3 Reasons Why the Market May Not Celebrate Interest Rate Cuts
It is unusual for such a high level of uncertainty about the size of an upcoming rate decision.
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The market continues to run higher into the Federal Reserve interest-rate decision on Wednesday. Expectations of a half-point rate cut are building, with odds of 65% as of early Tuesday morning. Just a month ago, the market was pricing at only a 25% chance of a half-point cut, but worries about the jobs market, along with signs of economic strength, have shifted the narrative.
It is unusual that there is such a high level of uncertainty about the size of the upcoming rate cut. The Fed typically signals what it will do well in advance, but this time, the debate is much more intense. There is some retail sales data coming up on Tuesday morning that will have some influence on the decision as well.
With the market continuing to run higher into the Fed decision and a high level of uncertainty about exactly what the central bank will do, there is an elevated likelihood of a volatile reaction. For a while, the market was worried that a half-point cut would signal that the Fed thinks it is behind the curve and is worried about the economy. While that is no longer the big concern, a half-point cut is going to be a major policy development that is just the start of the next big Fed cycle.
I’m concerned about the run-up into the Fed for several reasons. First, it creates a ‘sell the news’ situation. The market is pricing in lower rates and has been doing so for a while. The Fed is merely doing what it is expected to do at this point.
In addition to the technical setup of the news, there is also the problem of negative seasonality. The last half of September is historically the worst period of the year for the stock market, and that fact may add momentum to a negative reaction. Seasonality is self-fulfilling, and once a negative reaction is triggered, it can quickly gain traction.
The third issue is that charts of individual stocks are becoming more extended and do not offer many great entry points. I’ve been leaning toward profit-taking, and my cash levels are increasing as I find very few stocks I want to aggressively buy at this point.
No one knows what the Fed will do, but conditions are good for a negative reaction, and I’m going to be cautious.
We have a positive open on the way.
At the time of publication, Rev Shark had no positions in any securities mentioned.
