The Door is Open. Time for the Fed to Act. How Much?
Weekly Market Outlook
By Donn Goodman
MarketGauge Pro
September 18, 2024
Happy to have you back with us. We hope that you had a good week in the markets as we watched most of our models outperform during this snapback rally.
The Door is Open
Investors have been anxiously waiting for the Fed to “take action” and reverse the interest rate tightening they began in early 2022. This past week new “data” came out showing a continued decline in wholesale and consumer prices.
With the CPI trending down and heading in the right direction, most economists and investors are optimistic that the door is wide open for the Fed to lower rates. Economists, analysts and investors are all waiting for Fed Chairman, Jerome Powell and his merry group of Fed Governors who vote (this week Wednesday), to begin to reduce the restrictive borrowing costs.
There are plenty of intelligent guesses as to how much the Fed may reduce rates. Most estimates are for a 25-basis point reduction although there are plenty of people who feel that rates have remained so high, the economy could use a 50-basis point reduction to start things off.
We had our own opinion and shared it with readers last week. We reviewed several potential scenarios last week, and if you have not yet had an opportunity to review (or wish to reread the column), this link will take you there.
Whatever the Fed decides, we do not think that “doing nothing” is a productive solution. Yes, inflation remains sticky and elevated, but with a 200 to 250-basis point spread between the Fed borrowing rates and the rate of inflation (trending down), they MUST do something!
One last point about this. Many forecasts are predicting a 125-150 (1.25-1.50%) basis point reduction in the Fed Fund rates by year-end 2024. We think that this is an overly aggressive estimation of what might occur. We would be in the camp that MAYBE we will see 75-100 basis points of reduction.
A Review of the Markets
After one of the worst weeks post Labor Day (September 3-6), especially in the tech heavy NASDAQ (QQQ) as well as small cap stocks (IWM), the market recovered. We saw the exact opposite action from the previous week with 5 up days for the S&P 500. Additionally, we saw a rebound in chip stocks. Small cap stocks must have gotten the memo that interest rates are about to decline soon, as they blasted off, especially on Friday.
Perhaps the most startling example of the bullish nature of the markets this past week was Wednesday when all the markets were in steep declines from the opening bell (Dow down 600+ points intraday) only to turn midday. The major indices finished up at the close. See chart below:
So far this year, these sudden and dramatic course changes have been followed by almost a mirror image of bullish activity as investors are pushed out, then pulled back into the markets. I can’t help thinking that this is a concerted effort by hedge funds and large institutional investors manipulating the markets for quick near-term profits.
Also, just based on volume spikes, one could see that retail investors have been quick to pull the plug on short-term profits and become heavy sellers only to discover a few days/weeks later they need to put the money back to work. A quick glance at a few charts illustrating the recent S&P activity and these short-term corrections over the past year. See below:
There is a sense that when investors sell and see the market turn around and head higher, they experience FOMO-Fear of Missing Out. See the chart below which shows this during the past 25+ years:
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In the above chart, Jason points out that when a big weekly reversal occurs near a new high, the S&P 500 has historically had above-average returns. Since 1957, 10 other significant reversals have occurred within 3% of a 52-week high (-3% weeks are followed by +3% weeks). This is what happened in the past two weeks.
Looking out over the next three months, the S&P 500 has been higher 90% of the time, by an average of +5.2% versus a typical three-month average of +3.5%. Summary: after recovering 4% from the previous week’s -4% loss, over the decades similar reversals have been MORE bullish than bearish for the market. Another good chart to illustrate this from our reliable source, Ryan Detrick is below:
Another good illustration of what occurred this past week is contained in the chart below. This shows the recovery in the indices as well as the chip stocks (SMH) and biotechnology (XBI). I like that these two areas are highlighted given Mish’s emphasis on these two sectors of the market in her Economic Modern Family. SMH is represented by “Sister Semiconductor” and XBI is represented by “Big Brother Biotechnology”.
Mish points out that these are two vital areas showing “risk on” and the health of the economy and the markets. This robust recovery in stock prices, especially these two areas this past week, bodes well for the longer-term health of the markets. If you would like more information on the Economic Modern Family and/or like to read Mish’s book “Plant Your Money Tree”, go here: https://www.marketgauge.com/book.
The summary of the above chart is that the short-term trend of the market has turned higher. These 4 ETFs had all fallen below a declining 5-day moving average and are all now above a rising 5-DMA. For this to occur in September and with an upcoming potential loosening of the Fed overnight lending rates is a sign of a more positive and bullish near term trend, these analysts believe.
If you read the Market Outlook from last week, you would have noticed that we did tell you that September 8-18 tends to be a more positive period in the difficult month of September. The jury is out as to whether or not this will inevitably be the negative month many investors expected.
Fun statistic of the week. See chart below:
What is driving the market’s return?
There are several factors. In these weekly Market Outlooks, we try to identify the main drivers of the stock market. Let’s review a few of the most important drivers so far in 2024:
Click the link below to continue reading about:
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7 factors driving markets higher
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Market sentiment
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The life span of bull markets
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The bull market in metals (i.e. gold)
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The Big View Bullets
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Keith’s weekly market analysis video
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The market’s price action and news flow can be confusing and intimidating, but investing in this environment doesn’t have to be. If you would like personal guidance and hands-on management of your assets with the assistance of tactical, risk-managed, strategies, please contact me at [email protected] or Keith at [email protected].
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