While the markets responded strongly to expectations of multiple Fed rate cuts in 2019, once it is clear that those rate cuts are necessary based on a weakening economic outlook, the market’s reaction my change, notes Landon Whaley.
In the moments leading up to last Wednesday’s FOMC statement, a Bloomberg anchor referred to it as “the most important meeting this year…so far.” Everyone and their mother who had money at risk or is otherwise impacted by Fed decisions, tuned into to see what the Fed would do and more importantly, what Powell would say.
The announcement turned out to be a big ‘ole nothing burger.
Despite no significant developments, the Fed funds futures market is now indicating an 80% chance of a Fed rate cut in July (slightly more than before the meeting). To those people I say, heed Powell’s warning from Wednesday, "There was not much support for cutting rates now at this meeting. It would be better to see more before moving." I’m not saying the Fed can’t cut in July, but if they do, the cut would be completely politicized because the Fed will not have the data to support a cut in July.
That said, a Fed rate cut (or two) in 2019 is a done deal, but it’s the timing that you have to manage. The most likely order of events is more dovish speak in July, followed by a full-on dovish cry at Jackson hole in August, paving the way for the first cut in September. By that time, the Fed will have all the data they need as U.S. growth will have slowed for nearly a year, inflation will have experienced its own year-long bear market, and we will likely have further deterioration in the labor market.
Despite the coverage the Fed and rate cuts are getting, there are two things to keep in mind that no one is discussing but that significantly impact how you position yourself as we traverse the second half of the year.
First, even if we get the expected two rate cuts this year (no matter the amount), the Fed won’t arrest the downward trajectory in U.S. growth (which means we will toggle between either a Fall or Winter FG no matter what) and it won’t bend the corporate earnings cycle and avoid the earnings recession later this year.
Second, between now and whenever the rate cut occurs, we’ve got a Winter FG environment to navigate. Investors who are buying the bounce in sectors like semiconductors, basic materials, and financials are going to find out the hard way that Winter is here.
I know it’s easy to get caught up in the headlines and the rampant speculation about what’s to come. Sticking to our foundation of remaining data-dependent, process driven, and risk-conscious ensures we limit how much our own humanness negatively impacts our decision making.
The bottom line is that there wasn’t a single development last week that changes either the current Fundamental Gravity reality or the playbook for U.S. markets.
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