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THE WEEK IN REVIEW: August 25-31, 2024
How Much Should the Fed Cut?
As we head into September, conversations will begin to pick up and grow louder as to exactly what the Federal Reserve should do at its next meeting on Sept. 17-18. The second reading of second-quarter gross domestic product (GDP) was revised upward from 2.8% to 3.0% last week, and we’re expecting a lot of employment news in the next few days. All of this will play into the Fed’s actions later this month.
The market welcomed Fed Chair Jerome Powell’s comments to expect a rate cut in September. The probability of a cut is currently 100%, but markets haven’t settled on how much it will be. So far, the chances of a 25-basis-point cut (.25%) are higher than the chances of a cut of 50 basis points (.50%).
If you look out to December, markets expect rates to be at least 0.75% lower. But has Powell said anything to this point other than the Fed plans to cut in September? Nope. Didn’t the Fed say to expect one or maybe two cuts at most this year? Yep. Will there be cuts at the remaining two meetings of 2024? We don’t know yet.
GDP still seems solid, so that doesn’t make a case for more aggressive cuts. If job and wage growth continues to soften (instead of falling off a cliff) and inflation keeps declining at a steady rate, that doesn’t hold with bigger cuts either. So what is the market telling us that Powell doesn’t know or isn’t willing to say?
A couple of things could happen from here. We will either hit the economic skids by year-end, and the Fed will be forced to scramble because we’ll be in a recession (which the market won’t like), or the Fed will methodically lower rates in response to the data as it comes in. The market may not like that either and may have a tantrum here and there as it gets used to the Fed Funds rate going from 5.25% to 4.5% (rather than 4.25% or even 4.0%) by year-end.
The handwringing over one-quarter or one-half of a percent seems far more likely than the economy falling into a recession at this point. In our view, once the Fed starts cutting rates in September, they will continue in November and December. That would make three cuts in 2024, not one or two. In some circuitous way, that would make markets happy — and we’d still end up at 4.0%.
There will continue to be debate over the magnitude of the cuts, but at least we aren’t talking about when rates will begin to decline or, even worse, that they have to rise.
The Mag One
Unless you were like Tom Hanks in “Castaway” last week and had no communication with the outside world, you likely heard about Nvidia’s earnings. It seemed like the only news as we floated through a slow, final week of August, rolling into the Labor Day weekend and the unofficial end of summer.
In a nutshell, Nvidia’s earnings beat expectations but failed to live up to the unreasonable hype. After being up over $130 per share in the days prior, Nvidia dipped as low as $115 per share following the earnings announcement before settling back to the $120-ish level it had been hovering around for the past three months. And Nvidia’s volatility has continued, with shares dipping again on Tuesday morning.
There is a cautionary tale here, plus a mini and potentially costly lesson in market timing or day trading. The market advance has been led by a very narrow set of companies and we are enjoying a good year, but people still aren’t satisfied and are looking for more. Nvidia is up around 150% this year, plus it split 10-for-1 in June. Yet for some, it isn’t enough.
This is why we don’t follow or support discussing individual stocks or sectors, concentrating instead on asset allocation and a long-term focus. Is talking about individual stocks or sectors more exciting? Maybe. But it moves a person from acting via logic and discipline to relying more on emotion, taking them from being an investor to a speculator. It’s not much different than plain ol’ gambling.
This week, we saw a lot of gambling in the market, and when it was over, we were pretty much where we began after a lot of smoke and noise. Investments should be boring and predictable, and the excitement should be reserved for what you do when your investments deliver rather than excitement being caused by your investments. That’s just stress you don’t need.