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Last week’s market action caught plenty of people off guard…
The major indexes initially rallied in anticipation of a rate cut. But then they topped out on Wednesday after the cut announcement and stayed lackluster going into the weekend.
The dip came despite news of President Trump’s trade war truce with Xi Jinping, which would ordinarily have fired up the market…
We also had some big beats from Magnificent 7 earnings. Amazon (AMZN) initially gapped up around 13% in extended trading. Yet Microsoft (MSFT) sold off over concerns about the size of its AI spend. And Meta Platforms (META) tanked despite beating earnings estimates.
You can’t take anything for granted in this market. And you need to be ready for more surprises ahead…
The change in interest rate expectations was yet another jolt for investors…
Going into the Fed’s meeting, an October cut was practically locked in. And markets were factoring in a 92% probability of a 0.25% cut in December.
But Powell’s comments after the meeting showed that the December cut might no longer be a sure thing…
He said that a cut was “not a forgone conclusion.” He also shared that despite the 10-2 vote in favor of the October cut, there were some “strongly differing views” about the rate path going forward.
The board remains strongly split on the future of rate cuts. And the market now assumes less than a 70% probability of a December cut.
This rally was built in part on the prospects of rate cuts. But that cutting cycle might already be coming to an end.
And that’s not the only issue that could surprise the markets…
One of the major catalysts for the rate cut was softening in the jobs market.
Yet when the Fed cut last week, the government shutdown was entering its fifth week. The Fed had no new information at hand – only ADP data showing that private businesses on average created 14,250 new jobs each week for the four weeks ending October 11.
And then there’s inflation…
The September Consumer Price Index (CPI) data came in slightly below forecasts late last month. However, it showed that year-over-year inflation was tracking at 3% – well above the Fed’s target. And it has now been steadily climbing since April…
If government bureaus remain furloughed, we’ll also miss the core Personal Consumption Expenditures (PCE) inflation reading later this month. That will be the second month without that key information…
That will make it even more difficult for the Fed to entertain the idea of another rate cut. And it could spook the market as it rolls into year’s end.
Additionally, the trade war is far from settled. The truce between the U.S. and China could come undone, despite Trump talking up the results of the meeting.
It is shaping up to potentially be a volatile end to the year… And that could finally throw the massive bull market off course, especially if we see cracks in any of the Mag 7 stocks.
Whether or not a huge sell-off is imminent, it’s worth being ready for any potential surprises.
We need to stay disciplined and cautious and only do trades with the strongest setups.
And just as quickly, we’ll be ready to take profits off the table.
Happy Trading,
Larry Benedict
Editor, Trading With Larry Benedict
Reading Trading With Larry Benedict will allow you to take a look into the mind of one of the market’s greatest traders. You’ll be able to recognize and take advantage of trends in the market in no time.
