VIDEO: Data Doesn’t Support Big Action by Fed

In today’s Daily Rundown video, Chris Versace discusses why rail traffic and other data simply do not point to a hard landing for the economy, nor do they support the announcement of a 50 basis point rate cut by the Fed on Wednesday. 

He also explains why this adds to the risk that the market will be disappointed by the Fed’s updated set of economic projections. And he explains how the Portfolio is getting ready for that potential opportunity. 

"Those expectations have grown a little bit since last week," he said. "Candidly, not much has changed. In face, when you think about the size of that cut ... it's very much in tune with a hard landing scenario for the economy."

Finally, Versace shares what to expect with the August Retail Sales and Housing Starts reports.

Transcript

CHRIS VERSACE: Hey, folks. Chris Versace here, Monday, September 16. And we've got a big week ahead of us.

That's right, it is fed week. If you read our morning comments this morning or even Friday's roundup, then you know kind of where we stand. We expect the fed to deliver 25 basis points in rate cuts. And there is the risk of the fed disappointing expectations in the marketplace.

And I would say that those expectations to be disappointed have grown a little bit since last week. Why? Well, if we take an updated look at the CME fedwatch. Tool, the largest probability by the market is now that the fed delivers a 50 basis point rate cut later this week and 125 in cuts by the end of 2024 in total.

That's across the September, November, December meetings. And they're still expecting round numbers-- 225 basis points of cuts in total by June of 2025. You know, the question we have to ask ourselves is what's changed so much in the last few days that has kind of goosed the expectations by the market for now a 50 basis point cut later this week?

And candidly, not much has changed. In fact, when you when you think about the size of that cut and that 125 basis points of cuts this year, it's very much in tune with a hard landing scenario for the economy. But when we step back and we kind of parse the data that we've gotten thus far, whether it's GDP figures or rolling GDP forecast figures-- by the way, the Atlanta fed coming out of last week. That rolling GDP forecast was at 2.5% for the current quarter.

But if we look at other data that's out there, it doesn't support a hard landing scenario. There are concerns about the pace of job growth. I understand that.

But again, the August employment report actually added more jobs than was expected when you net the numbers out. Wages were continuing to grow. And as we saw last week, consumer sentiment is picking up. So, you know, there are a lot of positive things kind of happening.

But when we look at other data, it really reaffirms the notion that we're more likely to see a soft landing or no landing scenario for the economy than a hard landing one. What I'm talking about here is some figures from the Cass Transportation Freight Index. That picked up in August after picking up solidly in the month of July.

If we take a look at weekly total rail traffic, this is something I pay very close attention to because if we think about freight or rail traffic, things are moving around. When the economy is heating up or growing, we should be seeing rising shipments. And when it's cooling off, we should be seeing cooling or falling shipments. Well, in the case of the weekly total rail traffic, it has only accelerated in July and August.

When we take a look at some of these numbers. We're talking mid to upper single digit numbers. Even in the back half of August, as I look at the data year over year, for the week of August 10, up 5.2%-- August 17, 8%-- August 25-- 9 and 1/2%-- August 31, 8.4%. In September for the first week, September 7 for the data up over 7%.

That does not sound like an economy that's about to hit a hard landing. So we take a look at all that data. And from our perspective, it really suggests that the economy is on far firmer footing than some are thinking.

And for that reason, we continue to think that the fed is going to deliver a 25 basis point cut this week, and there is room to disappoint relative to the market expectation when we parse through the fed's updated set of economic projections. It's for that reason that we are continuing to be cautious with the portfolio today, tomorrow, Wednesday morning. If we do see that disappointment, we could see the market trade off, and that's what we want to be prepared for, which is why we will be sharing an updated table today for the portfolio that has, yes, the usual updates for earnings expectations, or I should say consensus earnings expectations, to be clear.

We'll be updating any price targets, panic points that we need to, but we'll also be sharing potential entry points for a variety of holdings in the portfolio. So these will be some signposts. And again, context is always important. We'll want to assess what's going on in the market as we contemplate these potential price areas and making any moves with the portfolio.

So with that, we'll have that out later today. But I also want to take a moment and say that, yes, it is fed week, but it's not the only thing that's happening this week. We will get the August retail sales report, and that is expected to rise ex auto 0.3% in August compared to July.

July was up 0.4% And remember, July, we saw a lot of strength because of the Prime Day and competing events-- Walmart, Target, that sort of thing. We continue to be concerned that there is a little bit of pull forward from August and potentially September, really, with back to school sales but consumers also taking advantage of a lot of different deals.

If you remember, we are hearing quite a bit about how consumers are trading down. We shared some comments with you last week from Kroger that really called that out. When folks are trading down the type of deli meats and other meats that they're buying, it's a big indicator that folks are being selective, and we think we're likely to see that with the August retail sales report.

But we do see that report really bringing the context that it usually does for Costco. They simply delivered gangbuster August comp sales, and I think it's going to be reaffirming. Remember that we haven't seen any major earnings expectations for Costco change since they announced their membership price hike, and that went into effect September 1st.

I wouldn't be surprised if coming off of the August retail sales report that we do see some folks tinker with their numbers a little bit. We could see some price targets move higher for Costco shares as well.

Let's also remember that they are going to report later this month. That's when we'll be revisiting our price target for Costco shares. And then we also have the August housing starts report coming later this week, and let's just set the tone for this.

There's been a lot of enthusiasm for housing-related stocks, again, because the market's getting excited, potentially overexcited, about rate cuts. So when you take a look at our builders first source shares, man, they have been moving, and we continue to think that the fed moving down a rate cutting cycle will be very positive for that particular holding over the next not just quarters but really over the next 12, next 18 months. That activity and pickup in the housing market should also be positive for United Rentals, Vulcan Materials as well.

But could we see these names be a little volatile this week if we're right and the fed disappoints? Yes, I think that is entirely possible. We talked about this last week regarding United Rentals. It's one that we recently upgraded back to a two rating. And if we do see the shares come off following the fed announcement, boy, that might be the place to pick up some additional shares for members and for the portfolio.

But we'll be walking through those levels again in that updated table that we'll be sharing later today. So, folks, please be sure to check your emails, check your alerts. We want to make sure you're getting our latest thoughts in that table.

And as we move through the week, particularly after the fed meeting, if we make any moves with the portfolio potentially similar to the actions we took in early August, we want to make sure that you are right there with us. That's today's video. Thanks for watching. And remember, keep checking your alerts.