💰 5 Fact Friday: The Great Rotation + The Trump Trade

ECONOMY
1. Rate Cuts On The Horizon 🌅

Last week, the Consumer Price Index (CPI) came in lower than expected: 3% year-over-year and -0.1% month-over-month. This marked the first monthly price decrease since 2019 (excluding briefly during Covid), largely due to a 3.8% fall in gas prices.

Meanwhile, the labor market is cooling. Unemployment has ticked up for three months in a row for the first time in 8 years. This shift has the Fed’s dual mandate in full focus.

What Is The Fed's Dual Mandate?

The Federal Reserve has two main objectives:

1. Maximizing Employment: Keeping the job market strong.

2. Stabilizing Prices: Keeping inflation around 2%.

But balancing these goals can be tricky.

To tame inflation, the Fed raises interest rates, which can slow economic growth and increase unemployment. However, if it focuses solely on boosting employment, it could keep rates too low, leading to inflation.

What’s Happening?

On Monday, Chair Jerome Powell said the Fed does not need to wait for 2% inflation to begin the rate-cutting cycle. He emphasized that central bank policy operates with “long and variable lags.”

“If you wait until inflation gets all the way down to 2%, you’ve probably waited too long,” Powell added.

Market Reaction

Markets celebrated this news. Investors expect cheaper borrowing costs will boost economic activity and corporate profits, leading to higher stock prices. This sent all three major indices up, with the Dow reaching a record close of over 40,200.

The Takeaway

With easing inflation and rising unemployment, the Fed may finally be ready to cut rates. Upcoming inflation and unemployment reports will be the final determinants, but markets seem confident.

Traders see a <5% chance of a July cut, a 98% chance of a September cut, and a >50% chance of three rate cuts by December.

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MARKETS
2. The Great Rotation Begins 🔄

Investors are rotating out of tech giants and into smaller, interest-rate-sensitive sectors. This shift is being called the "Great Rotation."

Why The Shift?

1. Interest Rate Expectations: Investors are betting on companies that benefit from lower borrowing costs for operations (industrials, biotech, etc.) or sales (real estate, autos, etc.).
   

2. Profit-Taking: After a massive run-up, tech stocks are seeing some profit-taking. The "Magnificent Seven" are now fully valued, prompting investors to pocket some gains and reduce their exposure.
   

3. Market Breadth: Diversifying beyond tech stocks is a positive sign. It broadens market participation, reducing reliance on a handful of companies.

What’s Happening?

1. Small Cap Surge: The Russell 2000, a benchmark for small-cap U.S. stocks, has climbed ~3% in the past five days. Meanwhile, the Magnificent Seven ETF ($MAGS) has fallen more than 2%.
   

2. Real Estate Rally: Real estate stocks are benefiting as lower rates reduce financing costs for property investments, breathing life back into the sector.
   

3. The "Other 493": As investors gradually shift away from the top tech stocks, the "Other 493" in the S&P 500 are gaining traction. According to Bank of America, these companies are set to report their first annual profit increases since 2022.

The Takeaway

After market concentration reached record highs last month, we’re now seeing a welcome correction. Investors betting on this trend are selling yesterday’s winners to buy sectors that benefit from lower interest rates.

Although the market is prone to short-term overcorrections, this trend is a healthy sign. It helps prevent a tech bubble and paves the way for more sustainable growth.

Know The Community: Poll Question 💬

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PSYCHOLOGY
3. How To Beat Your Trading Biases 🧠

Our brains can sabotage our investments, making us cling to bad trades. Here’s how psychological biases work against us and 3 simple ways to conquer them:

Loss Aversion: We hate losses more than we enjoy gains. This makes us reluctant to sell losing positions, hoping they'll rebound.

Sure-Loss Aversion: Selling a loser makes a hypothetical loss real. Even if holding might lead to further losses, we tend to avoid the pain of actualizing it.

Endowment Effect: We often overvalue what we own and undervalue what we don't, making it harder to let go.

Tips to Avoid These Traps

1. Track Sold Assets: Keep a watch list of assets you’ve sold. This can help you review your decision-making process and build confidence in future trades.

2. Justify Exits: Just as you need to justify purchases to yourself or others, apply the same process to exits. This will force you to make rational, data-driven decisions, rather than emotional ones.

3. Set Kill Criteria: Use exit criteria like stop-loss orders to prevent emotional decisions. And stick to them, no matter how you feel in the moment.

By understanding these biases and creating structured decision-making processes, you can make smarter trades. Control your mind, control your wealth.

MARKETS
4. The ‘Trump Trade’ Sparks Markets 🔍

"What doesn't kill you makes you stronger," - Trump, probably.

After surviving an assassination attempt, Trump's odds of winning the 2024 presidential election surged, according to PredictIt.

Just a month ago, the popular betting platform pegged his chances of election at 53%. By Monday, they soared to a record high of 69% before settling around 65%.

The Trump Trade

Investors are increasingly betting on a "Trump trade," pricing in the potential impacts of a Trump presidency. Here’s what that entails:

Winners:

1. Energy, Finance, and Healthcare: These sectors stand to benefit from deregulation.

2. Domestic Manufacturers: Tariffs on imports could boost local manufacturing.

3. U.S. Dollar: Driven by expectations of strong growth and protectionist policies.

4. Crypto: Trump has flipped to a pro-crypto stance, and his running mate, J.D. Vance, is a Bitcoin holder.

5. TikTok: Surprisingly, Trump indicated he would no longer ban TikTok, viewing it as healthy competition for Meta.

Losers:

1. Bonds: One-party control typically leads to greater deficits, resulting in higher inflation, higher yields, and lower bond prices.

2. Chinese Manufacturers: Companies dependent on the Chinese supply chain could be adversely affected.

3. Multinationals: Companies with significant international revenue could suffer from a strong U.S. dollar.

4. Chinese Yuan and Mexican Peso: These currencies could be negatively impacted by a stronger U.S. dollar and potential tariffs.

5. Subsidized Sectors: Industries like solar and EVs that rely on government subsidies could be hit hard by a Trump presidency.

The Takeaway

Trump's economic playbook revolves around deregulation, tax cuts, and trade tariffs. These strategies might boost some industries while leaving others in the dust.

As the 2024 election approaches, consider how your investments are positioned for either a Republican or Democrat victory. While you don’t need to (and probably should not) adjust your holdings according to polls, keep in mind how the political landscape could impact your assets over the next 4+ years.

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TRAVEL
5. Travel Hack With Home Swaps 🏡

Looking for a budget-friendly way to travel? Home swapping might be your answer!

Platforms like People Like Us and HomeExchange are gaining traction, boasting over 10,300 and 175,000 homes available for swapping, respectively.

These platforms are seeing rapid growth, with People Like Us on pace to double the number of home swaps made last year.

Why Home Swap?

• Cost-Effective: Save on lodging by swapping homes. Annual membership fees are around $150-$220, making it an affordable option for frequent travelers.

• Variety: Options range from city apartments to country cabins, allowing you to explore anywhere you like.

• Local Connections: Many swappers maintain relationships with the people they exchange homes with, building a network of friends around the world.

How to Make It Work

• Build Trust In Advance: Use video chats to meet potential swappers and tour homes. Planning months in advance helps to build rapport and feel comfortable.

• Flexible Travel Dates: Being flexible with your travel dates and locations can increase your options for swaps.

• Secure Valuables: Lock away your valuables in a room or car trunk.

• Review Policies: Double-check insurance coverage for both your home and the one you’re staying in.

Embrace the adventure and cut travel costs with home swapping!

It's a great way to explore new places, meet new people, and live like a local—all while keeping your travel budget in check.

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