Market Shifts As Fed Rate Cut Looms: Tech, Utilities And Consumer Staples In Focus

*Analyzing the markets with Richie Naso, a Wall Street veteran of over 40 years and former member of the NYSE.

DJIA 52-wk: +19.57% YTD: +9.83% Wkly: +2.80%

S&P 500 52-wk: +26.42% YTD: +17.95% Wky: +4.02%

NASDAQ 52-wk: +29.00% YTD: +17.80% Wkly: +5.95%

Nvida: 52-wk: +171.30% YTD: +140.51% Wkly:15.82%

On Wall Street is for the Fed to deliver the first cut to interest rates in more than four years on Wednesday, and traders are rekindling hopes it may offer bigger-than-usual relief.

On Friday, through traders were seeing roughly a coin flip’s chance that the Fed could deliver a large cut of half of a percentage point, instead of a more traditional quarter of a point, according to data from CME Group.

“Our cycle model, the Regime Indicator, just shifted from Upturn to Downturn,” wrote the stock market strategists at BofA Securities this past week. That had my attention, even though my own model, Tactical Sloth, calls for ignoring market cycles. I don’t do sector or theme rotations. I’ll do a tire rotation, but grudgingly.

Sector swappers are abuzz about power companies outrunning artificial-intelligence giants since the end of June. The iShares U.S. Utilities

IDU

1.29%

exchange-traded fund has returned 12%, while the iShares U.S. Technology

IYW

0.53%

ETF has slipped 4%. For an S&P 500

SPX

0.54%

fundholder, it’s no big whoop. The stuff that’s working has outweighed the stuff that isn’t, and the fund has returned a couple of percent over that stretch. For more-tactical investors, it raises the question of whether it’s too late to take tech profits and buy something boring.

It isn’t too late, according to BofA. While tech seems 'egregiously expensive,' its earnings growth, though still impressive, is slowing. The S&P 500 carries “extreme concentration risk,” with Apple

AAPL

-0.12%

, Microsoft

MSFT

0.84%

Nvidia, Alphabet, and Amazon.com together making up more than a quarter of the index. Volatility is likely to be elevated in years ahead, says BofA, and for that, investors will want quality, stability, and income. Over the past decade, dividends have contributed just 16% of returns, but going forward, they could chip in something closer to their historical average of 40%.

That favors utilities, which pay close to 3% in dividends. They remain cheaper than average relative to the S&P 500. And BofA notes that utilities aren’t as sleepy as billed; since 1980, they’ve returned 11% a year, close to the Nasdaq’s 12%. Utilities are quiet tech beneficiaries, especially as AI data centers create soaring demand for power.

Could also be a problem. The index now trades at 21.1 times 12-month forward earnings, a level that has recently been near a ceiling on the market. “I look at 21 times earnings, and then I look at slowing growth, failing yields but not falling that fast, and then extremely aggressive earnings increases and AI enthusiasm, and I’d feel a lot more comfortable with this market reading at 19 times,” says Sevens Report’s Tom Essaye.

THIS WEEKS INTERESTING SECTOR PIECE, CONSUMER STAPLES:

Accord to Barron’s Consumer staple stocks are looking pricey after they have taken off. It’s Time to Sell.

The Consumer Staples Select Sector SPDR exchange-traded fund, home to names such as Procter & Gamble

PG

0.35%

, Colgate-Palmolive

CL

-0.57%

, Walmart

WMT

1.18%

, Coca-Cola

KO

0.94%

, and PepsiCo, is up almost 8% from a multiweek low in early August, and it’s outperformed the S&P 500

SPX

0.54%

by 5.9 percentage points over the past three months.

It’s not hard to see why. Investors want the safety of staples, whose sales and earnings don’t take much of a hit when consumer spending slows down and when there are concerns about the health of the economy. And right now there are lots of concerns about the economy. The number of jobs added each month has declined, while growth in several sectors has slowed down. True, the Federal Reserve will likely cut interest rates this month to keep growth alive, but the positive economic impact won’t be felt very soon.

But sometimes that fear can push demand for staples too far. This week, the Consumer Staples ETF rose to a level that was 10.6% above its 200-day moving average, a level it hit on just two other occasions since 2013, not including those that occurred within a week of each other. In both previous cases, staples went on to drop more than 5% over the following few weeks. Some long-term investors may find such a mild short-term drop acceptable, but it isn’t ideal, and staples are still likely to underperform for a while.

Those price concerns are backed up by fundamentals. For one, large staples companies don’t offer much profit growth. They’re mature and have grown into the markets they operate in. Even when economic growth accelerates, consumers aren’t significantly ramping up the rate at which they buy household items, groceries, and toothpaste. So when staples stocks reach a certain valuation, there just isn’t enough growth to justify the price investors have to pay. Instead, they were bought because investors were scared, not betting on the future, and the stocks will pay the price when that fear dissipates.

Nor are the dividends offered by staples enough to justify the move. At current levels, the 12-month forward dividend yield for the Staples ETF is 2.5%, below the 3.6% yield offered by the ultrasafe 10-year Treasury bond.

Of course, staples dividends will grow, likely at a rate of 7% for the next two years, according to analyst estimates on FactSet. If dividends grow at that rate for the next decade, the average annual yield for the fund would still be only 3.8%, according to Barron’s calculations, not much additional return over bonds despite the higher risk.

“It’s not an opportunistic time to buy them here,” says Ellen Hazen, chief market strategist at F.L. Putnam Investment Management, of staples stocks.

Sure, investors who have ridden the gains and collected the dividends could sit tight, but there’s a strong case to sell and look for more attractive opportunities.

If you can find them.

I’d proceed with extreme caution this week. A quarter point rate cut looks to be a lock, futures-market pricing now showing 43% odds of a half-percentage point reduction. Either way a market at this level could react in a negative fashion.

DATA: Barron’s print edition page 28 9/16/24 Market Week Jacob Sonenshine

Paragraph: one, two & three NYT print edition 9/14/24 page B2 The AP

Paragraph: four Barron’s print edition page 13 Tech Stocks Look Pricey. Jack Hough

Paragraph: five Barron’s print edition page 28 The Trader Jacob Sonenshine

Paragraph: six Barron’s print edition 9/16/24 page 29 Steer Clear of Staples. Jacob Sonnenshine

This content (“Content”) is produced by Richard Naso. The Content represents only the views and opinions of Mr. Naso who is compensated by TradeZero for producing it. Mr. Naso’s trading experiences and accomplishments are unique, and your trading results may vary substantially from his. TradeZero does not endorse the Content and makes no representations or warranties with respect to the accuracy of the Content or information available through any referenced or linked third party sites. The Content has been made available for informational and educational purposes only and should not be considered trading or investment advice or a recommendation as to any security.

Trading securities can involve high risk and potential loss of funds. Furthermore, trading on margin is for experienced investors and traders only as the amount you may lose can be greater than your initial investment. Likewise, short selling as a securities trading strategy is extremely risky and can lead to potentially unlimited losses. Options trading is not suitable for all investors as it can involve risk that may expose investors to significant losses. Please read the Characteristics and Risk of Standardized Options, also known as the options disclosure document (ODD) at

https://www.theocc.com/Company-Information/Documents-and-Archives/Options-Disclosur e-Document before deciding to engage in options trading.

TradeZero provides self-directed brokerage accounts to customers through its operating affiliates: TradeZero America, Inc., a United States broker dealer, registered with the Securities and Exchange Commission (SEC) and member of the Financial Industry Regulatory Authority (FINRA) and the Securities Investor Protection Corporation (SIPC); TradeZero, Inc., a Bahamian broker dealer, registered with the Securities Commission of the Bahamas; and TradeZero Canada Securities ULC, a Canadian broker dealer, member firm of the Canadian Industry Regulatory Organization (CIRO) and member of the Canadian Investor Protection Fund (CIPF).