In my last post I warned about a rug pull and that's exactly what happened. The market dropped 4.5% the subsequent week and this resulted in a sentiment reset as traders/investors ran for the exits en masse as per fund flows and positioning stats. The losses were recovered in the following week and then we hit new ATH yesterday, the day after the Fed cut .50. Heading into the Fed meeting, the futures market was 60/40 in pricing in a .50 vs .25 cut. I was personally expecting a .50 cut. Apparently only 10% of economists polled by CNBC were calling for .50...no surprise there. I was talking to a fellow advisor prior to the announcement and he echoed the consensus view that a .50 cut would signal a panic, i.e. that they know something we don't. This is nonsense. The Fed is simply catching up to the data. We've had plenty of evidence, painfully so, that inflation has moderated to the point where a 5.5% Fed fund rate is well into "restrictive" territory. The core PCE, the Fed's preferred inflation gauge has clocked in at a yoy rate of 2.6% for the past 3 months and add to that the recent soft non-farm payroll numbers and major downward revisions from prior months, it would be quite frankly, idiotic for the Fed to cut only .25%. Had they known about the downward revisions to payroll prior to their July meeting they probably would have cut .25% instead of doing nothing and so .50 cut is simply a catch up move. At 5% FF is still well above the neutral rate and so the Fed has cover/justification to cut .50.,,, the FF should already be at 4% is you ask me.
After the Fed announcement there was no shortage of hand wringing on twitter. If I had a dime for everytime someone made a reference to 2001 and 2007 I'd be a fucking millionaire. Here's a few excerpts:
"Today was the first rate cut of 50bps since March 2020, let's look back at rate cuts when the market was near highs in 2000 and 2007".
"The last 3 times the Fed started a rate cut cycle with .5% was 2001, 2007, 2020"
"Fed only cuts rates when the economy is in the gutter or about to go in the gutter. The fact that they did proves my point that we are in recession"
These types of post were flooding my "for you" page on twitter. If you're in this camp, you are in consensus. Please make note of the motto of this blog. The current doom analogs remind me of all the analogs in 2022 that compared the market to 2008. After the COVID crash it was the 1929 crash analogs were all over twitter. What you will hardly see on twitter are mentions of 1984, 1995 and 2019 whereby Fed cuts did not signal an immanent recession and were instead recalibration cuts. IMO, this is the most likely scenario we are dealing with here....at least for the next year or 2. The economic conditions in the US although moderating are still healthy overall. I'm sure you can show me some stats that suggest otherwise but there's ALWAYS something negative you could point out whether it be this year, last year or any other year the economy was in expansion. Corporate profits are healthy, layoffs are hovering near historical lows and credit spreads are calm....NOT something you see when there's an imminent recession. Also, private and corporate leverage is near 30 year lows. Before you point out rising credit card debt, please look at the trends in overall debt including mortgage debt which makes up 70% of the total and make note of the percentage of disposable income being used to service all debts in the US - it's 9.8% which is at a 40+ year low. You will find similar benign stats regarding corporate leverage. Oh, but look at the huge increase in government debt! Yes, that's true, but government debt is not the same as private debt as governments have something you and me don't....a printing press, but that's a discussion for another day. For now, just look at Japan to see how far things can go with their 250% Debt to GDP ratio.
The main message of this post is that there is plenty of moaning and worry about this rate cut cycle. Fears of a recession are acute and that suggests there is still a healthy wall of worry for the market to climb longer term. What happens in the next few weeks is probably more volatility. Once again, in the very ST, conditions don't look ideal but the more medium term indicators have cooled off/reset notably compared to how they looked like at the July market peak. If we get another bout of downside it would probably recharge the medium term indicators even more putting the market in a position to make a significant upside breakout later this year.
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