The Market Thinks Powell Can Nail a Perfect Economic Landing
The stock market is anticipating rate cuts from Jerome Powell but avoiding a recession or hard landing will be a challenge.
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The market continues to run higher as evidence of impending interest rate cuts continues to build. On Wednesday, the minutes of the last Fed meeting indicated that several members favored cuts in July. In addition, a massive downward revision of the number of jobs created boosted the theory that the market was already in decline and in need of a boost from lower interest rates.
The stock market is obviously anticipating that Jerome Powell will signal upcoming rate cuts when he speaks on Friday morning at Jackson Hole, but the primary issue is the size of the cut. The Fed is close to engineering a soft landing. The Fed has had little success in the past with its economic timing, but Powell will be celebrated as one of the greatest Fed Chairs ever if he can end the current economic cycle without a recession or hard landing.
There are additional jobs reports and economic data to come before the Fed decision in September, so Powell is likely to leave his options open about the size of a cut when he speaks on Friday. The issue will be how confident he sounds about a cutting cycle.
The market has had a fast and furious run-up into the Jackson Hole event. There will be some positioning action on Thursday, and some investors will move around their allocations, but the question that traders are pondering is the potential for a "sell the news" reaction to Powell.
The huge run-up over the last two-and-a-half weeks is a perfect setup for a selloff on Powell, but the market loves to love a dovish Fed, and there is little doubt that Powell will set the stage for a series of rate cuts.
Market conditions like we have now are some of the most difficult to trade. Stocks are too technically extended to offer prudent entry points, but they have too much positive momentum to sell or stay short.
The best course of action is to manage conditions tightly and be ready to react quickly if there is a sudden burst in volatility. I have a high level of cash to put to work but I’m not going to chase entries and make undisciplined buys. That can cause great frustration when there are no pullbacks, but it is the only way to control risk.
We have another positive open on the way.
At the time of publication, DePorre had no positions in any securities mentioned.
