My Take on Split Tickets, Half & Half Rate Cuts and an AI Twist
Let's look at what a Harris win with a GOP Senate could mean for the market, the rate cut odds and something sweet in artificial intelligence.
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After a wild string of weeks, let's take stock of what just happened, then look at the three big issues right now: the election, rate cuts and AI -- and see my biggest concern at the moment.
First, socks surged on the week, with the S&P 500 rising 4% and breaking 5,555. Many view this string of fives as a critical level to breach. At the same time, the Nasdaq led the way, up almost 6% on the week, and many of the laggards started to catch up. The Ark Innovation fund ARKK (a proxy for “disruption”) rallied a whopping 10% -- the first time in a while that it performed like a truly high beta play on the market.
On the surface, it appeared a simple week of rallying, but we had some moments of downside, most critically, on Wednesday when the S&P 500 opened down more than 1.5% only to stage a “stunning” turnaround, finishing the day up over 1% (the Nasdaq trading was even more volatile).
As we continue to see the market whipsaw (the major indexes are below where they rallied to in August, after the early August fear) I think we can keep this week’s T-Report simple (my travel week was a bit draining) and cover the major bases, by sticking to the theme of “Debates.”
The Election: Yeah, That's the (Split) Ticket
The key for the election, from a Wall Street standpoint seems as simple as: Wall Street will like gridlock.
A win by Harris, while the Republicans win the Senate (what the betting markets are telling us is most likely), would be good. There is a theory that when people vote against a candidate they are more likely to split the ticket, and I expect that there will be a large number of people voting against a candidate rather than for the candidate, further increasing odds of gridlock. The anticipation of gridlock is helping bonds because the market is able to discount the likelihood of some of the bigger deficit producing “promises” ever becoming reality.
Wall Street will like any sense that politicians are already pivoting toward the center as the election nears and they try and win over moderates and independents. There was a lot of chatter last week that Harris is being advised to the center on some key issues by major donors.
The Rate Cut Debate: Half and Half
According to the Interest Rate Probability on Bloomberg function, the market has priced in a total of three cuts in the next two meetings (it feels like four or more cuts are being priced in).
The meeting this week is priced in 50/50 for a half-percentage point cut. As someone who advocated for a July cut, I should be in the half-point camp (it is certainly what I think they should do, but will they?).
The Fed doesn’t like to surprise markets (though, probably more against surprising on the negative than the positive) which leaves them in a bit of a quandary with markets pricing in a 50% chance. In the middle of last week the market was “only” pricing in a 17% chance of a half-point cut.
I’d go 50, but for a group that decided not to cut at all in July, has the data been good enough on the inflation front (maybe) or weak enough on the job front (maybe) to cut 50?
Is this a Fed that is willing to cut by a half-point and risk seeing either an uptick in inflation or job creation? That is probably what will drive the debate at this meeting.
Three-quarters of a percentage point in next two meetings sounds correct (though I’m leaning to a quarter point then half point.
More “interesting” is that the market is pricing in 10 cuts, getting down to 2.86% by next September – which seems far too fast
The risk from the Fed is to disappoint longer-dated bonds and equities, with more of the risk coming from what they say about the next year or so, than what they do at this meeting – though a half-point cut would allow markets to ignore any hawkish comments (which seems like a path the Fed would not like to go down – as it really would decrease its ability to jawbone).
A Turn for AI?
From a marco economic and market perspective, the artificial intelligence debate remains incredibly important as the AI stocks remain big drivers of most market moves. It is a debate surrounding valuations and current (call it next year or so) cost vs. benefit. Is the cost of implementing AI outpacing the benefit? Has the market priced in competition or other risks? Or, is the risk still that the market hasn’t yet digested the true impact of AI?
Markets did respond to some industry leaders giving positive comments on the outlook and if “buy the dip” remains strong in any sector, it is the AI and chip sector (though my “favorite” stock to watch, NVDL, the leveraged version of NVDA actually saw its shares outstanding reduce on the week).
What I’m starting to play with is Open AI o1 (also known as Strawberry). It is designed to be a “reasoning model for solving hard problems”). It seems interesting at first blush. It is much slower than ChatGPT, but seems to try and come up with actual answers (rather than what sometimes seems as glorified search). I’ve been told this model is scoring 95% on average on the LSAT.
I just started to play with this, but since I’ve been on the “overvalued” side of the AI equation, I wanted to make sure people see this as soon as possible, as it could be another seminal moment in AI.
Bottom Line
My biggest fear, in both directions, for stocks and bonds (and even credit) remains that there seems to be very little depth in terms of liquidity.
Given what the market has priced in, expect markets to fade a little coming into the Fed as the risk of being disappointed is high (though if he comes across as dovish going forward with a half-point cut, it could be off to the races.).
I’m moderately bearish, though breaking 5,555 was important on the S&P 500 and am running small positions compared to normal because of my fear of outsized moves.
