The Weekend Edition # 147 - Are We Ready for a Soft Landing?

Welcome to another issue of the Weekend Edition!

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Here's what we cover

• Market Recap - The Fed Suprises Us

• Macro - Ready for a Soft Landing?

• Closing Thoughts - Still Large Cap Value

• Calendars

Market Recap - The Fed Suprises Us

16 Sep - 20 Sep 2024

“The Fed would likely consider every possibility before they start out with a jumbo cut of 50bp.” - That’s what I’d written about a month ago in my Weekend Edition.

Well, the Fed certainly seemed to have considered every possibility then! I have to admit that I am still surprised that the Fed cut by 50bps and laid out such an aggressive path ahead - a full 1% for 2024.

While the Fed surprised with their dovish projections of 200bps of rate cuts until the end of 2025, the Bond Market was pricing in an even more dovish scenario with over 200bps of cuts for the same time period. With that, we saw some adjustment to expectations, and the yield curve bear steepen, i.e., led higher by the long end of the curve.

The market seems to still be adjusting to whether the Fed cuts are hawkish or dovish. We saw the S&P 500 reach an all time high on Wednesday, the day of the Fed meeting, but move lower into the close. However, Thursday brought a new all time high, as well. One thing to note though is that breadth is improving, i.e., the market is not being led by just a handful of stocks. Here are some breadth measures:

Commodities

Precious metals had a great week - particularly Gold, which hit another all time high. We think gold could go higher, and at MacroVisor we have a call for $3000/ounce. I can’t help but wonder, if gold is signaling that things are about to get much worse before it gets better!

Macro - Ready for a Soft Landing?

If there’s one thing that the Fed is trying to tell us after this week, it’s that they will do anything to engineer that soft landing. Last month, I talked about how the Fed could technically, achieve that soft landing if they started cutting in September, because economic growth still remains strong enough for there not be any hint of a recession. We’re seeing exactly that situation now, with the Fed doing insurance cuts aggressively enough to avoid being the cause of a recession.

The economy could still slip into a recession, but the probability is much lower if the Fed follows the current rate reduction path. However, we’re probably not going to stop talking about the “R” word, until we are well into 2025 and we have evidence that the Fed is indeed following the aggressive path that they’ve laid out.

When Greenspan cut rates in 1995 from 6% to 5.25% in 6 months, it was called a “recalibration” of rates. It shouldn’t come as a big surprise that Chair Powell used the same word, and every major analyst out there is picking up on that. The Fed’s actions at the time are widely regarded as a successful attempt at achieving a “soft landing” for the U.S. economy. The US avoided a recession, the labor market remained stable and inflation remained under control.

At the time, markets responded positively to the cuts. The stock market rallied, with the S&P 500 rising about 13% in the months following the initial rate cut. The yield curve bear steepened, meaning that long-term Treasury yields rose faster than short-term rates. With bonds becoming less attractive, equities were favored.

There are still some risks to bear in mind.

Let’s not forget that this time the strength in the US economy was largely driven by fiscal spending. So if the fiscal impulse is slowing, we may not see growth being as sustainable as previously imagined. Let’s also remember that we’re in an election year, and both the US Presidential Candidates have policies that are inflationary. This cycle may not be as smooth as the 1995 era. But, we certainly think stocks are better than bonds!

Closing Thoughts - Still Large Cap Value

While the markets focus for the first half was solely on inflation, the focus for the second half is more on growth risks, earnings, and the geo-political uncertainty, including the US elections.

Seasonality and volatility could extend in to October, given the upcoming US Elections. However, we’re gradually seeing the market broaden out. As we see earnings start to slow among the Mag 7, the rest of the 493 are gradually catching up. This brings some much-needed stability to the market among an otherwise volatile time.

This could be a good time to continue to accumulate equity positions. We continue to like large caps and value. Even within small caps, we would lean towards more small cap value.

Have a great week ahead!

Sincerely yours,

Ayesha Tariq, CFA

There’s always a story behind the numbers.

Calendars

US Earnings Calendar

US Economic Calendar in Eastern Time (Source: Trading Economics)

None of the above is Investment Advice. I may or may not have positions in any of the stocks or asset classes mentioned. I have no affiliation with any of the companies other than explicitly mentioned.