The Fed signals "the time has come" to lower interest rates
Investors scrambled to buy the dip this week, pushing stocks to within a hair's breadth of year-to-date highs. Is there more in the gas tank or is all the good news priced in?
The S&P 500 Index is just shy of regaining its' all-time high for the year. Traders bid up stocks all week in anticipation of Friday's speech at the economic symposium by Fed Chair Jerome Powell in Jackson Hole, Wyoming and they were not disappointed.
Each year the world's central bankers meet in Jackson Hole for a three-day economic pow-wow. The symposium's participants comprise much of the global financial community's Who's Who. Deals get done. Bankers exchange notes behind closed doors while putting their best foot forward to the public worldwide. Jerome Powell did just that.
"The time has come," said Powell, to begin cutting interest rates. He didn't say when or by how much, but the markets expect the process to start at the Fed's next FOMC meeting in September. Ostensibly, this year's theme explored what lessons were learned from the response of monetary policy to both the pandemic and the subsequent surge of inflation. Learned papers and speeches aside, I suspect that what is occupying conversations among central bankers is the amount of debt economies have accumulated over the past few years in fighting the pandemic and its aftermath.
However, few in the equity markets care about anything but how stocks are going to move next week. In that case, Nvidia, which reports next week, will have much more influence on the short-term performance of the stock market than what the Fed says or does. The general belief is that this AI king of semiconductors will continue to surprise the market on the upside. If so, it would be a safe bet to believe technology stocks will continue to climb and bring the market along with it. A disappointment would impact the markets negatively.
The good news is that the number of stocks and sectors that are now participating in the upside continues to broaden. Industrials, financials, health care utilities, consumer durables, other cyclicals, and even real estate are gaining traction.
Gold has been an outstanding performer thus far this year and gold mining stocks are playing catch-up to the metal. I expect this outperformance to continue as the dollar continues to decline with interest rates. As for the stock market, we are close to all-time highs as I write this. There is a good chance that we break that level on the upside before we close out August unless Nvidia disappoints. September into October, however, may prove to be problematic for further gains. Seasonally, it is a bad time for stocks in general. Throw in the volatility that the presidential elections will generate, and we have the makings of a perfect storm for equities. Most traders I talk to are expecting a pullback. That would not surprise me, but I don't think it will be earth-shaking, so my advice is to stay invested. If you have some extra cash on the side, use that money to buy the dip. The most important thing that readers should not do is allow election fears to dictate what they do in the stock market. It has been shown repeatedly that elections have little impact on stock market performance, and I don't expect that to change now, regardless of who wins or loses.
Bill Schmick is a founding partner of Onota Partners, Inc., in the Berkshires. Bill’s forecasts and opinions are purely his own and do not necessarily represent the views of Onota Partners, Inc. (OPI). None of his commentary is or should be considered investment advice. Direct your inquiries to Bill at 1-413-347-2401 or e-mail him at billiams1948@gmail.com. Investments in securities are not insured, protected or guaranteed and may result in loss of income and/or principal.