Here's Why This Rate-Cut Cycle May Not Play Out Like Others
It is now considered a coin toss whether the Fed cuts interest rates by a quarter point or a half point.
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A sharp intraday reversal on Wednesday after a hotter-than-expected CPI number and positive comments from the CEO Jensen Huang of Nvidia NVDA triggered a positive change in market character. Bulls then built on the positive momentum and managed further gains on Thursday and Friday. The S&P 500 is now back to testing its recent highs in mid-August, and the Magnificent Seven names have regained some of their luster.
The most notable action during the week has been the shifting odds of a Fed interest rate cut next Wednesday. At the close on Friday, it is a coin toss between a quarter-point and a half-point cut. There was concern earlier that a half-point cut could signal panic by the Fed, but the hotter-than-expected CPI and PPI shifted the economic narrative. Goldilocks is back in town, and market players appear to believe that the Fed is in good shape and not behind the curve.
The next big market event will be the FOMC meeting and the rate-cut decision on Wednesday at 2 p.m. ET. We’ll see what happens before then, but if there is a further run-up, then there will be elevated odds of a "sell-the-news" reaction.
The start of a rate-cut cycle is typically not bullish for the market, but this has not been the case in a typical economy. Market players have been prematurely anticipating cuts for years, but the economy has remained surprisingly strong while inflation has moderated. Typically, the Fed cuts rates in response to a negative credit event or notable economic slowing. Neither is the case this time, so rate cuts have more bullish implications than usual.
Many individual stocks are acting well. On Friday, new 12-month highs ballooned to over 1,000 names, with breadth running 7,700 gainers to 1,700 decliners. The bulls regained momentum after that big intraday swing Wednesday, and they are running with it as they anticipate a friendly Fed next week.
Have a great weekend. I’ll see you on Monday.
At the time of publication, Rev Shark was long NVDA.
