What Happens if the Fed “Goes Big”

Plus, stocks with the best (and worst) seasonality ahead... [TradeSmith Daily logo] [TradeSmith Daily logo] September 18, 2024 What Happens if the Fed “Goes Big” By Michael Salvatore, Editor, TradeSmith Daily In This Digest: - Why a 50-point cut has TradeSmith raising an eyebrow… - One thing we expect for sure out of the Fed meeting… - The five best (and five worst) stocks for the next two weeks, according to seasonality… - TradeSmith software turns a good macro investing strategy [into a great one]( Do you hear it, dear TradeSmith Daily readers? That buzz in the air? That’s the unmistakable drone of millions of traders shuffling around in their desk chairs, anxiously awaiting this afternoon’s policy decision from the Federal Reserve. And even more than that, the comments to follow from Fed Chair Jerome Powell. This will be the first cut in interest rates since the Fed smashed the panic button during the 2020 pandemic crash. And traders have some interesting ideas about what’ll happen. Whereas just a week ago, most market participants expected a 25-basis-point cut, now 65% of them think we’ll see the Fed “go big” with a cut of 50 basis points. [chart]( Speaking from pure intuition, a 50-point cut out of the gate seems more likely to spook markets than juice them… since it would imply the economy is in trouble and the Fed feels it needs to ride swiftly to the rescue. Powell himself has reiterated his “data dependent” stance, [saying in August]( that the “timing and pace of rate cuts will depend on incoming data, the evolving outlook, and the balance of risks.” Well, what does the data say? In the most recent Consumer Price Index report, core CPI increased by 0.3% month over month against expectations of a 0.2% rise. If the Fed truly were data dependent, this minor setback on inflation would indicate a more gradual pace of rate cuts than traders seem to expect. Piling on, the retail sales numbers out Tuesday morning showed an unexpected increase. So, not only has inflation beaten expectations, so has (once again) the American consumer. SPONSORED AD [Time-Sensitive Invitation to Join TradeSmith’s VIP Circle]( [image]( For the next 48 hours, we’re unlocking an offer that gives you unrestricted access to every tool, service, and cutting-edge innovation TradeSmith offers. By seizing this opportunity, you’ll also receive every product we ever release in the future – at NO extra charge. This includes elite unadvertised services that are normally kept off-limits behind the velvet rope. No matter if we release $20,000 or $50,000 worth of new products in the coming year, you’ll receive everything automatically, at no extra charge, as part of this VIP circle – if you act in the next 48 hours. [Click here to get the time-sensitive details]( Many will disagree… but, in the face of this data, a 50-point cut seems excessive to us at TradeSmith – including Jason Bodner. - Check out what Jason wrote to his Power Trends readers earlier this week… Jason is our resident growth-stock investing expert. His [Quantum Edge Pro]( portfolio specializes in smaller-cap, high-growth names with the potential to vastly outperform the market over the long term. Those kinds of stocks are uniquely positioned to benefit from lower rates. Reason being, small-cap growth stocks tend to need to borrow more money to fund their growth. Regardless, Jason agrees that a 50-point cut would be too much, too soon. And the data backs him up: You might think the bigger the cut, the better. That’s not necessarily the case, especially for stocks. When easing into rate cuts, the S&P 500 is up 24% on average one year after the first rate cut. When the cuts are sharper, those gains shrink to just 5.2%. [chart]( Source: MAPsignals.com A quick cut also hints that the Fed thinks we’re on the verge of a crisis, which isn’t the case right now. And the central bank would also be acknowledging that it should have cut sooner. That’s something they won’t want to do. Of course, anything is possible. Whether rates come down by a half point or quarter point, rate cuts are good. And they are particularly good for certain stocks. When interest rates fall, small-cap stocks rise. You can see that inverse relationship in the chart below. The 10-year Treasury bond yield peaked in Oct. 2023, and the S&P SmallCap 600 bottomed. [chart]( Why does this happen? Well, small-cap companies get more bang for their buck as rates fall. They typically have higher debt than large-caps to finance growth. When rates fall, their debt payments shrink and earnings explode. Small-caps also have high growth potential. So not only are they themselves getting more bang for their buck as rates drop, so will those who invest in them. Jason also rightly points out the dynamic of sidelined cash. All this year, Jason has observed that investors, despite the surge to new highs, have sat out the market rise to the tune of $6.3 trillion in money-market accounts parked in safe assets like short-term U.S. Treasury bills. As rates come down, so will the risk-free return. And once that happens, the natural laws of incentive will bring some of that money out of the sidelines and into the very kind of stocks Jason is targeting. It’s a one-two punch of a thesis that should not be ignored. And I’d invite anyone who wants access to Jason’s all-star portfolio of small-cap growth names backed by institutional buying pressure to [go here and learn more](. - But whether the rate cut is small or large, we expect one thing for sure out of this week’s FOMC meeting… [As we’ve said]( time and again, it’s “the market’s biggest rumor becoming news.” Rate cuts have been top of mind since the Fed priced them into their [“dot plot”]( at the end of last year. Per that plot, the Fed expects rates to go down by 75 basis points by the end of 2024. To borrow from a tried and true Wall Street adage, this was the “rumor” to buy. All year long, setting aside some bumps in the road, stocks have soared both by virtue of the AI bonanza continuing to put up record profits for semiconductor companies… and the impending rate cuts lighting a fire under rate-sensitive sectors like small-caps and real estate. Today, though, we get the “news”… and that may prove to be the ultimate sell signal of the year. Especially when you look at seasonality… Take a look at our TradeSmith Seasonality chart of the S&P 500 index, going back 74 years: [chart]( We’ve remarked before that September is the worst month for stock-market returns all year, averaging a 1.1% loss. But what most don’t know is that losses are back-loaded – the majority of pain comes in the second half of September. That’s reflected in the chart above. Historically, the S&P 500 index has lost an average of -1.09% from today (Sept. 18) through the last day of the month (Sept. 30). You’d do well to take profits on some of your winners right about now, ahead of Powell’s speech. But as always at TradeSmith, we want to take it a step further… - Let’s look at which stocks are set to do best (and worst) over the next two weeks… By looking through our seasonal data, we can see which stocks have tended to hold up well during the weakest two-week period of the year… and the ones that have fared even worse than the benchmarks. Here’s the top five performers over the next two weeks… [chart]( Note that win rates were not super high here. The seasonal effect against stocks was pronounced. Still, we see some solid performers. With 43 years of data, Nike (NKE) has been the best-performing stock over the weakest two-week period of the year. It’s posted a win rate of 67.4% during this time and an average winning trade of 6.2%. If you have to bet on one stock, that’d be the one to consider from a statistical perspective. (Disclosure, I own NKE.) Oracle (ORCL), which has been on a tear lately, is also interesting. It’s seen a lower win rate during these two weeks, at 62.2%, but put up the highest average winning trade of the above, at 6.8%. Now, let’s look at the losers: [chart]( With the lowest win rate of the S&P 500 stocks, we have Fidelity National Information Services (FIS). It’s posted a win rate of just 22.7% during this weak period and an average trade (counting wins and losses) of -3.41%. Morgan Stanley (MS) is another weak candidate, with a 23.3% win rate and the average trade losing -4.12%. Buying statistically strong stocks and avoiding weak ones is a great way to stay on top of the volatility we expect. But here’s another method you should consider… - TradeSmith’s software turns good strategies into great ones… Regular readers will remember how a few months back, our CEO Keith Kaplan showed newsletter legend Porter Stansberry that he could’ve done a whole lot better for his subscribers if he’d only followed our software’s signals. To be clear – Porter didn’t have to change any of his investments. Nor when he bought them. He just had to follow TradeSmith’s proprietary sell signal algorithm to optimize the best times to cash in. Doing so would’ve resulted in gains more than double what Porter was able to do on his own. And this isn’t the only portfolio we’ve put to the test. Recently, the analysts at our corporate partner InvestorPlace – global macro expert Eric Fry among them – have run their own track records through TradeSmith’s software. And what they found was… just what we expected – more potential outperformance. And the timing for this discovery couldn’t be better. Due to a strange confluence of factors, very much related to what’s coming out of the Federal Reserve today, America’s economy and markets may be headed for dark times. But those dark times can be avoided by following the precise signals our software provides. [In his next presentation]( on Tuesday, Sept. 24 at 8 p.m. Eastern, you’ll learn why Eric thinks this… and how TradeSmith’s software would’ve improved not only his strategies, but that of Louis Navellier and Luke Lango, too. Eric’s talk is free and open to the public; [click here to reserve your spot now]( while they’re still available. To your health and wealth, [Michael Salvatore signature] [Michael Salvatore signature] Michael Salvatore Editor, TradeSmith Get Instant Access Click to read these free reports and automatically sign up for research throughout the week. [25 Doomed Blue Chip Stocks]( [3 Stocks to Build Your Wealth in 2024]( [5 Unapologetically Profitable Stocks for 2024]( © 2024 TradeSmith, LLC. All Rights Reserved. P.O. Box 340087 Tampa, FL 33694 To unsubscribe or change your email preferences, please [click here](. [Terms of use]( | [Privacy Policy](