Stocks are back where this all started: Morning Brief
Tuesday, September 17, 2019
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Has anything really changed since July 31?
The Fed’s latest two-day policy meeting gets underway today, and it is expected to result in another rate cut tomorrow afternoon. Now, since the Fed cut rates on July 31, obviously a lot has happened in the market.
But looking at where markets stand, it might also seem like not much has changed.
At the Fed’s last meeting it voted to lower interest rates by 25 basis points, the central bank’s first cut since 2008. Following this anticipated rate cut, Trump announced new tariffs on Chinese imports. This announcement sent markets into a tailspin. Calls for the Fed to act more aggressively began, from the White House and elsewhere. The S&P 500 dropped as much as 8% during the month of August. The Treasury yield curve worryingly inverted for the first time in over a decade.
The signal financial markets sent was that recession risks were rising. Quickly.
And then it all just sort of went away.
On July 29, the day before the Fed’s last interest rate announcement, the Dow closed at 27,198; on Monday, it closed at 27,076. That same day, the S&P 500 closed at 3,020; on Monday, it closed at 2,997.
Even the price of crude oil — after this weekend’s news that Saudi Arabian oil facilities were attacked and 5% of the world’s oil supply was taken offline — isn’t all that far from where it stood ahead of the Fed’s last meeting. Following Monday’s 15% rally, WTI crude settled at $61.88 per barrel; on the day of the Fed’s rate cut it settled at $58.58.
Because whether it was the August jobs report, or the August retail sales report, or August inflation data, or something else that did it, at some point in the past three weeks investors became convinced that there would not, in fact, be a recession in the U.S.
And everything has been unwinding since. As we noted last week in this space, the stock market has seen massive rotations out of growth and momentum trades that had worked during this downturn and into value stocks that had been beaten down. This kind of mismatched positioning in the market is why Bank of America's latest Bull & Bear reading is still at "extreme bearishness" — everyone has been bracing for the end of the world. (Which apparently involved buying McDonald's and Chipotle every day.)
Over the last few weeks, investors have instead been snapping up shares of banks, small caps, industrials, homebuilders, and chip stocks. The kind of stuff that leads during an environment when investors anticipate more growth and less recession.