Don’t Fight the Fed

What is it? 

The Fed has been raising rates and is projected to continue that this month. The stock market has felt the pain of those interest rate hikes. 

“The Nasdaq Composite (^IXIC) notched a 2.1% gain Wednesday, ending a seven-day losing stretch that had been frustrating the buy-the-dip crowd once again.”*

We don’t believe that a minor bounce will be sustained unless economic conditions change. 

“Problem is, surging stocks are the last thing the Federal Reserve wants to see.”*

Why does it matter?

“On Wednesday before the opening bell, a report from the Wall Street Journal’s top Fed whisperer Nick Timiraos caught investors’ attention, with the report suggesting another 75 basis point rate hike will be coming from the central bank later this month.”*

This may already be priced into the markets, but raising rates have proven to slow the economy. 

“The simple outline of tighter financial conditions is a stronger U.S. dollar, wider spreads across bond markets, and lower stock prices. Trigger-happy equity bulls should read that sentence again, as they remain, de facto, fighting the Fed.”*

We believe that while the Fed could keep rates at this level or even lower them, the current market conditions are not a great spot to buy in heavily. Because of that, we will be more in line with the Fed’s actions and hold more cash than if in a more favorable environment. 

Chinese Chips

What is it? 

China and the U.S. are competing for high-end technology that could have vast implications for the global economy. 

“The U.S. embargoed Intel chips from going to specific places in China that are and were developing high performance computers, the result was that China designed its chips for its supercomputers.’”**

Why does it matter?

“The U.S. ban on exports to China of Nvidia and AMD’s flagship artificial intelligence chips will create new business opportunities for domestic startups jockeying for a piece of China’s fast-growing data center chip market, industry executives and analysts told Reuters. They need to build a software ecosystem for the chips that can compete with Nvidia’s software platform called CUDA which dominates the AI market.”**

We believe the stock values for Nvidia, AMD, and others within the sector will continue to see an impact of these tensions. Also, while these chips could be sold to the military many will be sold to improve other products and services. 

“Data firm PitchBook shows that those top startups alone have raised $2.5 billion in recent years, including from Shanghai government-backed fund Shanghai Guosheng Group and Hillhouse Capital, which counts several U.S. pension funds and Yale University as limited partners. Other investors include the Chinese entities of big-name Silicon Valley venture capital firms like Sequoia China and Lightspeed China Partners.”**

“Matt Ocko, managing partner of Silicon Valley venture capital firm DCVC. His firm is a major investor in companies that work closely with the U.S. defense and intelligence communities. ‘It’s not acceptable for major pools of U.S. capital to fund AI chips and other PRC (Chinese) military tech that threatens U.S. national security.’”**

Trump era protectionism may have changed the way technology companies operate. It will be interesting to find out who will take advantage of this new chip market going forward.

Other articles we found interesting this week:

Companies Are Buying Large Numbers of Carbon Offsets That Don’t Cut Emissions

Apple’s New iPhone Gets The Worst Reception Since iPhone 6S

Mortgage rates close in on 6%, highest since 2008

Current 401(k) portfolio

Our last portfolio reallocation: 5/19/2022. 

Want more information?

The weekly market insight provides a window into the process we use in our investment management process. At Breakaway, we believe markets are always changing and require a nimble yet data-oriented approach. 

Our process attempts to identify trends and momentum in the financial markets. With that information, we align our clients’ portfolio accordingly in the hope to help our clients accomplish their life goals while attempting to lower the risk of a large drop in their portfolio.

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Sources:

*Jared Blikre. “Why the Fed wants to see a strong dollar and falling stock prices: Morning Brief”. 9/8/2022. Yahoo Finance. https://finance.yahoo.com/news/fed-strong-dollar-falling-stock-prices-morning-brief-093242900.html

**Jan Lanhee Lee and Stephen Nellis. “U.S. ban on Nvidia, AMD chips seen boosting Chinese rivals”. 9/8/2022. Reuters. https://www.reuters.com/technology/us-ban-nvidia-amd-chips-seen-boosting-chinese-rivals-2022-09-08/

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