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Short Summary
Main recommendation: Royal's view, presented as his own opinion, is that the market may be over-pricing a September Fed rate cut and that a hike would be hard for the Fed to deliver, that investors should expect higher volatility than the current low VIX implies, and that he finds an HVAC company and a garage door manufacturer interesting as selective ideas. He frames the Fed's stance as shaped by mixed jobs data and inflation that has been flat, rather than by energy prices.
Key Points
- Jobs data: a weekly report showed 103,000 jobs added, plus 103,000 in revisions, which changed the overall picture, with earlier weak months being revised.
- Market pricing: the market was pricing a September cut at 44%, which Royal sees as at odds with the Fed's likely direction.
- Inflation: recent inflation data and the Supreme Court decision were essentially flat, and Royal says disinflation would make rising inflation hard to sustain.
- Volatility: the VIX sits at 14.48, and Royal warns that low volatility encourages complacency, so he tells advisors and clients to expect more volatility than current levels.
- Consumer backdrop: growth came in weaker than expected, and real wages turned negative because nominal wage gains have not kept up with inflation that began in 2022.
Details Worth Noting
- Concrete instructions: When talking with advisors and clients, set expectations for volatility above current levels rather than assuming calm markets will persist.
- Concrete instructions: Royal highlighted an HVAC company out of Pittsburgh, which he says is shifting from a basic subcontractor model to partnering with building owners for higher-margin, recurring revenue; its stock fell about 30% this week after earnings were poorly received, which he suggested could make it a good entry point.
- Concrete instructions: Royal pointed to the nation's largest commercial garage door manufacturer, which he describes as benefiting from structural tailwinds in building capacity and nondiscretionary replacement demand; he noted it is buying back stock and hit a 52-week high, but still views it as having an attractive multiple.
- The HVAC company is also developing a data center business and announced an acquisition of a small professional services firm this week.
- Royal says garage doors tend to have one of the highest returns on investment for homeowners preparing to sell, and that purchases are driven by need rather than discretion.
Bottom Line
The video presents a view that the Fed is unlikely to hike in September, the market may be too complacent given low volatility, and selective industrial stocks may offer opportunities during a period of uneven economic data.
