Stocks were left gasping for air yesterday as the weight of higher yields, an escalating war in the Middle East, a nearing election… and everything else that goes bump in the night. Earnings season is barreling down the road, headed straight for your portfolio, and it’s anyone’s guess what the results will look like, even more importantly, how the markets will react.
Dark clouds, high winds? It seemed like just yesterday that I was struggling to answer the all-important question of what to grill for my family on July 4th. Summer was exploding, bees were buzzing, and the sun was shining brightly. Ahhh, summer, now a distant memory, fades in our minds as it melts into the rear horizon. Things were looking up for the markets back then. It was clear that the Fed was ready to thrust aside its war hammer and begin to sow some seeds of growth. That’s right, rate cuts were coming… finally.
You can slice things any way you like, but at the end of the day, lower interest rates are expansionary. Maybe not instantly, as we all may wish, but ultimately, I will say it again, lower rates are expansionary. My regular readers know that I am not particular about the magnitude of the cuts. -25, -50, -75 basis-points, whatever, it’s the fact that the Fed has dropped its hammer and has now taken up the shears that is important. Will you and I feel the fruits of cuts right away? No, but we will eventually. I have repeated and repeated this, and I am sure it is not a popular assertion when I give interviews. People would like to believe that the markets and the economy behave like well-trained dogs. Wild, but, willing to snap to heel with a simple gesture. No, the economy takes its time, and markets don’t walk in a straight line.
So, here we are, just a few weeks after the Fed officially cut interest rates by a respectable -50 basis points. Those dreams of early summer were finally realized just as the leaves of Autumn began to turn. All may not be well, however. There is a hidden fear that a recession may be lurking in the shadows, perhaps a massive cratering of the labor market. After all, why would the smartest and most powerful economist-bankers in the world decide to double their order with a -50 versus a -25 basis-point cut? Ok, well at least the Fed is on the case. We will just have to wait and see if the cuts were timely or big enough to avoid disaster. One economic release at a time, until we see a sign, or better yet, a positive trend.
Last week, we learned that the labor market may not be headed for disaster with an exceptionally positive release. Some folks have characterized it as a “blowout” number. I am not one of those, but the number was a very positive data point. Blowout, positive, or whatever, a strong labor market is good. Good for you, good for me, good for that neighbor down the street whose name you always forget, good for the US economy… and yes, good for the stock market. This seems like a dream scenario. Rates are coming down, inflation has dissipated, and the economy may be healthy. Markets should be rocketing higher, pressing us back in our seats, but alas, it isn’t. Just take a quick look at this chart of the S&P500 since July 4th.
That doesn’t look like any fun at all. It certainly doesn’t look like a well-heeled pooch. It has you a bit nervous, doesn’t it. Don’t worry, I understand, there is nothing worse than watching your net worth behave like a yoyo. But wait, there is hope. Now I have to remind you of the obvious. The Fed is cutting interest rates, and the economy is not crashing! For you stock-heads out there NVIDIA’s EPS growth is probably going to slow from last quarter… BUT TO BE CLEAR, it is expected to slow from +165% to +95% year over year growth. That is not just “not too bad” for a $3.1 trillion market cap company, it is absolutely fantastic! Granted, not all companies look like NVIDIA, but it is now the second largest member weighting on the S&P 500, which means its behavior will have a big hand in setting the tone for the index. So, what do we do now? I thought you would never ask. Take a look at the following chart then follow me to the finish.
Do you recognize this chart? Of course, you do, it is the same as the one above, but this one starts in January of 2023 versus July 4th of this year. Can you see the trend? It is positive, YES. How positive? Is a +49% gain ok for you? Over the span of 442 sessions, just under 2 years, we have achieved a roughly +25% annualized gain in the S&P. Those gains were achieved because of hopes that the Fed would pivot to cutting rates from hiking just in time to avoid a recession – a soft landing. So, here we are, and it is looking more and more like we are realizing those hopes. So, what does the future hold beyond the right margin of this chart? Given everything we know up until yesterday, more of the same. Until the market falls out of the long-term, secular trend… YES, more of this… growth… albeit bumpy and not so well-heeled, but we will get there. Just please, remain vigilant, but be patient… your puppy deserves that.
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