US economy is in 'middling' phase as Fed fights inflation

US market averages (^DJI, ^IXIC, ^GSPC) closed Monday's session higher after last week's sell-off. NorthEnd Private Wealth CIO Alex McGrath joins Market Domination Overtime to discuss the state of the market ahead of the Federal Reserve's first interest rate cut.

"We're coming off the back end of a pretty long inflation battle here with rates being at historic peaks. And, you know, you look at the underlying macro data that we're staring at every day, and it's not exceptional, but it's not bad either. It's just kind of in this middling phase. And certainly a much better start to this week than we had last week," McGrath explains.

He argues that the Fed's cuts will not immediately come to the rescue as its cuts will likely "take time to work through." He adds, "I don't think you have to look much further than a lot of the numbers we've seen from the consumer discretionary companies, where they're slashing forecast because the demand just isn't there like it has been. And that's not entirely surprising."

While inflation is down, he argues, "the problem is there's 20 to 30% built up in there that's still increasing on a month-over-month basis. And it's just the consumer's got to get tapped out at some point. And I'm not saying that's like a death and destruction phase coming, but you are starting to see inklings of that." However, easing rates should help counter that issue.

Moving forward, McGrath believes the equities market "could be a bit rocky," so investors should take more of a defensive approach and take a position in sectors like industrials (XLI), utilities (XLU), healthcare (XLV), real estate (XLRE), and consumer staples (XLP). He also recommends semiconductors, calling them "the new industrial." On the fixed-income side, he argues that "it's probably time to start taking some duration there" as the Fed kicks off its rate easing cycle.

For more expert insight and the latest market action, click here to watch this full episode of Market Domination Overtime.

This post was written by Melanie Riehl

Video Transcript

Our next guest says the consumer is the key to the market puzzle.

Joining us now is Alex mcgrath, North End and private wealth, Cio Alex, it's good to see you.

So you say Alex, I like this, that the, the market you say seems to be mirroring our national mood here.

What, what do you mean by that, Alex?

You know, it, it, you know, we, we're coming off the back end of a pretty long inflation battle here with rates being at historic peaks.

And, you know, you look at the underlying macro data that we're staring at every day and it's not exceptional, but it's not bad either.

It's just kind of in this middling phase and you, you know, certainly a much better start to this week than we had last week.

But you know how much of that was really like recession fears or how much of that was really, you know, we, we certainly favor that had a lot more to do with that jobs number coming the prior Friday and then you had all these whispers coming out, you know, we, you potentially a 50 basis point cut got whispered into a quarter basis point cut and then you had some turmoil there throughout the week and now we seem to be back on track.

So we'll see where it goes.

We're just kind of in this middling spot where, you know, growth isn't fantastic, but it's not bad and, you know, jobs numbers aren't horrific but they're not great.

We're just kind of in this middling situation here.

What's gonna change that, Alex?

What's the next, I mean, is it gonna be the fed?

Is it something else you're looking to?

I would love to say that it's gonna be the fed riding to the rescue.

But, you know, we all know that any kind of cuts or any kind of actions the fed is gonna take or is gonna take time to work through.

And I don't think you have to look much further than a lot of the numbers we've seen from the consumer discretionary companies where they're slash and forecast because the demand just isn't there like it has been.

And that's not entirely surprising.

I know we, we keep hearing, you know, inflation is way down, inflation is way down.

And that, I mean, certainly from a year over year perspective, that is absolutely true.

But the problem is, is, you know, there's 20 or 30% built up in there that's still increasing on a month, over month basis.

And it's just, you know, the consumers gotta get tapped out at some point.

And, you know, I I'm not saying that's like a death and destruction phase coming, but you are starting to see inklings of that and, you know, the fed lowering rates will help that down the road.

But I don't know that there's any like super immediate fix that they can do from the eccles building in DC.

So, Alex, you know, if that's your view of the fed, the economy, uh, the consumer, um, how does that sort of inform shape your view of the markets?

Alex?

How do you want to be positioned in the equity market?

Well, certainly, certainly we feel like the next couple of months here could be a bit rocky.

That's, you know, not again, not death and destruction, but it's just more taking a, you know, tactically defensive approach, you know, going out and grabbing utilities, industrial health care, real estate consumer staples, you know, typically defensive positions like that, that are interest rate sensitive should be a good spot to sit in right now just because with interest rates going back, potentially going backwards, you know, and those defensive positions should buoy a lot of those equity or that section of the equity market.

And so that's kind of where we've started to shift some things.

That doesn't mean we're like wholesale abandoning the large tech growth trade, but it's just like repositioning some of the edges to get a little bit more exposure into those more defensive positions.

Gotcha.

Where in tech still makes sense to you here.

You know, certainly I would say to us, you know, semiconductors are really the new industrial, in our opinion, you know, that those are just pieces that go into everything, you know, where you're looking.

So that, that would be the number one spot, you know, like, certainly, like, you know, the large cap social media companies, I don't really have a ton of thoughts there, but, you know, for us on the tech side, it's all about semiconductors.

What about the fixed income investors who are listening right now?

Alex, what's your guidance?

Oh, that's, that's been, that's been an interesting conundrum for the last two years there.

Um You know, certainly, you know, when all this started floating rate looked great, you know, the shorter end of the curve was fantastic because you were participating in all of those interest rate hikes along the way, you know, getting upwards of 6% on basically market neutral money as we start to look at rates coming backwards.

You know, it's, it's probably time to start taking some duration there.

And, you know, we've started to do that a little bit not going way out on the curve maybe in that 1 to 5 range.

And, you know, so that's kind of where we're sitting on the fixed income side.

But, you know, floating rate has been great this whole time.

But everybody that's sitting in those floating rate and money markets, it's probably start probably time to start moving that duration, play out a little bit and again, don't, I'm not saying play the, you know, 10 to 15 or 20 to 30 curve, but certainly starting to bump that out a little bit, should pay some dividends for people.

And finally, Alex, I know you're watching the consumer real closely here.

What, what are you gonna be sort of focusing on metric wise in order to figure out the health of the consumer going forward?

You certainly keeping an eye on retail sales.

I know the last measure we got was fantastic on that front.

So we'll kind of see what the next look looks like and as well as the revision, but it's really for us watching the consumer discretionary spending space and those consumer discretionary earnings report to try to get a good idea of what that looks like and that will certainly have that those are the number one things that we're looking at as it concerns the consumer going forward.

Like, what does that spend look like?

And how does that translate into the next couple of quarters?

Because that ultimately will depend, will alter our asset allocations.

Alex.

Thanks a lot.

Appreciate it.

No, thank you for having me guys.