US stocks (^DJI,^GSPC, ^IXIC) are eyeing a recovery this week after last week’s sell-off. Commonwealth Financial Network CIO Brad McMillan joins Morning Brief to discuss the state of the market as the Federal Reserve gears up for an interest rate cut at its September meeting.
McMillan expects more market volatility ahead, yet, it will be “constrained” for two reasons: a slowing economy and an interest rate cut. While the economy is slowing, McMillan does not see a looming recession, and as the Federal Reserve starts easing interest rates, the market will have to adjust.
He explains that the market “is still looking to adjust to a more defensive posture,” as US economic growth continues to slow. He encourages investors to take defensive positions that still offer opportunities for growth. He specifically points to the real estate sector (XLRE), adding that it is an area of the market well-positioned for an interest rate cut.
As the market rotates away from Big Tech, McMillan believes there is some downside risk: “A lot of what has been what’s been driving this is the idea that the AI tree is going to grow to the sky, and we’re starting to get some realization. You’re starting to see some numbers out there that say, no, that’s not going to happen.”
For more expert insight and the latest market action, click here to watch this full episode of Morning Brief.
This post was written by Melanie Riehl
Video Transcript
It’s tied now for today’s strategy session.
Our next guest seeing of volatility continuing to ramp up in the coming months.
Even S ECs, no signs at least for now of a recession ahead.
Joining us, we wanna bring in Brad mcmillan.
He’s Commonwealth Financial Networks, Chief Investment Officer Brad.
I it’s great to see you.
So here we are today looking at green on the screen coming off.
What was a very, very tumultuous week here for the markets when you take a look at that roller coaster ride?
Is it just getting started?
And why?
Good morning Sean.
I think we’re gonna have some volatility here going forward.
I don’t expect, I expect to see more bounces ahead.
But I think the important thing here is that volatility is going to be constrained because you got two things going on here.
First of all, the economy is basically doing ok, it’s slowing down, but I don’t see a recession in the immediate future.
And second of all, even though the market is going back and forth on how big the rate cuts are.
The fact of the matter is we’re going to see one.
So I think both of those things.
It’s the market trying to come to grips with that so volatility, but we’re still OK. OK. And so even a mid volatility there seems like for many people who are looking for the buying opportunities out there, more of this mentality for buying on the dips.
Where are those dip, buying sectors, opportunities that you’re looking across and, and keeping on your notepad?
I think the thing to keep in mind here is the market is still looking to adjust to a more defensive posture.
We’re still gonna have growth but it’s gonna be slower and we’re gonna see shifting from the fed raising or holding to cutting.
So I think because of that, you want to be looking at staples that’s defensive, but it still offers the opportunity for growth and it offers interest rate sensitivity.
You wanna look at real estate, real estate has gotten hit hard and for very good reasons with rates coming back down, that starts to make a little bit more sense and then safety, safety and yield.
You look at utilities, I think you’re defensive today.
But I think the reason that that works is because it plays into the interest rates rather than a recession.
What, what does that then tell us about technology?
We talk about the fact that we’re expecting this rotation, ju ju just in terms of leadership, I guess, underperformance relative to the rest of the market.
What are you expecting to see there?
And how should then investors further diversify or what do you still find if anything attractive within tech?
Well, tech has been a big play on growth.
It’s been an A I story.
I mean, a lot of what has been, what has been driving this is the idea that the A I tree is gonna grow to the sky and we’re starting to get some realization, you’re starting to see some numbers out there that say no, that’s not gonna happen.
So a lot of this is investment driven all of these companies.
So I think there is some downside risk there.
But at the same time, these are very solid businesses.
So I think it is relative under performance rather than a collapse.
And I think as we move into this kind of environment, I think dividends are going to become more important, which also points more to a value rotation which companies are perhaps the most vulnerable to, to pull back and and further pull back on the realization that this A I tree does not grow to the sky if you will.
Well, when you look at valuations and you look at recent performance, I think NVIDIA is certainly one that comes to mind.
Fantastic company, wonderful technology is everybody gonna need to buy 50% more of their product every year for the next 10.
I’m not so sure.
And because of that, when you look at the fact that um the price is to perfection.
You can be cautious about the stock with it while still acknowledging it’s a terrific company.
What type of pull back then?
Are, are you expecting an NVIDIA O over that longer term?
Perhaps because of the valuation call?
I haven’t actually done the numbers to be honest with you.
So I can’t give you a target.
But I think if we saw evaluations and growth rates normalized, that would necessarily imply we’re gonna see at least slower growth and quite possibly a pullback.