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Well, the market wanted it… and it got it.
On Wednesday, the Federal Reserve cut rates by 0.25%, citing concerns about a softening jobs market. It was the first cut since December last year.
A small majority of Fed officials even expect to cut two more times at the Fed’s October and December meetings. But there were plenty of dissenting opinions. Close to half of the officials at the meeting (nine out of nineteen) are predicting just one or no further cuts this year.
The market has rallied on the prospect of cuts ever since Jackson Hole. Yet Wednesday’s cut failed to fire up the markets.
Both the Nasdaq and S&P 500 struggled for direction and closed lower on the day. And even market darling Nvidia, which led much of this year’s rally, continued to slide on the news of China’s ban on its chips. (Also recall Sam Altman’s warnings of an AI bubble a month ago.)
It’s worth reminding investors to be careful… especially if future rate cuts don’t go to plan.
So let’s look at some of the complicating factors…
Juggling Jobs and Inflation
If the Fed is worried about the jobs market, I don’t understand why it only lowered rates by just 0.25% What does a 0.25% cut really achieve?
A 0.5% cut followed by another 0.25% cut next month would have gotten the market’s attention. Instead, investors are floating in no-man’s land.
Option pricing is telling me that the market’s bias is still to the buy side. But a 0.25% cut in October (with perhaps just one more cut in December) is unlikely to put a rocket under an already overpriced market.
The Fed’s decision highlights the challenge it is facing…
Inflation is still well above its target. So the Fed is essentially prioritizing jobs over controlling inflation. Yet eventually that higher inflation works its way through the economy, leading companies to put a cap on hirings.
Plus, inflation could soon grow as tax cuts put a new wave of stimulus into the economy.
With all this uncertainty, the Fed’s next move seems murky… and could change depending on the data that comes out.
So how should investors play it?
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A Divided Fed Board
I sound like a broken record on this… but investors need to remain extremely cautious. We may see a 0.25% cut next month. But then we have two months until the Fed’s next meeting.
And a whole lot could change in that span…
If inflation ratchets higher, the minority calling for only one cut (or none) could soon become the majority. Jerome Powell might be unwilling to divide the board with further cuts.
Plus, job numbers and openings have been trending down (and unemployment up). But there is always the possibility of a rebound. Alongside sticky inflation, that could put a hold on cuts. The Fed has already walked back from rate expectations for next year.
And of course, on the flipside, there’s always the risk that the job market could deteriorate significantly. That would have major ramifications for the economy and stocks.
So even a series of rate cuts may be unable to prop up falling stocks. And those who’ve become accustomed to buying the dip could be in for large losses…
That’s why I’ve continually reminded you of the value of trading in these moments… Rather than focusing on your long-term view, you can use short-term trading to make money even when markets start swinging up and down.
So I’m glad you’re here… and I aim to give you the tools to thrive even when market volatility returns.
Happy Trading,
Larry Benedict
Editor, Trading With Larry Benedict
P.S. Want more of my take on the Fed’s decision? Eric and I discussed our concerns on the Trading With Larry Live podcast… If you like this type of content, please like and subscribe!
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