Transcript

Victory Lap. · ANGLES.

0:01
SPEAKER_00: Victory Lap, my weekly market review, August 25th, 2024.
0:08
SPEAKER_00: Things got off to a somewhat muted,
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SPEAKER_00: low volume start on Monday with many A-list institutional traders at the beach this week.
0:16
SPEAKER_00: Their B-squads seem to be under orders to basically tread water,
0:21
SPEAKER_00: waiting to see if anything of interest emerged from either the annual Federal
0:25
SPEAKER_00: Reserve jamboree in Jackson Hole or the Democratic National Convention in Chicago.
0:32
SPEAKER_00: As the session wore on,
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SPEAKER_00: however,
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SPEAKER_00: the level of investor conviction and general chatter about a possible upcoming
0:40
SPEAKER_00: signal from the Fed on Friday concerning the start of a multiple interest rate cut
0:45
SPEAKER_00: process before year end seemed to intensify and stock prices ripped higher for the
0:51
SPEAKER_00: S&P 500's eighth straight day of gains,
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SPEAKER_00: its longest winning streak of the year.
0:57
SPEAKER_00: Remarkably, the index closed the day less than 1% away from its all-time record high.
1:04
SPEAKER_00: And the Nasdaq,
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SPEAKER_00: with an 8-day win streak of its own,
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SPEAKER_00: shifted back into a bull market just 11 trading days after having fallen into a correction,
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SPEAKER_00: the fastest such turnaround since 2011.
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SPEAKER_00: It entered a technical correction,
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SPEAKER_00: defined as having fallen more than 10% from a recent high,
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SPEAKER_00: on August 2nd,
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SPEAKER_00: then kept tumbling until August 7th,
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SPEAKER_00: including the washout plunge of August 5th.
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SPEAKER_00: Then, from August 8th through the 19th, the index rose more than 10%, ending the correction.
1:40
SPEAKER_00: stocks took a breather on a quiet tuesday with the indexes finally flashing red
1:45
SPEAKER_00: rather than green to end the winning streaks but the technical evidence suggested
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SPEAKER_00: that this was probably only a pause and consolidation in the rally caused by low
1:55
SPEAKER_00: volume profit taking in possibly overheated short-term conditions rather than any
2:01
SPEAKER_00: kind of fundamental negative re-evaluation of where stock prices should be
2:06
SPEAKER_00: On Wednesday,
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SPEAKER_00: the annual jobs report fact check showed a largely expected downward revision of payrolls,
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SPEAKER_00: reminding us that growth is definitely slowing.
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SPEAKER_00: We also saw a tale of two retailers.
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SPEAKER_00: Target's earnings and sales report was very solid,
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SPEAKER_00: but Macy's not so much,
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SPEAKER_00: and their respective stock price moves reflected that.
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SPEAKER_00: At an index level,
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SPEAKER_00: the rally resumed,
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SPEAKER_00: particularly in small cap names,
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SPEAKER_00: after minutes from the last Fed meeting indicated that there was a high level of
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SPEAKER_00: confidence among members about a September interest rate cut.
2:43
SPEAKER_00: The Fed's two-day Jackson Hole fiesta began on Thursday,
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SPEAKER_00: but Wall Street didn't expect to learn too much until Friday,
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SPEAKER_00: when Chairman Jerome Powell was scheduled to address the media.
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SPEAKER_00: With no real catalyst before then and anemic summer trading volume,
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SPEAKER_00: stocks and other risk assets floated lower on the back of profit-taking and bets on
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SPEAKER_00: the fact that we may be experiencing something of a short-term overbought condition
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SPEAKER_00: on the back of the recent rocket ride that began on August 7th,
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SPEAKER_00: especially in tech and AI names.
3:18
SPEAKER_00: Powell's address began at 10 a.m.
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SPEAKER_00: Eastern on Friday.
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SPEAKER_00: And as well as being a victory lap, it gave Wall Street the signal that it was looking for.
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SPEAKER_00: The time has come for policy to adjust.
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SPEAKER_00: The direction of travel is clear,
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SPEAKER_00: he said,
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SPEAKER_00: and expressed confidence in the continuation of inflation's decline and the Fed's
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SPEAKER_00: ability to pull off a historic soft landing,
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SPEAKER_00: signaling definitively that the process of interest rate cuts is now finally underway.
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SPEAKER_00: The word methodical was routinely used in reference to this process.
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SPEAKER_00: And the reading between the lines of what Powell said and listening to Fed speakers
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SPEAKER_00: and interviews after the event,
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SPEAKER_00: a jumbo cut of half a percent up front in September would now seem much less likely
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SPEAKER_00: than a steady stream of quarter point cuts in the Fed funds rate over the upcoming
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SPEAKER_00: Fed meetings in September,
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SPEAKER_00: November,
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SPEAKER_00: December,
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SPEAKER_00: January,
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SPEAKER_00: March,
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SPEAKER_00: and maybe even beyond.
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SPEAKER_00: Stock markets loved it and prices zoomed higher.
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SPEAKER_00: Once again, disproportionately led by tech and small cap names.
4:30
SPEAKER_00: The S&P 500 wasn't quite at a new all-time high by the end of the session, but it was pretty damn close.
4:37
SPEAKER_00: Since August 7th,
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SPEAKER_00: we have seen several examples of US economic data that has been better than feared,
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SPEAKER_00: but those fears were mostly irrational,
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SPEAKER_00: and they are obscuring the fact that the US economy is slowing.
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SPEAKER_00: We still don't yet know the answer to the question,
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SPEAKER_00: is the Fed merely normalizing interest rates into a soft landing,
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SPEAKER_00: or is it cutting to rescue the economy from a recession?
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SPEAKER_00: For a couple of trading days in early August,
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SPEAKER_00: investors piled into bonds and dumped stocks after a disappointing jobs report,
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SPEAKER_00: and recession became a trendy buzzword.
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SPEAKER_00: But that was ridiculous,
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SPEAKER_00: mostly the result of hysteria from a few attention-seeking commentators,
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SPEAKER_00: political operatives,
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SPEAKER_00: and a financial media desperate for viewers and clicks.
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SPEAKER_00: None of the economic data was then or is now pointing towards a recession.
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SPEAKER_00: To think that one is imminent simply isn't backed by any facts,
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SPEAKER_00: but that doesn't mean that one can't happen.
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SPEAKER_00: It absolutely could.
5:41
SPEAKER_00: On the flip side,
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SPEAKER_00: the removal of an imagined possibility doesn't actually mean the situation has got
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SPEAKER_00: any better.
5:49
SPEAKER_00: So buying everything in sight just because a non-existent risk seems to have
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SPEAKER_00: suddenly disappeared is just as irrational.
5:58
SPEAKER_00: The truth that the data shows is that U.S.
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SPEAKER_00: economic growth is slowing and the only question is by how much.
6:06
SPEAKER_00: The stock market is pricing in a perfectly executed soft landing by the Fed,
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SPEAKER_00: whereby they cut interest rates aggressively enough to relieve stress on consumers
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SPEAKER_00: and corporations and boosting profits for U.S.
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SPEAKER_00: companies without tossing the country into a dumpster fire or a recession.
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SPEAKER_00: It is generally underestimating how bad the effects of a soft landing failure will be,
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SPEAKER_00: even though such a failure is still not anywhere near a base case scenario as
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SPEAKER_00: things stand.
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SPEAKER_00: PS,
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SPEAKER_00: while there will be mostly smiles all over Wall Street when the Fed rate cuts arrive,
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SPEAKER_00: retail investors do need to prepare for something less welcome.
6:50
SPEAKER_00: those delightful 5% high-yield savings accounts will likely start to cut their
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SPEAKER_00: rates roughly step for step in line with what the Fed does in the coming months.
7:01
SPEAKER_00: Many savers have got very used to these kind of returns on their cash for taking
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SPEAKER_00: zero risk and will have to get used to a somewhat lower stream of free money going forward.
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SPEAKER_00: Even then,
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SPEAKER_00: however,
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SPEAKER_00: it's still going to be way more than any bank or credit union pays you in their
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SPEAKER_00: regular savings account.