Rough Week

Rough Week

The FOMC meeting saw no change in rates, but markets got hit pretty hard. What happened?

The primary surprise was the removal of two rate cuts from their 2024 projections. This means the Fed expects rates to stay higher through 2024-25. The basis for that is that the economy and jobs market have held up much better than expected, which makes it likely inflation will remain too high.

The market saw that and is giving up on the idea that higher rates are temporary, which had been a popular attitude all year. The original thinking was that by now we’d already have seen something like a recession and the Fed would be cutting rates. The market celebrated the lack of recession but ignored the implication that rate cuts wouldn’t happen. Now, that realization is hitting.

It’s reasonable to think there should be some pain in that realization. We’re certainly seeing it in the bond space, with the whole Treasury curve hitting new highs. In turn, that should translate into other markets, like stocks.

Not that stocks have been having a party, either, but the damage hasn’t been nearly as great. The question now is how will stocks do? Is this just another post-OpEx bump in the road like we’ve seen so far this year or could this turn into something more? It doesn’t help that we’re still in a seasonally weak period until early October and there are plenty of new worries around. Strikes are on the rise, the government seems likely to have a shutdown, and Quantitative Tightening seems to be getting its teeth back, among other issues.

Some questions are fundamentally unanswerable, or at least extremely complex. How will stocks perform? That depends on many factors, including the risk appetite of investors. That hasn’t looked great, of late. Fridays have been easy for bulls this year, as volatility gets smashed ahead of the weekend. Even that ‘easy win’ has been a struggle the last two weeks.

In truth, a wide variety of outcomes are possible. This modest amount of fear could be it, similar to the rest of the year. Or, as Goldman Sachs says, we could see an elevator down as we clear negative flow-of-funds. Honestly, this is the sort of situation where in past decades we might start to hear soothing words from the Fed. The only positive thing we’re getting is seven large, megacap companies are holding up the stock market. Given the language of the Fed, that intervention seems unlikely anytime soon.

All we can really do is watch and see when conditions clear. The only thing I’d add is that this is likely to be a buyable bounce, eventually. The economy still looks like recession isn’t near and the above chart implies the potential for opportunities.