Markets are run by narratives. Take artificial intelligence (AI), for example…
The narrative has been that AI will deliver an era of massive growth. It will dramatically increase productivity and give companies a competitive advantage.
As a result, investors have bid up AI stocks exponentially higher.
Companies like Nvidia (NVDA) have benefited enormously from the first stage in the AI story (the hardware build-out). Meanwhile, the second stage (software adaptation and development) is still playing out.
We don’t know yet which companies are set to benefit, with contenders like Palantir (PLTR), CrowdStrike (CRWD), and Snowflake (SNOW) jockeying for first place. The goal is that they will eventually justify their sky-high valuations.
But that’s why folks need to remain cautious. OpenAI’s chief, Sam Altman, recently compared the runup in artificial intelligence (AI) stocks to the dot-com bubble.
And when a narrative fades or changes course, big winners can turn on a dime…
A New Narrative
The AI narrative helped drive stocks off their April lows. Yet now another narrative is creeping into the market…
And in this case, the Federal Reserve is playing a big part…
That narrative suggests that the Fed is readying itself to cut rates later this month (September 17). Fed Chair Powell has caved in to the relentless pressure from the White House.
Weakening jobs data and slowing economic activity will help the Fed justify the upcoming rate cut.
But with a September rate cut just about fully baked in (its probability remains well above 90%), the market is now looking further into the future. Some people are dreaming of as many as five 0.25% cuts by the end of next year.
And vitally, if the narrative that the Fed is about to enter a rate-cutting cycle comes into question, much of the energy behind the market’s rally could drain away.
That could pull stocks sharply lower.
Plus, there’s another narrative floating around that could turn out to be false…
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An Old Narrative Reappears
Inflation peaked in June 2022. It steadily fell until mid-2023. Then, after a brief rebound, it resumed its trend lower.
The narrative said that inflation was behind us. It became a “scare” from the past.
But as we discussed yesterday, inflation has been rearing its head over the past few months.
Many have forgotten last month’s Producer Price Index (PPI) blowout number. Few consider how producer inflation will soon find its way into consumer prices. Companies won’t be able to absorb those rising costs forever and will have to pass them on to customers.
We could very well face the crazy scenario where the Fed cuts rates right before inflation bursts higher.
Investors will no doubt cheer a cut on September 17. But you need to be wary that the narrative around future rate cuts could soon change.
The Fed could abandon any further rate cuts as inflation takes hold.
Plus, if the AI story starts to fade, the biggest narrative underpinning the rally could evaporate into thin air.
Happy Trading,
Larry Benedict
Editor, Trading With Larry Benedict
P.S. While much of the focus will naturally be on the Fed’s meeting this month, there’s another major event taking place the same week…
The two catalysts could lead to some massive swings and an extraordinary profit opportunity.
That’s why I’m holding a special Fed Decision Advance Warning briefing on Wednesday, September 10, at 8 p.m. ET – a full week before the Fed makes its interest rate decision.
I’ll show how you can profit from this massive opportunity if you’re ready before it hits.
To find out about it, all you have to do is RSVP with one click here.
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