Ginned Up
The market popped higher after 'Fed Day'... The promise of more 'juice'... But what if Powell is wrong again?... Inflation hedges are moving higher – for good reason... The 'dark side' of a Fed rate cut...
The 'juice' hit today...
After the Federal Reserve announced its first bank-lending rate cut since 2020 yesterday (with a promise of more to come), the markets oozed with optimism – or greed, depending on the view.
All the major U.S. indexes were higher by at least 1% today. The benchmark S&P 500 Index and equal-weight version hit new all-time highs, as did the Dow Jones Industrial Average. The tech-heavy Nasdaq Composite Index was the outperformer, closing 2.5% higher. Meanwhile, artificial-intelligence darling Nvidia (NVDA) was up roughly 4%.
Clearly, Wall Street investors liked what they heard. I (Corey McLaughlin) even heard one Wall Street veteran say "the Fed is with us" on Bloomberg Radio this morning.
As we wrote in last night's edition, the Fed said it was cutting its federal-funds target by 50 basis points, or half a percentage point. That brings the new range to between 4.75% and 5%. And Fed Chair Jerome Powell sounds like he's intent on peppering the economy with monetary policy "juice" now, in the months ahead, and likely beyond.
The Fed's care has gone from high inflation to... something else...
"The U.S. economy is basically fine," Powell claimed during yesterday afternoon's press conference. Yet, he also said people should take the Fed's 50-basis-point cut "as a sign of our commitment not to get behind" the trend of a weakening jobs market and rising unemployment.
The word of the day was "recalibration," meaning the central bank is looking to ease policy from what the Fed has considered to be restrictive to something more neutral.
Powell doesn't know (or wasn't willing to share) the interest-rate level the Fed will ultimately cut to. Yet he did offer something to keep in mind over the long term: "The actual things that we do will depend on how the economy evolves."
I would urge everyone to write down that statement if you're interested in what the Fed might do next, at least while Powell is still the chair. I say that because Powell's tenure may depend on who wins November's presidential election. Both candidates favor rate cuts. But while Powell's comments about immigration being a driver for higher unemployment rates probably won him points with Donald Trump, it likely didn't endear him to Kamala Harris.
Still, no matter who is in charge, the bigger picture is the central bank is a reactionary body, using months-old, backward-looking data to make decisions...
What is happening with the economy (and the market)...
The unemployment rate has trended higher since April 2023 and multiple prerecession or recession signals have emerged in recent months. At the same time, defensive sectors like consumer staples and health care have outperformed mega-cap tech stocks since July.
We could see more of that trend if the economic "data" continues to worsen from here. That goes for unemployment, GDP (still projected at around 3% growth for the current quarter), and the rest of this earnings season and next. Leading indicators of the manufacturing and services sectors have also had concerning readings lately, which have led to down days in the market the past few months.
But the bigger surprise might come from the inflation side...
What if inflation isn't conquered, as the Fed is suggesting?
Personally, we're skeptical that it is. Today, the bond market was, too.
The Fed's central bankers also published their quarterly projections yesterday, which are ultimately always wrong. But people like to believe they're worth something.
Each of the 19 central bankers in the room for the Fed's two-day policy meeting projected multiple rate cuts by the end of the year and expect to green-light another 1% of easing in the fed-funds rate next year.
While shorter-term bond yields, which tend to track Fed policy, were lower, longer-term bond yields rose. The 10-year Treasury moved above 3.7% and the 30-year Treasury rose above 4% – despite the Fed saying many more cuts are planned.
As our Ten Stock Trader editor Greg Diamond wrote to his subscribers today...
This indicates that the Fed has made a mistake that the bond market is getting ahead of. Most likely, bond investors don't believe that inflation will go back down to the Fed's 2% target anytime soon.
The U.S. dollar is also holding firm despite a cut in the world's reserve currency.
As I mentioned yesterday, this has all the makings of a "sell the news" event. Volatility isn't going anywhere, so get ready for a lot of trading.
This is something to watch. A reignition of high(er) inflation would upset most current market expectations – and Americans' budgets again.
But remember, stocks, bought at reasonable valuations, are great inflation protection in the long term.
For now, the primary market story is the overwhelmingly bullish reaction to yesterday's "first cut" and the promise of more.
Gold was popular today, too – for good reason...
Rate cuts are intended to juice the economy, and they lead to more inflation... which means more value for "real assets" like gold.
As a result, gold moved higher today to a new all-time high of around $2,590. Gold is up 25% in 2024 and is in a strong uptrend above its 50-day and 200-day moving averages.
As we wrote last month, the long-term technical setup for gold looks good... and it has at least three major fundamental catalysts going for it...
1. The threat of escalating war in the Middle East and the ongoing war between Russia and Ukraine. Simply put, more developments in these wars could lead to further "shocks" for stocks and send investors into "safe haven" assets like gold or bonds.
2. It looks like the Federal Reserve is comfortable returning to "business as usual" and will [continue to] lower interest rates. This isn't that long after the economy endured a 40-year-high rate of inflation (and still-rising prices). Cheaper dollars means rising prices for dollar-denominated assets... like gold.
Other central banks are also buying gold as a way to hedge against the dollar... to the tune of more than 1,000 tonnes in each of the past two years.
3. Campaign promises from the U.S. presidential candidates to "fight" inflation. We've seen this story before... The proposed policies, in one way or another, will only exacerbate U.S. debt and inflation, and certainly won't get to the root of the problem: fiat currency and money printing.
We're not alone in our thoughts here.
Futures traders' sentiment on gold has now reached extremely bullish levels, as True Wealth editor Brett Eversole discussed in today's edition of the free DailyWealth newsletter. As Brett explained, though, such an extreme in any asset is often a "strong contrarian signal."
In this case, that would suggest gold is due for a pullback. But as Brett said...
The reality is more complicated...
Sentiment in the futures market tends to track prices. When the trend is up, folks get more bullish. Eventually, they get so bullish that a slowdown – or a major reversal – is inevitable.
There's a catch, though. While bearish sentiment almost always signals a market bottom, bullish sentiment doesn't always mean a crash is incoming.
Brett went on to show four other instances since 2010 where gold has seen major bullish sentiment peaks. In two cases, prices were down double digits in the next seven months. But after the other two, prices continued to boom. So Brett concluded...
We don't know how things will shake out this time. But today's sentiment levels, while elevated, aren't as high as we've seen in the past. Folks can still get a lot more bullish before the current boom ends.
It's worth being cautious, though.
Elsewhere, if 'digital gold' is your preference...
Bitcoin is up more than 5% in the past 24 hours, continuing a run of roughly 20% gains in the past two weeks.
But the technical picture for bitcoin doesn't look nearly as strong as gold's right now, as DailyWealth Trader editor Chris Igou wrote today. Despite bitcoin's recent strong move, it's still trading below its long-term, 200-day moving average...
You see, bitcoin has entered a series of lower lows and lower highs. This downward channel has been consistent over the past six months. And in August, it caused bitcoin to fall below its 200-day moving average (200-DMA).
This trend line acted as "support" in July. But when bitcoin fell below the 200-DMA in August, the trend line turned into "resistance"... sending the cryptocurrency lower again. Check it out...
The downward channel has been consistent for six months. That shows it's strong. And it's likely to continue now that the 200-DMA is acting as resistance.
Chris said that if bitcoin turns lower from this "resistance" level, it could fall to lower lows near $50,000. Alternatively, if the rate-cut buzz pushes bitcoin above its previous high in August, the long-term trend would be bullish again, and "then we could look for an entry point."
DailyWealth Trader subscribers and Stansberry Alliance members can read Chris' entire issue from today here.
You might be sensing a theme here...
While Mr. Market appears ginned up on a fresh round of juice, several of our editors are advising caution in various market sectors.
That's not to say it's time to go "all out." But remember, the Fed is cutting rates because it sees economic weakness. And with the major U.S. indexes near new highs, that may not be fully appreciated or realized in the market yet.
Finally...
Don't forget our friend Marc Chaikin has been tracking this story. Marc is the founder of our corporate affiliate Chaikin Analytics. And he's put together a new presentation to share what the Fed's decision will mean for the markets.
In short, he says there's a "dark side" to rate cuts that most people don't understand. But he's going to explain it all tonight at 8 p.m. Eastern time.
Make sure you tune in. All viewers will hear Marc's take on the Fed, plus what he recommends you do with your portfolio to prepare for what's next. The event starts in less than two hours. Click here to register so you don't miss anything, or watch starting at 8 p.m. sharp.
New 52-week highs (as of 9/18/24): Alpha Architect 1-3 Month Box Fund (BOXX), Western Asset Emerging Markets Debt Fund (EMD), iShares MSCI Spain Fund (EWP), Fair Isaac (FICO), Fidelity National Financial (FNF), Nuveen Preferred & Income Opportunities Fund (JPC), Omega Healthcare Investors (OHI), Planet Fitness (PLNT), Construction Partners (ROAD), Skeena Resources (SKE), Texas Pacific Land (TPL), and The Trade Desk (TTD).
A quiet mailbag today... As always, send your comments and questions to feedback@stansberryresearch.com.
All the best,
Corey McLaughlin
Baltimore, Maryland
September 19, 2024