Are stocks headed for a melt-up with the Fed set to ease rates over the next 12+ months? It could seem that way as stocks continue to print new highs as the ‘soft landing’ script firms. And whilst there might be further upside – the environment echoes a lot of what we experienced from the mid 1990’s. For example, at the time we had expanding growth, low inflation with aggressive easing from the Fed. What’s more, investors were very bullish on the promise of the internet – set to deliver powerful productivity gains. Stock multiples continued to expand as the S&P 500 delivered strong double-digit gains not seen in decades. Today conditions feel similar.
"Market History"
It’s Not Only Falling Inflation & Growth Risks Driving Rate Cuts
As inflation continues to moderate and the employment picture weakens – markets are trying to gauge just how much the central bank will move. A 25 basis point (bps) cut for September is now a 100% probability according to CME Group’s FedWatch tool. There’s a 63.5% chance of a 25 bps cut; and 36.5% of a 50 bps cut. Markets clearly want 50 bps… but they also know that very rarely is there just “only one rate cut”. This post explores the relationship between debt growth (across all sectors) and the overall trend for interest rates. It’s a relationship which is not often discussed – but would be remiss of investors to ignore.
It’s Fed Week… Market Sees Cuts Coming
Are rates restrictive? And if they are – how do you know? That’s the question the Fed will address tomorrow – but it’s not easy to answer. For example, on the one hand there’s a (large) cohort who believe the Fed are falling ‘behind the curve’ – therefore increasing the odds of a recession. They feel that growth risks are to the downside – and do not need to wait for both inflation and employment data to confirm what’s ahead. On the other side of the coin – there are those who think we still run the risk of higher inflation if acting too early.
Is the Market “Euphoric”?
It’s that time of year… where “Sell in May and Go Away” makes its typically annual appearance. Personally I don’t give it much weight… basically none. Who invests with the timeframe a few months? Not many that consistently make money. But therein lies the rub – this saying is only relevant as a function of how you choose to invest. Your time horizons are likely very different to mine. This post will offer background where the adage comes from. From there, I will try and answer the question of whether the market is “euphoric”. And finally, I’ll share some names that I’ve been adding to…. it’s not NVDA.
For a full list of posts from 2017…