Algos and traders kept pushing stocks higher last week, betting on the idea that the Fed is about to announce a larger-than-expected rate cut on Wednesday. Billionaire hedge fund manager John Paulson and Wharton School Professor Jeremy Siegel are just two of the people calling for the Fed to be more aggressive, writes Kenny Polcari, chief market strategist at SlateStone Wealth.
Recall that the original expectation was for a 25-basis point cut. But traders and algos were not happy with that, and started demanding a 50-bp rate cut. So, stocks rallied hard again, with the Dow gaining 297 points, or 0.7%, the S&P 500 up 30, or 0.5%, and the Nasdaq up 114 points, or 0.65%.
Remember the Wall Street Journal article I told you to watch for two weeks ago? The one where “Nicky T” lays out a plan for a 50-bp rate cut? Well, it came out in last Thursday’s edition: “Federal Reserve Chair Jerome Powell Faces a Difficult Decision as the Central Bank Prepares to Cut Interest Rates Next Week: Start Small or Begin Big?”
Utilities Select Sector SPDR Fund (XLU)
The article (released during the pre-meeting quiet period for Fed speakers) made it clear that the Fed may be considering a 50-bp rate cut. The article is the way the Fed “tests” the market’s reaction. And it is exactly what I told you was likely to happen if the Fed was really considering a bigger cut.
In any event, market action will be about what the Fed says after they announce the cut. Will they define the new neutral rate? Because right now, it’s all over the place. Some are calling for a 3% neutral rate while others suggest it’s more like 4.5%.
Will they tell us that the job market is not as bad as Paulson and Siegel suggest? Will they be able to convince the markets that they are not behind the eight ball? Nobody expects it to be “one and done,” so we still have meetings they could cut at in November, December, and next year!
In my opinion, if JJ cuts aggressively (50 bps), it screams “Houston, we’ve got a problem,” which again would be cause for a sell off. So, he is walking a fine line. He needs to be clear that the Fed is not panicking.
In any event, all sectors rallied nicely last week, but guess which one was the standout? Utilities! The most boring, “un-sexy” sector gained 1.4% and is now up 24% year-to-date. What that tells you is that investors are expecting rates to come down, because when they do, money moves into utilities due to the typically high dividends they pay in addition to the growth prospects that many of them are now displaying.
Down the food chain, we also saw Homebuilders surge – rising 3.3% on the idea of lower rates. Retail also gained 2.9%. On Friday, gold also kissed and pierced a new century mark at $2,600 per ounce. An amazing performance for gold, +24% YTD.
