This strategist isn't expecting a 50bps cut from the Fed

A Federal Reserve rate cut is anticipated at the September FOMC meeting scheduled for September 17 and 18, but its impact on markets (^DJI, ^IXIC, ^GSPC) remains uncertain. Envestnet Solutions Co-CIO and Group President Dana D'Auria joins Wealth! to discuss her outlook as markets enter a period of uncertainty.

D'Auria emphasizes that the upcoming jobs report will be crucial, noting that Fed Chair Jerome Powell has essentially guaranteed a September interest rate cut in his Jackson Hole speech in August.

"When you get that kind of dovishness, the market thinks 'Wow, maybe it's a 50-basis-point [cut], not a 25.'" The jobs report, she suggests, will help investors gauge the potential magnitude of the rate cut. However, D'Auria tells Yahoo Finance, "Either way, I'm not expecting a 50-basis-point cut."

She advises investors to consider a key question: "Are these rate cuts coming because it's just time... or is it coming because we kind of already are looking out and anticipating some weakness?" D'Auria points out that if weakness is expected, a 25-basis-point cut may not be sufficient, as it has already been priced into markets.

Regarding current investment strategies, D'Auria recommends focusing on "more value-y areas of the market" for long-term growth, such as small-cap stocks (^RUT). However, she stresses that there are no guarantees, and outcomes depend on the economic landing.

For more expert insight and the latest market action, click here to watch this full episode of Wealth!

This post was written by Angel Smith

Video transcript

Dana.

Great to have you back here on Yahoo Finance with us first as we get all of these different readings over the course of this week, which one should take center stage for investors who are watching out for what is historically, a week, month of trading?

Yeah, I think, well, certainly the jobs report is gonna be a, a singular focus, I think really just from the standpoint that, you know, we had our, our fed share come out and more or less guarantee us a, a rate cut in September and when you get that kind of dovishness the market thinks, wow, maybe it's a 50 basis point, not a 25 right.

So, I really, you know, what, what the jobs report is going to be meaningful in terms of, you know, the expectation it sets with the market quite honestly though.

I think either way, I'm not expecting a 50 basis point cut.

I think Powell needed to reassure, he felt that he needed to reassure everyone that the rate cuts are on the way.

You know, there has been shatter that it's been taken too long to begin with.

So, uh, you know, I think it was important and he thought the signaling was important.

I don't think that means we're getting a 50 basis point rate cut, uh, regardless.

So our rate cuts and 25 basis points as it may be and is expected, is that enough to offset what is typically the seasonality that we would see in September?

Yeah, it's a good point and, and you know, the, I mean, obviously no guarantees about anything, but we do tend to see that, you know, there's a big question, I think investors are facing right now, are these rate cuts coming?

Because it's just time, you know, we're high, uh we've defeated inflation, unemployment is still low.

And so it's time to avoid the, the potential for a market correction or a recession or is it coming because we kind of looking out and anticipating some weakness.

And I think, you know, if you, if you fall in the camp of the ladder where you think that there's some weakness coming and that we have to get rate cuts going in order to avoid that weakness, then I think, you know, the 25 basis points may not cut it just from the standpoint that it's already priced in at this point, it's been expected for quite some time now.

So with that in mind, I mean, we've been keeping close tabs on the tech sector.

As historically, we've also seen that be one of the bi the biggest beneficiaries during rate cutting cycles.

And so is that especially with the set up that we have right now where it seems like more investors are apt to take profits where possible and then broaden those investments out elsewhere.

Uh is tech set to perform differently.

And, and if we do see some of those dollars being reinvested elsewhere, where does that broadening narrative start to really prevail?

Yeah, it's interesting what happened with NVIDIA, right?

Because I mean, it wasn't a bad report by any stretch of the imagination, but you just have these overwhelming expectations on tech right now.

Of course, we are seeing the broadening out that you're speaking of and uh it's been a good thing I think for the market, so many discussions I have with advisor firms and um you know, just uh home offices who are looking at these indexes and this very top heavy concentrated view that you get when you're in a passive investment and kind of grapple with whether they should be actively managed and you know, kind of front run what the market is doing, create some bread here, you know, even out a little bit uh from a, you know, one over end perspective as opposed to a market cap weight perspective.

So, uh you know, my, my overall on this is that from an investing perspective, I am definitely a proponent of kind of trying to uh tilt a little bit towards these smaller areas, maybe more value areas of the market, but that's more of a long term play.

Right.

And I think that from a market perspective, there's no guarantee that you can expect, you know, again, it falls in the camp of if we're going, you know, if these rate cuts are coming and we've avoided, uh, you know, the, the worse, the headwinds and, and we really do stick this landing.

That's great for small caps.

Small caps are interest rate sensitive.

They rely on capital markets more for funding.

So that would be a great thing for them.

If we're headed to a correction and a recession, small caps are going to suffer and typically they will suffer in that kind of a period more than large caps.

But if you wait it out, you, you can benefit on the long run anyway, just lastly while we have you here, Dana and, and you mentioned NVIDIA and naturally that takes us into the conversation of where A I the in the trading thesis around generative A I stands right now.

Where do you think we are within that larger cycle?

Here is a lot of investors are waiting for real return on investment from the big capital expenditures that have been put forward by companies.

Yeah, it's so interesting to compare it right to the internet, the.com E and, you know, all the expectations there.

I mean, certainly, you know, the internet dot coms, this thesis was 100% correct, but there was a lot of fallout before we actually got there.

Right.

And this is so often the case with new technologies that being right about the thesis and actually making money on that thesis are two very different things.

It wouldn't surprise me at all.

And, you know, I, I'd say my base case for A I is probably that it looks something like that, that it, that it takes some time for these type types of productivity improvements, efficiency improvements that we're expecting from A I to really penetrate the economy in a way that you see a productivity increase that actually translates to a better bottom line for companies that are receivers of this, not the nvidia's the creators, but you know, the users.

And III I think that's gonna take some time.

I think it's going to be um chunky, you know, some companies are gonna be leaders and other companies are gonna talk a lot about all these great things they're doing and they're not really doing anything at all with A I.

What they're doing is, you know, standard tech stuff.

So II I think, you know, making money on this and the thesis um is probably a slower, longer burn than maybe the market is pricing at the moment.