September 19, 2024
Good morning,
Last Thursday’s Morning Note highlighted the deep dichotomy between the stock and bond markets over a recession developing soon. The no-recession bulls with stock market participants and equity market strategists all calling for a 50bps cut on one side, and the hard-landing, recession-may-already-be-here bears, a camp represented by bond market participants, economists, and macroeconomic strategists expecting 25bps cut on the other side. Only one camp was going to be right, and Jay Powell chose the bulls yesterday by not only announcing a 50bps cut but a dovish-50bps cut at that!
Score another win for market strategists who believe that the best prognosticator of the future performance of the market is the market itself. Economists are left to recalibrate this morning; they are never wrong. I suspect their belief in a recession won’t be dampened. It will just be pushed out into the future.
Initially, the equity market reacted cautiously to the Fed’s decision as it signaled growing concerns about the broader economy. However, rate cuts are generally positive for risk assets, providing cheaper borrowing costs and liquidity. Now that they have cut 50bps (with another 50bps penciled in for year-end), the soft landing is likely to be the base-case for stocks and bonds looking out for at least six months.
With some time to digest, markets look to open higher this morning; futures have the S&P +1.65%, NASDAQ +2.25%, and Russ2K +2.61%. It is not a coincidence that the notion of a developing market top is officially erased today if index prices hold even a fraction of this morning’s gains into the session close. (No small aside; I was in the Topping camp … color me wrong <Deep Sigh>)
What’s ahead? We still have high valuations; it is likely that sentiment will be overheating by the end of this week, a now less than certain election looms, and we still have to get through a historically weak few weeks of the calendar. A correction ahead is highly likely. But this morning, we can confidently call it a buying opportunity if it develops, instead of the beginning of a recessionary bear market. The recession has been kicked down the road like the proverbial empty can.
Be well,
Mike
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