Beware the Fed-Cut Hangover

Powell’s Cut Falls Flat. Here’s What Happens Next… [Morning Reckoning] September 24, 2024 [WEBSITE]( | [UNSUBSCRIBE]( Beware the Fed-Cut Hangover Baltimore, Maryland September 24, 2024 [Greg Guenthner] GREG GUENTHNER Good Morning Reader, Imagine you’re packed shoulder to shoulder in a huge arena to see your favorite band. The group is ripping through the final number of its encore performance and the scene is getting wild. A wall of sound slams into the sweaty crowd as everyone shouts along to the final verse. Fireworks ignite, drumsticks fly, and the singer thanks the crowd… Everyone hustles off stage and the house lights come up as the cheering crowd starts to settle. You and thousands of strangers waited months to see this show – and it didn’t disappoint. Now, it's over. You’re left drenched in sweat, ears ringing, completely exhausted. Everyone around you is aimlessly shuffling around trying to find the exit. You’re squinting to adjust to the newly bright conditions, still buzzing from the music as you slowly fade back to reality. You don’t have to go home, but you can’t stay here. Well, folks, it wasn’t nearly as exciting as a rock concert. But last week’s rate cut and its immediate aftermath have dragged many of these same feelings out of your fellow investors. We were led into the main event with plenty of over-the-top media fanfare, promising a brand new rate cut regime. And when Powell pulled the trigger, we were treated to 50 bps to kick off the show. Expectations were high – and the Fed delivered. The rest of the week was a blur. After a little hesitation following the announcement, the Dow and the S&P 500 managed to log new all-time highs the next trading day. The party was on! But the new trading week already has a different vibe. The house lights are back on. The music's over. All that’s left are throngs of dazed investors wandering in circles, waiting to see what happens next… [[Revealed] Is A Starlink IPO Coming In 2024?]( Take a look at this tweet from Musk pictured here. [Click here to learn more]( Could this be a sign that a Starlink IPO is set for the second half of 2024? According to one top venture capitalist, the answer is YES! And for the first time ever, you have the rare chance to profit pre-IPO… BEFORE Starlink goes public. [Click here now for all of the details.]( [LEARN MORE]( The Fed-Cut Hangover New all-time highs never felt so…uneventful. Maybe investors are just hungover from the rate-cut noise pumped into their living rooms for the past month. Perhaps we’re simply dealing with a classic case of recency bias spurred by the late summer selloff. Or, last week’s lackluster finish led by utilities and staples soured the mood. Any of these scenarios could have spoiled the bull market vibe. But I think the bulk of the blame lies with the Fed’s interest rate decision. Everyone knew a cut was coming and came into Wednesday ready to party. But now that the main event is over, the Fed’s policy shift is only creating more uncertainty. Investors from Broad & Wall to Main Street are racking their brains to decipher what drove the FOMC’s decision – and what could mean for the rest of the year. Did the Fed wait too long to cut? Are they behind the curve, just like they were in 2022? Does a double-cut mean we’re hurtling toward an imminent recession? I have no idea. But I do know that I’m not worried about the dreaded R-word. Instead, I prefer to focus on price and the underlying trend – two facts on which we can rely during any market environment. Whether you choose to follow price or not, one thing is certain: No one likes change. Resist as we might, as scary as it may be, the rate-cut cycle is here. And that’s not all… The third quarter ends in less than a week, and the earnings season festivities will quickly follow. Fall is suddenly upon us. Now’s the perfect time to review how stocks are faring and the potential seasonal headwinds that lie ahead following this rate-cut uncertainty. “Buy in October, and Get Yourself Sober” October marks a critical turning point for stocks. It concludes the worst six months of the year for US equities, kicking off the best time of year to buy stocks… October not only signals a significant shift in seasonal trends – it also has a knack for bottom-ticking the market, marking the low of 13 bear markets since World War II, per Trader’s Almanac (most recently, the Dow ripped 14% in October 2022). But here’s the thing: We’re not experiencing a bear market right now. Stock market bulls aren’t searching for potential support zones. Instead, they’re exploring unchecked levels of overhead supply. First half leaders are making up lost ground following the late summer selling session. Rotation is leading to broadening participation beneath the surface. And a new leadership group is emerging: small-caps. These conditions would be better described as the second year of a bull run, as opposed to the end of an ugly downtrend. Bull vs. Bear aside, the presidential election will take place in November. When it comes to the average October performance during election years, seasonal tailwinds favor the bears. The average October returns during election years since 1950 look like this: Dow -1%, S&P 500 -0.9%, Nasdaq -2.2%. Adjust Your Expectations Let’s go a little farther down the seasonality rabbit hole… Remember the stocks-only-go-up frenzy that kicked off 2021? It was impossible to miss! The stock market was handing out participation trophies made of solid gold…everyone's a winner! Later that year, reality set in as IWM tanked during November, its strongest seasonal month of the year. So far, stocks are green during the weakest month of the year. In fact, a traditionally volatile September is turning into an absolute barnburner. With only five trading days left in the month, this month is well on its way to becoming the first positive September in five years. That’s a welcome change for investors, who’ve recently dealt with some downright dreadful Septembers recently (S&P dropped almost 5% in September 2023, FactSet notes, and more than 9% in September 2022). Bottom line: Seasonality studies serve as a roadmap, not a definitive forecasting tool. In fact, the most useful information comes when markets buck seasonal trends (like they’re doing right now). Your best course of action is to remain cautious and give the market room to work out some of this rate cut angst. Anything can happen – but I would not expect an all-out meltdown going forward. Instead, stay alert for a little chop, and maybe a fake out or two lower as we kick off Q4. And keep an eye on the strongest names over the next few weeks. These could be your new leaders when melt up season arrives. Best, [Greg Guenthner] Greg Guenthner Contributing Editor, Morning Reckoning feedback@dailyreckoning.com [Download This New Survival Guide Today!]( This short 54-page “Crisis Survival Guide” has everything you need to know to protect yourself and your family in times of crisis. Things like what foods to stock up on now, staying safe during periods of rioting and looting and more. [>> To see how to download your copy, click here now](. [LEARN MORE]( In Case You Missed It… Brace for Impact: The Fed’s Panic Cut is a Sign the Worst is Yet to Come Sean Ring, Editor [Sean Ring] SEAN RING Good Morning Reader, Yesterday, the Federal Open Market Committee (FOMC) shocked most market watchers, including yours truly, with an aggressive 50 basis point cut, a mostly unexpected move. The Fed's decision, which saw Governor Michelle Bowman dissenting, raises serious questions about the stability of the U.S. economy. The stark contrast between the cut and the rhetoric leading up to the meeting signals more than just a recalibration of monetary policy. It signals fear. For months, Fed Chair Jerome Powell and his colleagues have emphasized that inflation remains stubborn, necessitating tighter policy for longer. But the sudden 50 bps cut suggests the Fed sees something behind the scenes that has them spooked—and it should have the rest of us spooked, too. Let's break down why this move reeks of panic, what Bowman’s dissent tells us, and why this could be the sell signal that stock market bulls desperately want to ignore. Why the 50 Basis Point Cut is a Panic Move When central banks slash interest rates, especially by 50 basis points, they send a clear message: they’re concerned about economic growth. But this latest move from the Fed is even more telling given the context. Just weeks ago, Fed officials were touting a "soft landing" scenario where inflation would be tamed without severely damaging economic growth. The sudden pivot to cutting rates so aggressively indicates that this soft landing narrative is, at best, fantasy. There are a few reasons why the Fed might feel the need to panic: Recent economic indicators like GDP growth, unemployment, and retail sales have painted a relatively stable picture. However, the Fed has access to real-time data, which might signal a sharp downturn or severe financial strain in critical sectors of the economy. Corporate profits have been dwindling for several quarters, and while consumer spending has held up, cracks are forming under the surface. Perhaps Powell and his colleagues are privy to data suggesting that a recession is not just possible but imminent. Despite reassurances, regional banks remain under significant pressure. [Earlier this year, multiple regional bank failures caused a wave of uncertainty throughout the financial sector.]( The Fed’s emergency rate cut might be an attempt to cushion the blow to balance sheets that are teetering on the edge of collapse. If this is the case, the cut is less about promoting growth and more about preventing a systemic collapse. The global economy isn’t in much better shape. With China’s economy faltering, Europe teetering on the brink of recession, and geopolitical tensions escalating, the Fed might be responding to the possibility that global events could drag the U.S. down. A worldwide slowdown could be brewing, and the Fed’s move may reflect an attempt to insulate the U.S. economy from external shocks. But whatever the reason, a 50 bps cut at this stage isn't a preemptive move—it’s a reactive one. This suggests the Fed has waited too long and is now trying to play catch-up. When the Fed panics, investors should take note. Why Bowman Dissented Fed Governor Michelle Bowman’s dissent is notable, especially given her hawkish stance in recent months. She and others have been clear that inflation remains too high, and cutting rates too soon would risk reigniting price pressures. So why did Bowman dissent, and what does it mean for the Fed’s credibility? Bowman has consistently argued that inflation remains a significant threat to economic stability. While headline inflation has cooled, core inflation—excluding volatile items like food and energy—remains elevated. By cutting rates now, the Fed risks fueling another wave of inflation, eroding our purchasing power and forcing them into an even tighter policy stance down the line. Bowman's dissent signals her concern that the Fed is prematurely declaring victory in the inflation fight. Bowman’s dissent might also reflect her discomfort with how quickly the Fed has shifted its stance. Central banks rely on credibility and clear communication with the markets. Rapid pivots like this erode trust and create uncertainty, leading to market volatility. If the Fed is panicking, Bowman’s dissent is her way of distancing herself from what she likely sees as a reckless course correction. Another reason for Bowman’s dissent could be the growing divergence between the Fed and other central banks. The European Central Bank (ECB) and the Bank of England are still cutting rates but hurried U.S. rate cuts risk tightening the rate differential and strengthening the EUR and GBP. This divergence may create a new wave of financial instability. Bowman’s dissent suggests a deeper rift within the FOMC, which shows internal disagreements on policy are more severe than the Fed is letting on. A Sell Signal for the Stock Market So why should stock market bulls be worried? A 50 bps cut might seem like a bullish move—it makes borrowing cheaper, boosts liquidity, and generally leads to rallies in risk assets. But in this case, the opposite could happen. Here’s why: The market hates uncertainty. The Fed’s sharp pivot creates more questions than answers. Why the sudden move? What data do they see that the rest of us don’t? If investors begin to question the Fed’s ability to manage the economy effectively, market volatility will spike. Without clear guidance, markets will be left to speculate on worst-case scenarios, which rarely ends well for stocks. A 50 bps cut at this stage isn’t a sign of confidence—it’s a sign that the Fed is worried about an imminent downturn. If the Fed sees a recession coming, it becomes how deep and prolonged it will last. Stock markets, pricing in a soft landing, are not prepared for a severe economic contraction. The cut may be the catalyst that sparks a broader market re-pricing. Regional banks have been under pressure for much of the year, and while lower rates might provide some relief, they also signal that the Fed is concerned about bank stability. If the financial sector takes another hit, it could cascade through the economy, impacting lending, consumer spending, and ultimately corporate profits. This is not bullish for stocks. By cutting rates now, the Fed risks significantly fueling a new round of inflation if the economy doesn’t slow as much as expected. If inflationary pressures reignite, the Fed may be forced to reverse course quickly, leading to an even more volatile policy landscape. The market doesn’t like uncertainty, and rapidly changing inflation dynamics create precisely that. Wrap Up The Fed’s 50 bps cut should be seen for what it is: a panic move. It signals that the central bank is far more worried about the economy’s state than it has let on and that internal dissent is growing. Bowman’s opposition suggests inflation risks are still very real, and the stock market should take heed. This isn’t the start of a new bull market fueled by easy money—it’s a sell signal. The road ahead is fraught with uncertainty, and investors who ignore the warning signs do so at their own peril. All the best, [Sean Ring] Sean Ring Contributing Editor, The Morning Reckoning feedback@dailyreckoning.com X (formerly Twitter): [@seaniechaos]( Thank you for reading The Morning Reckoning! We greatly value your questions and comments. Please send all feedback to [feedback@dailyreckoning.com.](mailto:dr@dailyreckoning.com) [Greg Guenthner] [Greg Guenthner, CMT,]( is chief strategist at Forge Research Group. He has spent the better part of the past two decades developing long-term and short-term strategies with a single goal in mind: to help everyday investors generate outstanding returns and control their financial futures. Greg’s charts, analysis, and insights have appeared in Marketwatch, Forbes, Yahoo Finance, and many other financial publications. [Paradigm]( ☰ ⊗ [UPDATE PREFERENCES]( [Contact Us]( © 2024 Paradigm Press, LLC. 1001 Cathedral Street, Baltimore, MD 21201. 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