Whispers of 'Don’t Fight the Fed' Enter the Market, But Obstacles Remain
Uncertainties persist at a time when investor sentiment is again flashing 'Greed.' We’ll be looking for opportunities especially if a selloff occurs.
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The Fed delivered a 50-basis point rate cut Wednesday that many speculated against, but the market expected. And the Fed’s updated set of economic projections suggest another 50 basis points in cuts are likely before the end of the year. Looking further out, another 100 basis points are on the table for 2025, but as Chair Powell reiterated during his press conference, the Fed will continue to react based on incoming data for the economy, inflation, and jobs.
That raised a flag about the cadence of cuts, especially because recent economic data suggest the Fed’s 2024 GDP trim to 2.0% may be premature. Even though the market got most of what it was expecting, the post-decision action was mixed with the S&P 500, Nasdaq Composite, and the Dow finishing in the red Wednesday.
Cue 'Don’t Fight the Fed' but…
Call it a delayed reaction to the Fed’s effort to extend the current economic cycle or the dollar’s decline, but the market looks to chug higher Thursday. Some are quietly saying “Don’t fight the Fed,” and as you look at the portfolio’s holdings in Bank of America (BAC), Morgan Stanley MS, and our more interest rate-sensitive positions, that isn’t part of our plan. Helping bring “Don’t fight the Fed” into the market narrative, this morning JP Morgan JPM shared the following:
“.. Over the past 40 years, the Fed has cut rates 12 times with the S&P 500 within 1% of an all-time highs. The market was higher a year later all 12 times with an average return of around 15%.”
That history will no doubt provide additional fuel for investor sentiment that has crept back into “Greed” territory over the last few days. But as we know, context is key, and past performance is not always indicative of future success. Let’s also remember the market doesn’t always move in a line with a positive slope (rising from left to right for all those who may not remember all their algebra) for an extended duration, and that it can be volatile.
With the August Existing Homes Sales data out later this morning, the only economic data point until Monday’s September Flash PMI data, there is little in the way of economic data to question the Fed decision or its potential road map. And Friday, September 20, is a triple witching event and that means heightened volatility.
Rate Cuts Have Started but Other Obstacles Remain
While we will continue to keep a close watch on the fundamentals and economic data, we're also keeping a close eye on technical levels for the market. Neither the RSI levels for the S&P 500 nor the Nasdaq Composite are near 70, but both are well above key support levels and overbought on other indicators. Finding bargains in the market won’t be easy and this could lead some to “hold their noses” when buying in the near term.
Keep in mind, while the Fed has started its rate-cutting cycle, geopolitical tensions persist, a U.S. government shutdown looms, recent polling data suggest the 2024 presidential election remains a tight race, and questions about aggressive 2025 EPS growth expectations for the S&P 500 persist. In other words, uncertainties remain at a time when investor sentiment is once again flashing “Greed.”
Not exactly the best combination for rational and common-sense thinking.
Sticking to Our Portfolio Plan
Following the almost 10% climb in the S&P 500 since early August we can’t rule out traders and short-term investors could book profits should the market punch its way higher. That could take some of the froth out as we stick to our portfolio "knitting" — looking for well-positioned companies poised to deliver superior earnings growth whose shares offer a favorable, if not compelling risk to reward trade-off.
At the time of publication, TheStreet Pro Portfolio was long BAC and MS.
