By Steven Van Solkema– WBI Chief Investment Officer
August is typically a relaxed time for market participants…not this year. The market is a mess, just last week the S&P 500 and the NASDAQ indexes experienced their worst drops since December 21. Though market participants were pleased to learn that Federal Reserve Chairman Powell initiated a 25 basis point cut on July 31, the market didn’t seem to respond as exceptionally as one would have hoped. It seems this cut was not dovish enough for market participants because this was something they expected. The market sold off in conjunction with the rate cut announcement, then the market came back a bit, but soon another announcement would upset the markets. We may still need the Fed to grab their brooms and clean up this shattering market. Investors are looking for a further reduction of rates, indicating the good news was not good enough.
To top it all off, President Trump announced on the following Thursday that the U.S. is going to tax the remaining imports from China by 10%, which led to a larger market mess. Market volatility is back, and reaction to the tariff announcement essentially wiped out June’s market gains. People are calling this a mid-cycle adjustment, which is reminiscent of the 1990s mid-cycle rate cuts when the Fed cut multiple times in 1995 and 1998. In those years, three cuts transpired over several months. Initial rates were higher than they are today, which is why the Fed had the flexibility to reduce rates over multiple months. In market terms, this signaled the beginning of the end.
So are today’s events aligning with the markets in the 1990s or is this a different scenario? At the moment, I don’t feel these align and I don’t believe the Fed does either. The Fed recognized demand for a rate cut and realized this was the sweep the markets needed. We have a 75% chance of another 25 basis point cut in September.
By the same token, Powell made it clear that this is not the beginning of an easing cycle. We seem to be in the later stages of a market mess and the Fed may be able to squeeze out excess return and keep this party going for a bit longer.
With earnings season at a close, the only thing polishing the markets last week were corporate buybacks. If companies didn’t come to the rescue and buy stocks back, we could have seen a much bigger market mess. If we continue to see any weakness in stock prices, corporate buybacks will likely continue.
Coupled with the “Fear of Missing Out,” participants believe that the Fed is going to cut rates again, which makes them want to run with the market. Could the Fed engineer a continued bull market? It is possible, but I think we are going to see a lot more volatility going into the fall season. As market participants, if we solely rely on Fed policy, corporate buybacks, and “Fear of Missing Out” trades, this bull market is going to be short-lived. They say beginnings are always messy, but in this case, the end may be messy too.
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