(Bloomberg) — The rally that briefly propelled stocks to all-time highs hit a wall after the Federal Reserve signaled it was in no rush to ease policy after cutting interest rates by half a percentage point.
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The S&P 500 erased a 1% gain after Fed Chairman Jerome Powell warned not to assume big rate cuts will follow. That’s not necessarily a bad thing, as aggressive easing is usually accompanied by economic stress, but traders ended up pushing stocks to near session lows at the New York market’s 4pm close.
“It wouldn’t be unreasonable for the market to pull back a bit after the rally ahead of today’s Fed announcement,” said Brett Kenwell of eToro. “But the longer-term outlook remains bright. As long as the economy holds up and inflation doesn’t pick up steam again, lower interest rates and solid earnings growth could keep stocks rising over the long term.”
For Ian Lingen and Beil Hartman of BMO Capital Markets, Powell’s press conference was commensurate with the size of the rate cut and effectively conveyed that officials aren’t particularly worried about any aspect of the real economy at the moment.
“In a classic ‘buy the rumor, sell the fact’ move, it’s striking that the ‘fact’ of a 50 basis point rate cut was met with selling. Positions have balanced and the market is getting back into trading mode on incoming economic data while keeping an eye on the potential impact of the presidential election.”
The S&P 500 fell 0.3%, the Nasdaq 100 lost 0.5%, the Dow Jones Industrial Average lost 0.2%, the “Magnificent Seven” index of mega-cap stocks fell 0.1%, and the Russell 2000 index of smaller companies was little changed.
The yield on the 10-year Treasury note rose 7 basis points to 3.71%. The dollar strengthened.
Wall Street reaction to the Fed:
Now it’s a battle between market expectations and the Fed, and employment data, not inflation data, will determine who is right. This policy change was pretty much predicted, so there hasn’t been a big movement in the financial markets. Now everyone is back to relying on data.
The Fed is trying to appear bullish with a big rate cut and reassure the market that the economic outlook is strong. But these two facts don’t mesh well. Be careful. A big rate cut in a slowing economy always portends a market downturn. Today may have been the market’s peak.
History tells us that the market peaks shortly after the first rate cut. In fact, this one may be the one that peaks. Watch your stocks. Times are changing.
With the big move underway, some insurance against a soft landing has been removed, raising risk and should particularly benefit cyclical risk assets such as small caps, cyclical stocks, commodities and commodity currencies.
The Fed has been more aggressive than I expected, as a 50 basis point cut is historically associated with crises. I do not consider a 2% GDP, 4.2% unemployment, and 15% earnings growth forecast for 2025 to be a crisis, so I remain skeptical of the extent of the rate cuts expected next year.
Lower market interest rates should be positive for housing and employment.
We expect traditional beneficiaries such as small caps, value stocks, cyclical sectors and the equally weighted S&P 500 Index to get a boost.
The Fed accelerated this rate cutting cycle with a sharp 50 basis point cut and in a statement focused on the labor market, saying it remained “strongly committed to supporting maximum employment.”
While they pay lip service to the other part of their dual mandate (i.e. inflation), they have clearly taken their eye off the ball, and while inflation is well below the peaks we saw in 2022, fueling stock price gains and stimulating economic growth with low interest rates runs the risk that inflation will pick up steam again before this bull market is over.
While we believe the market will experience some volatility as the election approaches, we are cutting rates now and forecasting another 50 bps cuts by the end of this year and a total of over 150 bps cuts by the end of next year.
A 50 basis point rate cut should reduce the chances of a hard landing, and stock markets are encouraged by that outlook, given that the economy and corporate earnings tend to move in tandem.
Consistent with the declining probability of a hard landing, cyclical sectors led the day while defensive sectors lagged.
We believe this reinforces the potential for further gains for equities in 2025, led by large-cap U.S. stocks and a combination of growth and cyclical sectors.
Despite skepticism about the economic necessity of an aggressive 50bps cut, markets can and should celebrate today’s move and will continue to celebrate in the coming months as the Fed makes historic efforts to avert a hard landing. Recession, what recession?
By cutting interest rates by 50 basis points instead of 25, the Federal Reserve responded to market expectations of a larger rate cut to kick off the rate cutting cycle.
The Federal Reserve demonstrated today that it is so interested in protecting maximum employment that it has effectively put inflation concerns on the back burner.
Even more significant than the size of the first rate cut this cycle is the revision in the Fed’s dot plot, which suggests the Fed is willing to cut rates by another 50 basis points by the end of the year.
The stock market applauded the Fed’s decision to begin a 50 basis point easing cycle.
The announcement certainly wasn’t a surprise given how much debate there had been around the move, but the lack of guidance from Fed officials indicates that there must have been strong discussion and efforts to forge a consensus, even if there was only one dissenter.
The stock market loves the Fed’s blue-chip put options.
I think the Fed may have been premature with 50 basis points. The economy is slowing but still going strong. My criticism of the Fed has been short-sighted and focused on backward looking data. That’s what this is all about. It’s only taken one weak jobs report to get us to this point.
A 50 bps cut at the start of a rate-cutting cycle is significant because historically the Fed has attempted to catch up at the start of a rate-cutting cycle.
The message here is that the Fed is supporting the labor market.
The market got what it wanted: the first big rate cut by the Fed. It remains to be seen whether the market will remain happy. The Fed has a reputation for not rushing things, which could lead to disappointment if they are seen to move too slowly, especially if economic data continues to weaken. But today the Fed cut rates.
Easing monetary policy tightening could extend the U.S. business cycle, benefiting both fixed income and risk assets, but investors should be wary of tail risks. However, positive factors such as a stable economic environment and currently low interest rates continue to line up around the “soft landing” thesis.
Easy money from retail bank savings accounts and term deposits will decline. Investors will need to shift funds to shorter-term bonds to capture higher interest rates. Focusing on fixed income market opportunities rather than being benchmark-oriented can boost income and total returns. Both macro and spread opportunities across the credit spectrum should attract investors.
A stable economic environment and low interest rates should open up opportunities in equities. In small caps, favorable valuations are responding to improving earnings expectations for 2025, creating opportunities in healthcare, especially biotech, the software sector of technology, and insurance stocks in financials.
Company Highlights:
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The U.S. Security Council has given Nippon Steel Corp. permission to resubmit its plan to buy United States Steel Corp. for $14.1 billion, a politically contentious deal that is likely to be delayed until after the U.S. presidential election in November, people familiar with the matter said.
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Google won its court battle with the European Union over a 1.5 billion euro ($1.7 billion) fine for thwarting competition in online advertising, partially making up for a major defeat it suffered last week in a separate ruling for abusing its monopoly power.
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Qualcomm Inc. has lost a European Union court battle to pay millions of euros in fines over allegations that it lowered the prices of some chips so much that it squeezed out smaller rivals.
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T-Mobile US Inc. on Wednesday outlined growth targets for the next three years, predicting profits will increase thanks to customer acquisition and the use of new technologies such as artificial intelligence.
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Elliott Investment Management still wants to replace Southwest Airlines Chief Executive Officer Bob Jordan, union officials said, suggesting that changes already promised by the airline aren’t enough to satisfy activist shareholders.
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23andMe Holdings Inc. co-founder and CEO Anne Wojcicki told employees she remains committed to taking the genetic-testing company private following the resignation of its independent directors.
Major events this week:
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UK interest rate decision Thursday
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U.S. Conference Board Leading Index, Initial Jobless Claims, Existing Home Sales, Thursday
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FedEx’s financial results on Thursday
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Japan interest rate decision on Friday
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Eurozone consumer confidence on Friday
Some of the key market developments:
stock
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The S&P 500 was down 0.3% as of 4 p.m. New York time.
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The Nasdaq 100 fell 0.5%.
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The Dow Jones Industrial Average fell 0.2%.
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The MSCI World Index fell 0.4%
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The Bloomberg Magnificent 7 Total Return Index fell 0.1%.
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The Russell 2000 index was little changed
currency
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The Bloomberg Dollar Spot Index rose 0.1%.
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The euro was little changed at $1.1105
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The British pound rose 0.2% to $1.3187.
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The Japanese yen was almost unchanged at 142.46 yen to the dollar.
Cryptocurrency
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Bitcoin fell 0.1% to $60,055.19.
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Ether fell 1.3% to $2,314.6.
Bonds
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The yield on the 10-year Treasury note rose 7 basis points to 3.71%.
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German 10-year government bond yields rose 5 basis points to 2.19%.
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UK 10-year government bond yields rose 8 basis points to 3.85%.
merchandise
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West Texas Intermediate crude oil fell 1.7% to $70.01 a barrel.
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Spot gold fell 0.8% to $2,549.44 an ounce.
This story was produced with assistance from Bloomberg Automation.
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