Hello friends,
A few hours are left before the market opens after the FOMC has proclaimed the path forward for monetary policy, and Fed chairman Powell has added his two cents as to how things are faring. Futures are up, European and Asian markets rally, all seems fine …
Powell started the press conference with a monotonous “the economy is strong overall“, while soon after casually bringing a 50bp rate cut to the table – a contradiction in terms, and interpretable as yet another attempt at gaslighting the public. While as always there were different camps rooting for 50bp vs 25bp rate cuts, and arguments could have been made for both sides, and admittedly the Fed was in a tight space, though self-inflicted. A 0 or 25bp cut would suggest that the Fed believes the economy remains strong for which there is no other data than questionable government labour data that keeps getting revised dramatically downward in retrospect, or that the Fed is ignorant to the immense financial stress on the nation’s balance sheets, including their own. A 50bp, which does not happen that often under ‘normal’ circumstance, would admit that stress is high, the economy weak, and action on rates overdue.
Whichever cap you belong to, my opinion is that the cuts themselves don’t really matter right now. The Fed’s cycle of printing money, tightening and easing, and keeping inflation >0% is the cause for continued boom & bust over the last century. On the one hand, historically, Fed rate cuts have preceded economic recessions. On the other hand, the only reason the US has not already been in a technical recession (though in a de-facto one when looking at Manufacturing surveys, Housing permits, Small Business- and Consumer Sentiment) is that real GDP growth has almost exclusively been propelled by fiscal excess i.e. flamboyant government spending. The question is, will this continue beyond the November election? Will there be still need to window-dress the fact that most businesses that make up the economy have been suffering since 2020/21?
The stock market, as little data there is so far, has responded to Powell’s words with a fake rally lasting a few minutes, followed by strong selling near the end of day. The next few weeks will give a much better indication of whether the pattern currently formed on the SP500 will lead to new Highs soon rallying into November, whether the chop continues, or whether the majority of market participants are calling the bluff on Powell and de-risking their portfolios.
The SP500 is near local and all-time Highs, though has rejected both levels twice over the last two sessions. This is lowering the odds of a successful move, but does not nullify the possibility of a continued rally on the heels of the cut, or even a much-feared ‘melt-up’ into the election. The NASDAQ Composite, NASDAQ-100, Mid-, Small- and Micro-Caps are lagging even more so, stuck in secondary corrections, while only the NYSE Composite and the equal-weighted SP500 (RSP) are already trading near all-time Highs, suggesting continued leadership of the rally by financials, REITs, utilities, healthcare, staples and other defensives. Risk-on looks different.
For US stocks, I have taken a step back and increased my stringency a lot when looking at long opportunities. There are a couple of interesting biotech/pharma ideas (ADMA, INSM, RNA), but the only thing interesting to me right this minute would be RNG … a utility stock, a choice telling in itself:
Another of the better long ideas currently is German RHM, although volatility at the right side of the platform still needs to recede:
We’re facing a mixed, choppy market, often lacking conviction. It’s a good idea at such times to be active on the short side as well – I’ve been making money short some consumer discretionary issues (LULU, Swiss UHR, etc), and new entries are forming for example in Swedish Volvo or French Edenred. The best short was likely the collapsed ‘tech-bro’ & AI-leader SMCI that I marked as a topped-out laggard back in May, which could have been traded starting 24th of July up until now:
In all honesty, at this moment there are no setups that make me sit up straight in my chair. Speculative sentiment is limited, as the general lack of virile, liquid leaders and failures of stocks such as the Danish GUBRA suggest. Though most issues and market segments have, on the surface at least, recovered from the early-August Yen-carry trade selloff, chop and a general lack of convicted accumulation of leading issues by large market participants remain the problem. The large money drives the market in both directions, and right now it is still unclear which way we will go. Until a clear trend has established itself (and we might very well see that happen over the next couple of weeks), risk management should remain tight and exposure capped.
So long,
TGS