Raise the curtain, it’s show time!

Stocks rallied for a mixed close yesterday as investors flash guarded optimism about the new, new Fed put. Retail Sales surprised economists with a monthly increase yesterday, online shoppers carried the day.

Crossing the Rubicon. Well folks, today is the day. Can you remember one of those momentous occasions in your life? Maybe it was your wedding, the birth of a child, or an important birthday. Leading up to the event, your mind and emotions ran incessantly thinking about that very moment. Your emotions nearly overheated leading up to it. And then… it happened. It came… and it went. Pause, take a breath… now continue. Looking back, the next morning, your now back-to-normal self quickly realized that the lead up to the event was more exciting than the event itself. Don’t get me wrong, my marriage and the birth of my two awesome children are the top three highlights of all three highlights of my life, but I am talking about the day, or the event itself.

Today is one of those highlight days in the annals of finance, or at least it’s poised to be. The Fed is expected to cut interest rates. This cut has been the apple of the markets’ eye from the minute Chairman Powell first spoke about RAISING interest rates back in November of 2021. We endured the aggressive, if not draconian hikes. We remained optimistic through bank closures and market tantrums. We were patient. We were patient while inflation slowly ebbed toward the Fed’s +2% target. As we approached, we kept our composure as the Fed changed the narrative to the still not too bad employment situation. When it became clear that employment was getting worse than “still not too bad,” we realized that the last chock had been removed. The Fed was clear to move and lower interest rates for the first time since the Pandemic. Indeed, the markets got the high sign and began to earnestly plan for rate cuts. How big and fast became the new obsession. The smell of easy money wafted out of the Fed kitchen running our emotions and appetites into a frenzy. Will it be -25 or -50 basis points of cuts. Who knows, maybe even more, what if they don’t cut, no that’s silly, but what if they cut and say something hawkish, no they wouldn’t, would they, no, they are definitely cutting, I hope they do, we need this cut, big is good, bigger is better… ALL RIGHT, all right, just calm down. Are you with me? Sure, you are.

There is a really good chance that the Fed will cut interest rates today. But what does it all mean? Does it really matter if it is -25 or -50? No, but it does matter that they are now in a cutting cycle… at least we think that they will be. Looking back at history, the S&P500 typically does better in the year following the first Fed cut. At least it has in 5 out of the past seven cutting cycles. The 2 bad ones had a recession to contend with. So, the odds favor positive returns for the next year, IF the Fed starts to cut today… AND we avoid a long, drawn-out recession.

It all seems so straightforward, doesn’t it? Almost too good to be true. But unfortunately, it is not all straightforward. Inflation, it can be argued, is still sticky, despite great improvements. There is an election coming up in November, and the Fed, trying not to get caught up in politics, would typically shy away from policy moves of any kind to avoid the optics of political maneuvering. Speaking of that, a -25 or -50 basis point rate cut today is already mostly factored into the market, so it will not necessarily have a material impact on voters’ portfolios or personal finances in time to sway an election. In fact, if the Fed does nothing, the market is likely to throw a tantrum, and it could be argued that the Fed stunted the chances of a Democratic win. Tensions are high, indeed.

Can you feel those emotions swirling about? So, what should we really be focused on today… besides the size of the cut? The most important thing to focus on today is what Chair Powell says in his post-release presser, and MOST IMPORTANTLY, the Fed’s quarterly forecast. Read that statement again. YES folks, we are going to get a new Dot-plot today. We get to see where FOMC members expect the Fed Funds rate to be at the end of the year… which is rapidly approaching. In their last forecast (June) members were predicting that rates would be only -25 basis points lower than today by year-end. That would mean only 1 standard cut between now and the end of the year! Don’t get emotional, it is likely to change today. Will it be 3 standard -25 basis-point cuts or more… OR LESS? That is what will really move markets this afternoon. By the way, Fed Funds futures, as of this morning, are predicting a 100% chance of rates being 2 percentage points lower by year-end and a 63% of rates being lower by an additional ¼ percentage point! Will the Fed’s forecast true up to the market’s expectations? Well, in a few hours we will find out. Tomorrow though, we will look back on today and think about how the lead up to today’s event was probably more exciting than the event itself. Try and enjoy the day; you earned it 😊.

YESTERDAY’S MARKETS

NEXT UP

• Housing Starts (August) are expected to have climbed by +6.5% after falling by -6.8% in July.
• Building Permits (August) probably increased by +1.0% after sliding by -3.3% in the prior period.
• At 2:00 PM Wall Street Time, the Fed will release its rate decision and release its quarterly forecast. Do not miss this. Also, stay frosty for the Chairman’s press event at 2:30 PM, that is where the real action typically happens.
  
  

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