Expectations for Big Fed Move Are Pushing These Holdings Higher

Stocks are moving higher this morning with the vast majority of Portfolio holdings higher, being led by Amazon AMZN, Builders FirstSource BLDR, United Rentals URI and Microsoft MSFT.

The market’s increasing view for the Fed to do something big on Wednesday, as in a 50 basis point rate cut, is lifting URI and BLDR shares higher. It’s also pushed the S&P 500 past the 5650 level that we mentioned earlier this week which would have the index short-term overbought.

We remain skeptical that the Fed will deliver as much as 50 basis points in cuts on Wednesday, given the recent data, including Tuesday's August Retail Sales and Industrial Production reports.

Our skepticism extends to the 250 basis points in rate cuts the market sees being accomplished by the end of 2025. This will keep us on the prudent path with the Portfolio ahead of the Fed meeting and Friday’s "triple-witching" options expiration. It’s also not lost on us that we are now in the second half of September, which tends to be more volatile than the first half.

August Retail Sales

The August Retail Sales report was mixed. Yes, the headline figure rose 0.1% sequentially, besting the -0.2% consensus forecast, but it was not only a far slower figure compared to July's 1.1% increase, but other key categories came in weaker than expected as well. That includes the much-examined Retail Sales ex-gas, and ex-auto that rose 0.2% in August compared to July, slower than the 0.4% reading for July and missing the 0.3% forecast.

We warned that the August Retail Sales report could come in weaker than expected because of events in July from Amazon, Walmart WMT and others pulled forward sales, including back-to-school shopping. That seems to be what’s at play here, but the report also confirmed without question that Costco COST continues to rake in consumer wallet share. All we need to do is compare the August Retail Sales report against Costco’s August U.S. comp sales ex-gas, ex-foreign exchange that soared 6.7 higher year over year.

Working our way through the report, we also saw more confirmation for Amazon shares. Digital shopping rose 7.8% year over year in August, a quicker pace than the 7.4% year-over-year gain tallied for June, July and August. Department stores, like Macy’s M and others, continue to take it on the chin with the report finding retail sales for that category fell 2.1% year over year.

The other category that jumped out at us was restaurants, better known as "food services and drinking places." We all know that category has been strong since the pandemic, but over the last few months, we’ve gotten more reports and comments about consumers being selective, discerning and trading down.

It looks like we’re starting to see that flow through to restaurant sales which were flat compared to July and softer compared to the trailing three-month tally’s year-over-year performance. We’ve also noticed that grocery sales have accelerated over the last few months, another sign that folks are likely eating more at home. We see that as positive for Costco as well as the beverage and snacking business at PepsiCo PEP.

August Industrial Production

While most will focus on the retail sales data, we’re also working through the August Industrial Production report for what it says about manufacturing activity during the month.

Stripping away the data on mining and utilities, we see a much different picture than we did with the August Manufacturing PMI reports. The data from the Federal Reserve shows manufacturing activity rose 0.9% compared to July, leading the index to climb 0.8% sequentially, well ahead of -0.7% in July and the expected 0.3% reading.

On Monday, we talked about the strengthening in rail traffic that occurred in August, which has so far continued into September. Taken together, these point to the manufacturing and industrial economy likely performing better than previously thought.

Netting Out These Two August Reports

Putting the findings of these two reports together suggests that we are not likely to see a meaningful downward revision when the Atlanta Fed issues its next update for its GDPNow forecast.

That model last stood at 2.5% for the current quarter, and we could see a modest uptick in Tuesday's revision. Should that be the case, it brings more support for the soft-landing scenario, not the hard landing one depicted in the CME FedWatch Tool.

We still have one more piece of data to go, August Housing Starts, before the Fed winds up its policy meeting. It would take a big miss to dent the GDPNow model, but as always, we’ll let the data do the talking to us.

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At the time of publication, TheStreet Pro Portfolio was long AMZN, BLDR, URI, MSFT, COST and PEP.