The Federal Reserve has maintained its expectations for three rate cuts in 2024, but investors are growing wary of the forecast, projecting fewer cuts. Gradient Investments Portfolio Manager Keith Gangl joins Yahoo Finance Live to discuss the market implications.
Gangl notes that "the economy is doing very well," adding that he "didn't see a need for a cut." If the economy maintains its strength, "there's no reason to cut." He highlights that any rate cut decision will remain data-dependent.
Gangl advises investors to "stay diversified" in their portfolios as uncertainty surrounding rate cuts persists. He acknowledges that there has been a broadening out in the market: although the "Magnificent Seven" stocks have driven market gains, "there's other values" outside of those top stocks.
For more expert insight and the latest market action, click here to watch this full episode of Yahoo Finance Live.
Editor's note: This article was written by Angel Smith
Video Transcript
- Stocks taking a breather here, this morning, after reaching record highs last week. Now, investors are looking ahead to this week's PCE data to better gauge the timing of the Fed's first rate cut. Earlier this hour, we spoke to Chicago Fed President, Austan Goolsbee, in a Yahoo Finance exclusive about his outlook for inflation. Let's take a listen.
AUSTAN GOOLSBEE: We're in this murky period where we've got to strike a balance of the dual mandate. The law gives us the dual job of getting prices stabilized and maximizing employment.
- All right, well we want to bring Keith Gangl. He is Gradient Investments' portfolio manager here. Keith, it's great to have you. So we just heard from Goolsbee earlier in the hour saying exactly that on inflation. Also saying that he doesn't want to say a rate cut is on the table in June, he doesn't want to say it's off the table in June. So how are you as an investor listening to the latest commentary that we're getting out from Fed officials and how that's affecting your positioning here over the next couple of months?
KEITH GANGL: Yeah. We're certainly listening to the Fed officials. It's a great interview you had this morning with him. Bostic actually came out over the weekend, too, looking for one Fed cut. So that's Goolsbee looking for three, you're hearing one. So we're kind of in the camp that's going to be more like two, maybe three.
Going into this year, people are looking for six rate cuts. We didn't think that was way too aggressive. Economy is doing very well, unemployment is low, inflation is coming down. We didn't see the need for a cut so that's been dialed back down to three. And we think that could actually be a little less than that.
Now, if the economy stays strong, there's no reason to cut, as long as inflation is coming down as well. So those are a couple of things we want to monitor. So we certainly pay attention to a lot of economic activity but we're also listening to the Fed to see what they're saying.
- And so Keith, with that in mind, what is the playbook for a fewer than expected rate cut scenario for people's portfolios out there?
KEITH GANGL: Yeah, state of versified. I mean, last year was a story about the Magnificent Seven driving the overall market. The markets are up about 25%. Those names, on average, are up about 75%. But even outside of those names, the rest of the market was up about 13%.
So we're starting to see a broadening out of the overall market, which is a very healthy thing. So we think that should be the playbook going forward. You still want to own these Magnificent Sevens, but you probably don't want to own them all. You probably want to own maybe four or five and kind of weight those appropriately.
And then you also look for other values outside of the Magnificent Seven. And that's what you're starting to see. I mean, industrials had a nice run, we think financials are very well placed going forward, we like health care as well. Those are kind of the playbook we have going into year end.
Now, we think it's going to be choppy. I mean, the markets are up 10% to start the year. So we would not be surprised to see a mild correction here of like 5%. But going forward, we think the markets will be higher by year end.
- Keith, what do you think is going to trigger that correction, if we do get a correction of about 5%?
KEITH GANGL: Well, obviously, we just finished, officially. Q1 is done behind the books. But we could see anything. We could see unemployment maybe ticking up. In a few weeks, we'll actually start seeing Q1 earnings. So if those aren't as good as expectations, that could be the catalyst where we see a minor sell-off.
And that would kind of make sense, that time period. We're in April kind of May time frame, that the markets pull back a little bit, and then we kind of get that summer rally going.
- And then Keith, just lastly, while we have you here, as so many are trying to think about what that next area to emerge is. I mean, we've heard so much talk coming into this year about small caps and what the waiting looks like for portfolios at this juncture and for the course of this year. Where are you seeing that play continue to-- are they being leaned into or are investors a little bit wary about that right now?
KEITH GANGL: Yeah, small caps, you got to keep an eye on that, right. Everybody's expecting-- they haven't performed for the last several years so everybody wants to get into the area that hasn't performed, and small caps certainly in that list. Value is another name that's-- a sector that's kind of looked at for underperformance. So of those two, we actually like those large cap value names. We think there's a lot of value there.
Like I said, we like some of these financials and I think large cap value stocks have a lot of those. So that could be an area that does well. As far as small caps, now, the economy still has to remain strong, which we think it will. But we think it's going to slow a little bit.
In a slowing economy, small caps, generally, do better when you're starting to accelerate out of the bottom. And we're not sure we're there yet. So we own some small cap names, we're kind of keeping an eye on, but we're not making a big bet there either.
- Keith Gangl, who is the Gradient Investments portfolio manager. Keith, great to see you this morning. Thanks for taking the time.