4 Stocks to Buy Before They Bounce Back

SPEAKER_1 (0:00)

Lots of firms throw a couple flashy funds your way and call it a day, but not Vanguard. Vanguard bonds are institutional quality. Institutional quality isn't a tagline, it's a commitment to your clients. It means top grade products across the board. So if you're looking to give your clients consistent results year in and year out, go see the record for yourself at vanguard.com/audio. That's vanguard.com/audio. All investing is subject to risk, Vanguard Marketing Corporation Distributor.

SPEAKER_2 (0:27)

Please stay tuned for important disclosure information at the conclusion of this episode.

Susan Dziubinski (0:50)

Hello, and welcome to The Morning Filter Podcast. I'm Susan Dziubinski with Morningstar. Every Monday before market open, I sit down with Morningstar Chief US Market Strategist, Dave Sekera to talk about what's going on in the markets, the important things that investors need to have on their radars for the week, some new Morningstar research and a few stock ideas. Now, before we get started this week, we have a programming note for our audience. We will be dropping a bonus episode of the podcast this Thursday. Dave sat down with Morningstar Senior Analyst, Will Kirwin, to take a deep dive into one of Dave's recent stock picks, that's Broadcom.

Dave and Will discuss Morningstar's outlook for the company, how Morningstar can assign the company a wide moat rating given all the uncertainty around AI, and what a possible slowdown in AI spending could mean for Broadcom's future. So be sure to catch it wherever you get your podcasts.

All right. Well, good morning, Dave. Let's kick off today's podcast with last week's interest rate hike. Now going into the meeting, the market seemed fairly confident that the Fed would raise interest rates, yet stocks still sold off after the meeting. What do you make of that?

Dave Sekera (2:00)

Well, I think you need to be really careful. Yes, stocks did sell off after the meeting. Then on Thursday, we had what I would just call an everything rally. Everything seemed to do better on Thursday and it was a very strong day. Market held up pretty well on Friday and before market opened today, it looks like everything is doing pretty well. In fact, I would say surprisingly strong this morning.

In my opinion, all of the headlines, all of the talk about Cher Warsh's talk and his tone, and everything that he was trying to tell the marketplace, to some degree, you always have to realize a lot of that is just going to be noise here in the short term. So yes, the message he was trying to get across to the marketplace was that inflation is still too high, it's been too high for too long, the Fed is willing to do whatever they need to do in order to restore price stability and so forth. If you look at their economic projections, they showed the upward of vision to the expected policy path. But the end of the day, the Fed is going to end up always doing what the economy and the market forces them to do. So as long as they don't make a policy mistake, they're really what I would consider to be more a lagging indicator than they are a leading indicator. So looking forward, the market, still a little unsure exactly what they're going to be doing here in October, still over 50% probability of them hiking at that point. But I have to point out, there's also a 40% probability of another hike in December. I mean, one month ago, that wasn't even on the radar that they would hike in December. So I mean, there's, in my mind, at least one more hike before the end of the year, if not necessarily like even two.

So I guess, you know, the real question to the marketplace is why is there such a focus on inflation right now? And in fact, if you look at core CPI, that's actually lower now than when Fed.Chair Powell did the opposite, and he had cut Fed funds rate by 50 basis points in September 2024 So again, take this with, I would say, a boulder of salt. I am not an economist. This is my purely non-economist opinion.

But to me, it's all about the 10-year US. Treasury. So at this point, we're still battling, you know, 5%. Some days it's a little bit over, some days it's a little bit under. You know, but back then, when they had cut, they had a lot more room to make changes to ease monetary policy. Back then, the 10-year was only at 3.7%.

Now, if you look at the 10-year today, the market-derived, like, future inflation expectations are still really in the middle of the range they've been since 2021 So with the 10-year interest rate being higher, that means that it's really the market is requiring higher real interest rates after inflation than what we had had before. And to some degree, I think it's just a supply demand issue because there's just too much supply of new US treasuries that's going to be coming to market. There's going to be tens, if not hundreds, of billions of dollars of new supply coming in order to be able to fund the AI build-out boom. So the market's pricing that future supply into expectations. And people are just saying, hey, if we're going to have all of that still yet to come, you need to pay me a higher yield now in order to be able to compensate for that.