A little off the top. stocks rallied yesterday in response to an expected rate cut by the Fed. The US economy is slowing but still growing, providing cold comfort to investors.
MY TWO CENTS
- Don’t fight the Fed. Yesterday, the Fed announced that it would cut the Fed Funds Target Rate, the rate for overnight borrowing, by -25 basis points to 1.75%. The last time short term rates were here was in 2018. That year, the Fed would raise rates three more times going into the close of the year before the stock market threw a temper tantrum causing the Fed to change its policy which, by the way, has been the real driver behind this year’s positive performance in the stock market. Yesterday’s move was largely expected and the Fed did not disappoint on those expectations. They did however, make it clear that this latest move would be their last… barring any crazy things happening. The first hint that this would be the last move was a slight change in the wording of their policy. The words “act as appropriate” were removed. Instead they chose to “assess the appropriate path of the target range”, which in geek-talk (really geeky talk) means that they are done with their mid-cycle adjustment, for now. The point was further brought home in Chairman Powell’s press briefing where he was peppered with questions about the future path of rates. He made it clear that economic challenges were still being monitored carefully. The Fed is worried about a slowdown in manufacturing activity and business investment. They are concerned that consumer spending may slow, though it hasn’t really as of yet. The Fed is also concerned about cutting rates too far too fast which would leave them less room to maneuver if things turn bad. When asked if he thought rates would be adjusted higher in the future, the Chairman responded by stating that inflation would have to be much higher for them to even consider it. In other words, “not any time soon”. Still the Fed will watch the numbers closely and respond when appropriate. The Chairman had a tough job yesterday. The mission: deliver a rate cut while signaling that cutting is done for now without upsetting the market (remember the taper tantrum back in 2013). In this central-bank-accommodation-addicted stock market, a tantrum could be painful. The Chairman was successful in his mission as stocks rallied in response to his briefing after yawning through the actual rate cute announcement.
- Expandable. The Bureau of Economic Analysis announced third quarter GDP Growthyesterday which showed that the economy grew by an annualized quarterly rate of +1.9%. This represented a drop from last quarter’s +2.0% but above expectations of +1.6%. The economy is growing but growth is slowing. The US economy is now in its 124th month of expansion. The longest in history. Wanna’ give a guess on how we got here? The consumer!! Personal Consumptiongrew by +2.9% beating economist’s estimates. The consumer continues to outperform and unfortunately the same can’t be said of business investment which has been languishing according to this latest reading. As noted above, the Federal Reserve is concerned with the slowdown in investment, which was one of the drivers of its easing policy. The Fed hopes that these three successive cuts will turn the economy around as the same strategy did in 1975, 1996, and 1998. Lower rates affect mortgages, auto loans, and credit cards making borrowing cheaper. Theoretically, credit-happy consumers will buy more, increasing corporate profits thus causing companies to invest in business expansion. The consumer is certainly signaling a willingness to spend but companies have not. What have they been doing with excess cash and lower interest rates? They have been using cash and cheap borrowing to buy back stocks and pay dividends. Good for management and the stock market but not so good for the economy. Remember that roughly only 52% of Americans own stock with around 90% of that stock in the hands of the wealthiest 10%.
THE MARKETS
Stocks rallied yesterday as investors were reminded that the Fed has their backs. The S&P500 climbed by +0.33% to a new all-time high, the Dow Jones Industrial Average traded up by +0.43% just below its high, the Russell 2000 slipped by -0.27%, and the NASDAQ Composite Index advanced by +0.33% also a stone’s throw away from its all-time high. Bonds advanced in response to the Fed move and 10-year treasury yields fell by -6 basis points to 1.77%. As expected the US Dollar weakened and Gold advanced in response to the rate cut.
WHAT’S NXT
- Personal Income and Personal Spending are both expected to have grown by +0.3% month over month compared to prior readings of +0.4% and +0.1% respectively.
- The Core PCE Deflator, which is the Fed’s preferred gauge of inflation is expected to be 1.7% year over year, down from last month’s 1.8%.
- This morning Dunkin’, International Paper, Cigna, and Estee Lauder beat expectations while Generac, Yeti, and Ball Corp missed. We will also hear from Bristol-Myers Squibb, Archer-Daniels-Midland, Kraft-Heinz, WWE, Celgene, Altria, and US Steel, amongst many others. After the bell earnings include Qorvo, Avis and Pinterest.