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Powell’s Ready to Cut… And Not Just Once
Today Fed Chair Powell delivered precisely what the market wanted to hear… help is on the way. As a perpetual (closet) dove – Powell did his best to stay balanced however the cat is now out of the bag. Rate cuts are coming. And there will be more than one. Consistent with other meetings – Powell said rate cuts are an option if economic data continues on its current path. In other words, it was the (same) scripted “data dependent” Fed.
However, there were some important nuances.
Quarterly Real PCE Up YoY… As Savings Fall
The market received three important data points this week – inflation, wages and consumer spending – and it was mostly good news. First up, inflation continues to moderate. The Fed’s preferred inflation index – Core PCE – showed prices increased at a moderate pace for June— confirming excessively high inflation is behind us. However, prices are still ~30% higher than 3-years ago… they’re just rising at a slower pace. Whilst inflation is important – I wanted to know if consumers are still spending? The answer is they are – and by whatever means possible. They are drawing down on their savings and ramping the use of credit cards – which has seen card delinquencies hit decade highs. But from equities perspective – higher spending is good news. This feeds the ‘soft landing’ narrative….
The Three Stages of a Bull Market
Charlie Munger once warned us when wishful thinking takes hold – investors tend to believe that good times will be followed by more good times. This mentality feeds on itself – driving momentum – pushing prices higher. It’s what fuels the final stages of a bull market. Attributes such as independent thought, logic, rationale and objectivity give way to herd behavior. That’s when your internal alarm bells start ringing… and you start thinking differently from the crowd. Very few people have the ability to do that… but it’s what’s required.
The Big Tech Unwind
Can the market let the air out of the bubble without consequence? The answer relates to my post on economic cycles. That is, panics and busts only occur after booms and bubbles. But what a minute – are you saying this is a bubble? My answer to that is look at where we are in relation to the long-term mean. That’s your litmus test. For example, if we simply take the S&P 500 – it trades at ~22x forward earnings (on the assumption earnings growth this year is 12%). The 10-year average forward PE for the S&P 500 is ~18x (mostly as a function of long-term yields trading near zero). And the 100-year forward PE average is closer to 15.5x. And if we look at tech specifically – valuations are even more extreme.