Traditional sectors, while stable, may not offer the same growth potential as emerging technologies, which could lead to missed opportunities for investors focusing too much on traditional areas.
- The unpredictability of sector performance can sometimes be mitigated by in-depth research and analys ...
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Strategies for Navigating Market Volatility and Uncertainty
Nicole Lapin, Jessica Rabe, and Josh Brown discuss strategies for dealing with market volatility, highlighting historical trends and the importance of maintaining a disciplined investment approach.
Historical data shows that the markets have tended to reach their annual highs in the month of December around 50% of the time.
While historical data indicates that December has produced market highs for the year roughly 50% of the time over the past 100 years, Nicole Lapin and Jessica Rabe at DataTrek emphasize that this pattern is not a guarantee. Investors should avoid banking on the markets ending the year on a high note, considering the unpredictability inherent in investing.
Market volatility, as measured by the VIX index, often peaks in the month of August.
The VIX index, reflecting market volatility, typically sees a peak in August. There was a recent example where the VIX reached 65 three Mondays before the discussion, suggesting a seasonal pattern. Josh Brown points out that historically, high VIX levels, such as 60, often signal compelling buying opportunities as they may indicate panic selling or overreaction, rather than a true downturn in market fundamentals. He mentioned an instance where a minor jobs report and hedge fund issues with the Japanese yen spiked volatility.
Maintaining a disciplined, diversified investment approach and avoiding knee-jerk reactions to market swings is crucial for long-term success.
Josh Brown emphasizes the importance of asset allocation and expecting downturns as part of an investment strategy. Brown mentions his firm uses rebalancing strategies to capitalize on market dips and views fluctuations as opportunities—a testimony to a disciplined and diversified investment approach. He stresses that corrections are necessary for crea ...
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Strategies for Navigating Market Volatility and Uncertainty
Additional Materials
Clarifications
- The VIX index, also known as the CBOE Volatility Index, measures market expectations of near-term volatility conveyed by S&P 500 stock index option prices. It is often referred to as the "fear gauge" as it tends to rise when investors are more concerned about potential market turbulence. High VIX levels can indicate increased market uncertainty and fear, potentially signaling a higher likelihood of significant market swings. Understanding the VIX can help investors gauge market sentiment and make informed decisions about risk management and investment strategies.
- Rebalancing strategies in investment involve adjusting the mix of assets in a portfolio to maintain the desired level of risk and return. This typically involves selling assets that have performed well and buying assets that have underperformed to bring the portfolio back to its target allocation. By regularly rebalancing, investors can control risk and potentially enhance returns over the long term. It is a proactive approach to ensure that the portfolio aligns with the investor's financial goals and risk tolerance.
- "Dry powder" in investing refers to holding cash or highly liquid assets that are readily available to deploy when investment opportunities arise, especially during market downturns. It allows investors to take advantage of favorable market conditions by having the financial resources to make strategic investments when other assets may be undervalued. This concept is often used to describe a deliberate strategy of keeping a portion of one's ...
Counterarguments
- Historical patterns, such as markets reaching annual highs in December, may not be reliable indicators for future market behavior due to changing market dynamics and external factors.
- The VIX index is only one measure of market volatility and may not capture all aspects of market uncertainty or investor sentiment.
- High VIX levels indicating buying opportunities can be misleading, as they may also precede further market declines; timing the market based on volatility indicators can be risky.
- A disciplined, diversified investment approach is generally sound, but it may not be suitable for all investors, especially those with different risk tolerances or financial situations.
- Knee-jerk reactions to market swings can sometimes be beneficial if they are based on sound research and a clear understanding of changing market conditions.
- Asset allocation and rebalancing strategies must be tailored to individual needs and may not be one-size-fits-all; what works for one investor may not work for another.
- The advice to continuously contribute to retirement or brokerage accounts assumes that individuals have the financial capacity to do so, which may no ...
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