Microchip Companies Stumbled Over Government Policy
A message from our Founder, Chris Cordoba - A CFP Professional
In light of the breaking news Sunday, about President Biden stepping out of the 2024 Presidential Election, our entire CRAdvisor Team attended a webinar this Monday morning at 8:00AM, by Dr. David Kelly of JP Morgan Asset Management entitled: The Investment Implications of the President’s Withdrawal.
While the only thing certain about the markets is uncertainty itself, at this time Dr. Kelley didn't highlight any particular immediate threat that would give us cause for concern to take any drastic investment redirection. He did, however, comment on some other considerations from an economic perspective on what may happen in the months ahead in varying scenarios and he highlighted the opportunity to revisit the increase in valuation of large mega-cap stocks versus other assets classes. This is not an election centered concern, but a general investment consideration anytime we have a run-up in the markets. In part this will be discussed at our upcoming Half-Time Market Report and Economic Update later this month.
At this time, we stand confidently in our investment approach pertaining to the use of a custom bucket plan philosophy (see video) for each of our clients, to help plan for any uncertain events in the future. This helps us comfortably hold firm to a sound a disciplined long term investment approach, regardless of what short term concerns may take please in the near term - even a presidential election. That said, if you still have any questions or concerns, please feel free to discuss them with your CRAdvisor Team at your next review. Or contact us at any time. We are always here for you.
Click here to register for the Market Update - Special Investor Session with Craig Columbus, where this topic will be discussed in further detail.
Thank you for your trust and confidence. We'll stay in communication as more pertinent news continues to develop.
Sincerely,
Christian Cordoba, CFP
Founder
California Retirement Advisors
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The Markets
The rate cut stars are aligning.
For the last year, borrowing costs in the United States have remained relatively high as the U.S. Federal Reserve (Fed) waited for economic data to show that inflation was on track to reach the Fed’s two percent target. Now, we may finally be on the cusp of lower rates.
“The Fed’s preferred inflation gauge has eased to 2.6 [percent], not far off its 2 [percent] target, and the once overheated labor market has cooled to pre-pandemic levels. The rebalancing has been accompanied by moderation in consumer spending, as high prices and borrowing costs tamp demand and thus price pressures,” reported Victoria Cavaliere of Bloomberg.
Last week, Fed Chair Jerome Powell told the Economic Club of Washington D.C., “…if you wait until inflation gets all the way down to 2 [percent], you probably waited too long…Our test has been that we wanted to have greater confidence that inflation was moving sustainably down toward our 2 percent target. What increases that confidence is more good inflation data and, lately here, we have been getting some of that.”
Few anticipate the Fed will lower the federal funds rate at its July meeting, but the outlook for September is good. The probability of a September rate cut was above 90 percent last week, according to the CME FedWatch.
Changing rate expectations disrupted stock markets, last week. Investors moved from big technology firms into smaller companies that tend to perform better when rates are lower. Rita Nazareth of Bloomberg explained that the market experienced, “a ‘rotation’ that saw investors trimming positions on this year’s winners in favor of laggards. Underpinning that trade were bets the 2024 rally would broaden out of megacaps as the Federal Reserve cuts rates.”
By the end of the week, the Standard & Poor’s 500 Index was down about 2.0 percent and the Nasdaq Composite had fallen about 3.7 percent. The Dow Jones Industrial Average fared better, finishing the week in positive territory, reported Alex Harring and Jesse Pound of CNBC. Yields on U.S. Treasuries were mixed over the week.
S&P 500, Dow Jones Global ex-US, Gold, Bloomberg Commodity Index returns exclude reinvested dividends (gold does not pay a dividend) and the three-, five-, and 10-year returns are annualized; and the 10-year Treasury Note is simply the yield at the close of the day on each of the historical time periods. Sources: Yahoo! Finance; MarketWatch; djindexes.com; U.S. Treasury; London Bullion Market Association. Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly. N/A means not applicable.
Microchip Companies Stumbled Over Government Policy
In general, one aim of governments in democratic countries is to implement policies that promote solid and sustainable economic growth. Sometimes, a policy change—or the possibility of one—will ripple through financial markets. Last week, we saw two examples of this as companies that have benefited from enthusiasm around artificial intelligence saw their share prices drop sharply when it appeared that U.S. government policy might change.
1. Stricter limits could be imposed on some exports to China. In one case, a potential change in government policy caused the share price of a Dutch company to drop, reported Adam Clark of Barron’s. The company produces lithography machines that are necessary for semiconductor manufacturing. The company’s solid second quarter earnings report was overshadowed by news that President Biden may impose new restrictions on exports to China. Clark reported that the administration:
“…is considering more severe trade restrictions on exports to China if companies…continue selling chip-making machinery to the country. While the [lithography machinery] company is already restricted from selling its most advanced machines to Chinese customers, [the company] still generated 49% of its revenue from China in the second quarter, as buyers looked to stock up on older machinery.”
2. The United States’ relationship with Taiwan may change. In an interview with Bloomberg Businessweek, presidential candidate Donald Trump was asked about the United States’ relationship with Taiwan. He answered, “They did take about 100 [percent] of our chip business. I think, Taiwan should pay us for defense.”
After the remarks became public, the share price of Taiwan’s largest company—the world's largest maker of advanced chips—tumbled, reported George Glover of Barron’s. The share price fell even though the company had beaten quarterly estimates and lifted 2024 revenue projections, reported Jane Lanhee Lee of Bloomberg.
Other chip companies’ stocks moved lower, too, on concerns that a change in U.S. policy could result in new supply chain disruptions. “China’s ruling Communist Party has vowed to ‘reunify’ with Taiwan and has refused to rule out using military force to take back control of the country,” reported Glover.
It can be dismaying when the value of a stock or stock market index moves lower. However, falling share prices sometimes have silver linings. They sometimes create opportunities to invest in companies with solid fundamentals at attractive prices.
Weekly Inspiration
“It's not what you look at that matters, it's what you see.”
―Henry David Thoreau, author
Best Regards,
California Retirement Advisors