Key Takeaways
- Fed’s Aggressive Half-Point Cut Signals Caution Amid Economic Uncertainty
- Stock Market Rallies, But Global Slowdown Concerns Still Loom Large
- Commodities Like Oil And Copper Drop, Raising Global Economic Worries
One day after Jay Powell and the Federal Reserve cut interest rates by a half of percentage point, stocks partied, to quote Prince, “like it’s 1999.” The Dow Jones Industrial Average jumped 1.26%. The S&P 500 gained 1.7%. Both of those indices closed at all-time highs. The Russell 2000 added 2%, while the biggest winner of the day, the Nasdaq Composite soared 2.5%.
I will admit, I was a little surprised by the magnitude of the cut. This particular Fed has tended to move slowly and methodically, in quarter-point increments. I expected them to continue in that manner. Therefore, it’s fair to ask why a half-point now? I think there are three potential answers to that.
The first answer has to do with staying in front. The Fed was criticized as being slow to respond when inflation up ticked. We all remember the “transitory” characterization offered at the time prices began rising. That led the Fed to embark on a tightening path that went on for quite some time. It’s very possible the Fed did not want to make the same mistake this time and opted to be more aggressive.
A second theory has to do with the Fed calendar. The Fed last met in July, where rates were left unchanged. There was no meeting in August and there will be no meeting in October either. Because of that, you could argue the Fed would have cut in either August or October, but since there is no meeting then, they essentially cut twice in September.
The first two theories do not necessarily suggest anything about a weakening economy. You could suggest the economy is fine and inflation has come down, allowing rates to come down. The third theory, however, is a bit more troublesome.
A potential third reason for the aggressive rate cut is that the Fed is seeing something concerning either domestically, globally, or both on the horizon. We have seen a weakening job market and consistent downward revisions to past reports. We’re hearing about sizeable layoffs from certain companies. In fact, an article in today’s Wall Street Journal says since January, tech companies have cut about 137,000 jobs. During the last earnings cycle, we also heard a number of companies keep forward guidance either at current levels or revise lower. The latest examples of that were FedEx and Mercedes.
Overnight, shares of FedEx tumbled after disappointing earnings. The company missed on both earnings and revenues and also guided lower for the full year. In premarket, shares of FedEx are down 13%. We also heard from Mercedes yesterday, which warned on their future profits as a result of slowing sales in China.
The lowered guidance by both these companies is a little concerning. FedEx is often seen as a proxy for the economy and when they issue warnings, it’s usually because they see a slowdown in overall economic activity. With respect to Mercedes, they specifically called out China, which is troublesome because China has been struggling economically. Also, in somewhat of a surprise, despite cutting interest rates back in July, the People’s Bank of China unexpectedly left rates untouched this morning.
Additionally, it’s worth reiterating oil and copper prices have been trending lower this year, especially in the second half of the year. As I’ve discussed before, both of these commodities are seen as foundational to economic growth and a drop in prices could be tied to a global slowdown. On the bright side, we’ve seen a slight reversal higher in these products recently, but overall prices are still down quite a bit.
Finally, turning back to interest rate cuts for a moment, I want to draw attention to past easing cycles that began with a half-point cut. If history is any sort of indication of what to expect in markets, it could be time for investors to be cautious. The last two times the Fed cut rates this much to kick off a period of easing were in 2007 and 2001. If we look at where markets were two years after those cycles began, stocks were down substantially. For the 2001 cycle, stocks fell 31% over the next 24 months. In 2007, stocks were down 26% after two years.
Now, I will point out that the past does not necessarily predict the future. In fact, the recently completed tightening cycle and inverted yield curve did not result in the economic doom in gloom we’ve seen historically. Therefore, there is no guarantee that we will see a repeat of what happened in 2001 or 2007. I am simply bringing those years up for potential context.
For today, stocks are looking slightly lower in premarket and today is a quadruple witching where equity options, futures, options on futures and index futures all expire. Quadruple expirations like this are a quarterly event and can bring some added volatility. Today’s expected move for the S&P 500 is 33 points, which means a total trading range of 66 points is possible. What I would like to see is for stocks to follow through on yesterday’s action. Right now, 79% of stocks in the S&P 500 are above their 200-day moving average and 82% are above their 50-day moving average. That suggests the market is broadly rallying and a continuation of that would be bullish. As always, I would stick with your investing plan and long-term objectives.
tastytrade, Inc. commentary for educational purposes only. This content is not, nor is intended to be, trading or investment advice or a recommendation that any investment product or strategy is suitable for any person.