Leafing through the second-half outlooks and thought pieces, Shares was struck by a piece not from one of the serried ranks of Wall Street or Square Mile analysts but by a strategist at Boston-based MFS Investment Managers.

Portfolio manager and global investment strategist Robert M. Almeida, Jr suggests investors are too wrapped in the timing and size of Federal Reserve rate cuts and should be looking at the fundamentals of the businesses they own instead.

‘Are ‘When will the first rate cut be?’ and ‘How many times will the Fed cut in 2024?’ the right questions? And do the answers really matter? In 2028, when you’re digesting a five-year attribution analysis of a portfolio, will the timing of that first rate cut be a factor?,’ asks Almeida.

In any case, says the manager, rate cuts are not a panacea for broken businesses: what investors should really be looking at are the drivers of the companies they own and whether rate cuts will help.

‘Perhaps a more relevant question could be why might central banks need to loosen monetary policy? More importantly, if prices of goods and services are falling, whose revenue is being negatively impacted? Are their costs falling too? What will this mean for corporate profits compared with what has been discounted in stock prices?,’ asks Almeida.

‘While the market is happily applying a higher multiple to risk assets because of a potentially lower discount rate, it’s ignoring what mounting weakness may tell us about company fundamentals, and that’s what matters most to asset values.’

Almeida compares the current period with previous peaks in Fed Funds in 2001 and 2008 and the aftermath of the ensuing rate cuts.

In 2001, the Fed was caught out by a sharp growth slowdown and cut rates aggressively from 6% to 1% resulting in a 40% setback for the S&P 500, while from their peak in early 2008 the Fed again cut rates aggressively from 4.25% and ultimately had to hold at zero, but not before S&P 500 had almost halved.

‘I’m not suggesting we’re facing a drawdown of that magnitude. I’m merely pointing out that central bank interest rate cuts are not a near-term panacea for disappointing operating results,’ offers the manager.

‘While valuations are not at 1990s extremes - which were the highest in US history - analysts’ expectations are for high, single-digit profit growth. Anything that comes in below that will prove disappointing to investors who have alternatives beyond the equity market.’

Here, we beg to differ. On a cyclically-adjusted PE (price-to-earnings) basis, valuations are not just at 1990s extremes but marginally higher, so some stock-taking is surely in order.

‹ Previous2024-08-01Next ›