Market Faces Substantial Obstacles After the Fed and Index Rebalancing
Here's what makes upcoming economic reports very important.
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Following the half-point interest rate cut by the Fed on Wednesday and significant index rebalancing on Friday, the big question this week is whether the market can gain further positive momentum and continue to trend higher.
There was a euphoric response to the Fed’s dovish interest-rate move as bears that were anticipating a sell-the-news reaction were caught in a trap, but the squeeze action and fear of missing out may prove to be short-lived as the market contends with more economic news and negative seasonality at the end of September.
The market embraced a bullish economic narrative last week, which was largely based on the theory that the Fed’s half-point rate cut would help avoid a recession and produce an economic soft landing. However, not everyone believes that the Fed can stop a downshift in growth, and this makes upcoming economic reports very important.
There are two basic economic concerns right now. The first is that the market is underestimating the level of economic slowing. The second is that there will be a rebound in inflation as interest rates move lower.
While many folks are optimistic that the start of the Fed interest rate cut cycle is a positive, the reality is that historically, the market has struggled when the Fed starts cutting rates. Perhaps it is different this time, but the reaction to economic news will tell the story.
The big positive right now is the price action. The indexes are hovering near highs, and the Magnificent Seven names have been leading once again. Many stocks and indexes are extended and overbought and need some consolidation and rest, but there is nothing to indicate that a sudden collapse is about to occur.
There is consumer confidence and PCE inflation news due this week. Still, there isn’t much news flow as we deal with one of the weakest times of the year on a seasonal basis.
I expect choppy action as market players try to position themselves for whatever happens next. I’ll be managing positions closely and will stay very selective with new buying.
At the time of publication, Rev Shark had no positions in any securities mentioned.
