08/26/2024 Market Strategy
Marking Time
With the Fed Signaling a September Rate Cut, Investors Are Rotating and Repositioning for the Next New Normal
Key Takeaways
- Fed Chairman Powell’s remarks all but confirmed that the Fed will cut rates at its Sep. 18 meeting. We still think 25 basis points is most likely.
- With 477 or 95% of the firms in the S&P 500 index having reported, earnings are up 9.4% from Q2:2023 on revenue growth of 4.7%.
- Nine of the 11 sectors show positive earnings growth with four at double-digit rates. Just two sectors show earnings declining from a year earlier.
- This week brings another 16 firms reporting including companies in the technology and consumer discretionary and consumer staples sectors.
The gist of Fed Chair Jerome Powell’s remarks last Friday from the Kansas City Fed’s Annual Jackson Hole Economic Symposium was widely anticipated—more than intimating that a rate cut decision is likely at the September 18th FOMC meeting.
We can’t help but think that it was the downward revision to the cumulative payroll gains announced by the Bureau of Labor Statistics last week that subtracted some 818,000 jobs from the aggregate numbers released previously in the past twelve months that added to the confidence the Fed has been looking for to pivot policy even as economic resilience remains evident.
In aggregate, the BLS revision and several modest upticks in the unemployment rate and in several initial and continuing claims reports effectively put the proverbial “kibosh” on consideration of yet another pause when the FOMC announces its interest rate decision on September 18.
It sounded to us quite clear that the Fed is not thinking that the economy is in recession or looking as if it is about to slip into a recession, but rather that a beginning to an end of the current rate hike cycle is justified and nearer at hand than it has been since it started in March of 2022.
The market on Friday seemed to us to take the Fed Chair’s comments as an “enough is enough” assessment by the Fed for the current rate hike cycle rather than a need to fend off or avoid a recession.
Jerome Powell’s comments made after the July FOMC meeting suggested to us the Fed’s recognition of a need to expand the Fed’s current policy emphasis from a near singular focus on inflation to a broader consideration of its dual mandate that includes an objective of policy to support full employment (unemployment in a range of 3-4%). The latest unemployment number for the month of July at 4.3% likely helped nudge the Fed closer to a rate cut decision as well.
Of course there is no guarantee that the Fed will cut on September 18 but 20 FOMC meetings resulting in 11 rate hikes and nine pauses since March of 2022 suggest indeed that at least the beginning of the end to the cycle is “nigh” with inflation moving closer to the Fed’s 2% target, the economy still showing resilience as it slows somewhat and the unemployment rate rising somewhat.
While there never is an “all clear” signal sounded over the markets more things seem to be improving even as uncertainty remains on the landscape. Uncertainty after all has always been a part of the human experience, nature and the markets.
Our expectations are for the Fed to cut by 25bps in September followed by up to two cuts of 25bps each in November and in December “as needed.”
With the Cuts in the Bag, What’s Next?
As to next year—what will Fed policy look like then? More will be revealed via data points tied to the economy as well as earnings results in the weeks, months, and quarters ahead.
Stocks moving higher and bond yields moving lower last Friday came as no surprise to us on back of Powell’s comments.
In our view Powell’s remarks added support to a further broadening of the stock market rally from last October with S&P sectors that have lagged likely to benefit from a broadening in investor attention and appetite.
We expect information technology to remain among the sectors that can lead the market higher while sharing and giving other sectors room to participate and lead in the process.
While technology remains deeply embedded in the lives of business and the consumer the nine sectors outside of tech are likely to increase capex in tech related services, software, and hardware that can increase efficiencies in doing business and strengthen competiveness and employee and investor loyalty.
Small-cap and mid-cap stocks are likely to reengage their earlier rallies from last year’s Q4 and intermittent rallies they’ve had through the course of this year.
We remain overweight cyclicals versus defensive sectors while favoring broader diversification across style (growth vs. value) and market capitalizations.
Dividend growth and traditional dividend payers are looking increasingly attractive as bond yields move lower. We continue to see fixed income securities remaining complementary to equities in diversified portfolios.
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