Key question is how dovish is the Fed
(These are the market notes on today’s action by Mike Santoli, CNBC’s Senior Markets Commentator. See today’s video update from Mike above.) The market is settling itself 24 hours before the expected resumption of Fed rate cuts into a steady economy with loose financial conditions, with the key questions surrounding how dovish the Federal Open Market Committee’s outlook for policy will be – and how much of this anticipated friendly scenario has already been built into market prices. All of Wall Street is sharing and celebrating the historical studies of what happens when the Fed drops rates after a long pause and when the stock market is within 2% of a record high. In both cases, the forward performance of stocks has been stronger than average. And, of course, whenever the Fed cuts without a recession striking in the following year, the market has done well. A year ago such studies were popular, and it turns out the market since then has played by the script. This is all both intuitive and reassuring, though in the immediate days and weeks after a cut, the market has often had some indigestion. And, of course, the parameters used for such studies can be crucial. In September 2007 the Fed eased with the S & P 500 within about 3% of a record high; a year later it was 20% lower on its way to being cut nearly in half. Better-than-forecast retail sales for August out Tuesday contributed a sturdy reading to a dissonant set of macroeconomic signals. Spending has been uneven this year with pull-forward demand ahead of tariffs, then some payback followed by an apparent reacceleration. Unless and until we see outright net losses of jobs, consumption should hold up. And more-affluent households are spending heavily thanks to a wealth effect from rising stock markets and healthy interest income. Even with this, equal-weighted consumer-discretionary stocks are underperforming, with weakness in previously strong travel names and deepening struggles for restaurant stocks. It’s a tricky macro backdrop to read. The clear and dramatic erosion of labor-market momentum from the downward payroll revisions and survey data has sealed the deal for a more dovish Fed, yet there are enough other signs of perky activity and extenuating circumstances affecting labor supply that some view the jobs picture as an outlier rather than a faithful reflection of the underlying growth trend. Is it just wealthy households living it up and Big Tech plowing $300 billion into data center construction obscuring broader weakness? Or is the Fed about to take the pressure of an economy that’s not feeling much stress? Aside from the profit-taking in consumer cyclicals, we’re seeing some laggards-over-leaders action. Several big winners are for sale, including GE Vernova and Howmet Aerospace , while nine of the 13 worst stocks year to date were up on the day and energy is ahead by 1.8%. Typical mean-reversion action in a market drawing itself onto neutral footing before the Fed decision. Many calls for a “sell the news” response to the Fed tomorrow. Clearly there’s room for it given how certain the consensus has grown and how far prices have run. BofA global fund manager survey shows the most aggressive bullish posture since February, but still not as high as February, which itself wasn’t at an alarming extreme of euphoria. It’s no longer a hated rally, but we’re still shy of everyone acting with fearless recklessness. Are too many now anticipating such a wobble? And if there’s a sell reflex, sell what? The now-overbought Mag7 stocks , with the Nasdaq100 again back at its multi-year valuation ceiling of 28 times forecast earnings? The cyclicals and small-caps that the textbook says will benefit from an easier Fed? Bonds, which have hovered for a week after a ripping rally , and could struggle if attention returns to stickier inflation? However it plays out, the bullish trend is innocent until proven otherwise, even if it can’t persuasively explain its actions or its intentions from here.
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