Hope all is well with you. The Dow on Monday eclipsed a record high that it had set in mid-July while the S&P 500 followed suit on Thursday as stocks were lifted by the first interest-rate cut since March 2020. Each of the major indexes gained around 1.5% for the week, leaving the NASDAQ nearly 4% shy of its historic peak. Shogun was the big winner at this week’s Emmy awards. I have broken down this week’s update using quotes from the show.
“You’d walk into a sword just to prove the blade is sharp?” – Blackthorne
Like Blackthorne, I question the Fed’s strategy. I think it could prove unnecessarily dangerous for investors. The Federal Reserve on Wednesday cut its key lending rate. It gave the market exactly what it wanted, opting for a reduction of 50 basis points, or 0.50%. I would have rather seen a more incremental 25-point cut. The reason I hoped they would go smaller is now the market is going to expect further cuts and continued aggressive easing. This could lead to disappointment at Fed meetings in early November and mid-December. The day after the Fed’s rate-cut announcement the NASDAQ jumped 2.5%, the S&P 500 added 1.7%, and the Dow rose 1.3%.
“If you look and see nothing, you must simply look harder.” – Kiku
The retail sales number seemed like a non event. It barely grew however it’s important because it shows the consumer is still strong. The increase in monthly retail sales beat the expectations of most economists. Most had predicted a slight downturn. Sales rose 0.1% in August, and the Commerce Department also issued a positive revision to July’s gain. Consumer spending has remained strong despite elevated interest rates which is all the more reason the Fed did not need an aggressive rate cut.
“I don’t control the wind. I just study it.” – Toranaga
An inverted yield curve is often viewed as the harbinger of a pending recession. For two years we have been told economic headwinds are coming. Those headwinds never materialized and the yield curve is no longer inverted. This indicates that investors no longer see a high potential for an economic downturn. Since mid-2022, the yield of the 2-year U.S. Treasury note had been higher than that of the longer duration 10-year Treasury. On September 4, the 2-year yield crossed back below the 10-year yield, and it has since stayed there, with Friday’s closing 2-year yield at 3.58% and the 10-year yield at 3.73%. The Fed’s move has helped fuel optimism about the economy. Studying history and looking at previous half point cuts in this instance gives us the wrong impression. The previous aggressive moves by the Fed have been synonymous with shocks to the economy. The last three times the Fed cut rates by 0.5% in a single meeting during an easing cycle was in 2020 in response to the pandemic, in 2008 in response to the financial crisis, and in 2001 in response to the bursting of the tech bubble. Clearly this time is different. The sense is that the Fed is cutting from a position of strength. The previous 3 times were because it had to. This larger cut is not a reactive strategy to recessionary conditions. Rather it is a proactive strategy to prevent an unexpected slowdown in employment. While I don’t love the size of the cut, I understand it. The hope is it will help preserve the economic expansion.
If you’d like to speak about your investments or your plan, my calendar link is below and you can schedule a phone or zoom appointment.
