The Much Anticipated Fed Rate Cut Is Upon Us

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Pia Sing, Hakyung Kim and others from CNBC report S&P 500 and Nasdaq rally Friday to cap best week in 2024:

Stocks rose on Friday, with the S&P 500 and the Nasdaq Composite posting their strongest week of 2024 ahead of the upcoming Federal Reserve meeting.

The S&P 500 climbed 0.54% and closed at 5,626.02, less than 1% from its July all-time high. The tech-heavy Nasdaq Composite added 0.65% to end at 17,683.98. Both indexes posted their fifth consecutive winning day. The Dow Jones Industrial Average jumped 297.01 points, or 0.72%, closing at 41,393.78.

Utilities, communications services and industrials led the market higher on Friday, with each sector adding roughly 1%.

Investors also continued to rake up shares of megacap tech and semiconductor names, which helped drive this week’s rebound rally after tech’s recent underperformance. Powerhouse chipmakers Super Micro Computer and Arm Holdings added 3.4% and 5.9%, respectively. Alphabet advanced 1.8% and Uber jumped more than 6%.

“Investors are on guard for further bouts of volatility, particularly given the expectations surrounding the Fed meeting,” said Quincy Krosby, chief global strategist for LPL Financial. She noted that based on historical patterns, stocks typically have their roughest performance of the year during the second half of September.

On a weekly basis, the S&P 500 rose 4% and the Nasdaq Composite gained 5.9%, the best week this year for both indexes. The Dow has advanced 2.6% during the period.

Wall Street is now looking ahead toward the Fed’s policy meeting on Sept. 17-18, where the central bank is largely anticipated to lower interest rates by 25 basis points. Currently, the Fed’s target rate is sitting at 5.25% to 5.5%.

Economic data reflecting a moderation in inflation also seemed to support the case for a rate cut. The consumer price index in August came in at 2.5% on annualized basis, the lowest level since February 2021. Wholesale prices, meanwhile, rose 0.2% in August, coming in line with expectations.

Fed should ‘move aggressively’ with rate cuts, John Paulson says

You can count billionaire investor John Paulson as one of the people who thinks the Federal Reserve should start with a 50-basis-point cut next week.

“I think the Fed is a little behind the curve. … I think they’ve seen enough data that they can start bringing rates down, and I would suggest more aggressively would be better,” Paulson said on CNBC’s “Money Movers.”

Paulson also discussed his outlook for the U.S. Treasury market and gold.

While Wall Street overwhelmingly expects the first rate cut to come to fruition next week at the Federal Reserve’s policy meeting, further insights may be limited.

“Given the uncertainty around the outlook, we doubt we will learn a lot about the policy path,” Bank of America U.S. economist Aditya Bhave wrote Friday. “Regardless of the SEP [Summary of Economic Projections] and Powell’s tone in the press conference, the data will light the way.”

S&P 500 utilities, real estate and consumer staples indexes reach 52-week highs Friday

Three of the 11 sectors that comprise the S&P 500 — utilities, real estate and consumer staples stocks — reached 52-week highs Friday.

The utilities and consumer staples groups also traded at an all-time high on Friday, while real estate stocks remained about 13% below their record close set in December 2021, shortly before the Federal Reserve began tightening monetary policy in early 2022.

Notable gainers among consumer staples include Walmart, which rallied to an all-time high, bringing its one-month advance to 18.2% and its market-beating year-to-date gain to more than 53%. On Friday, Walgreens Boots Alliance saw the largest gain, surging 3.9% after lagging all year.

Utilities were led by Vistra, up 5.8% Friday, ahead 15.4% this week and 121% in 2024. Weyerhaeuser dominated the real estate group, higher by 2.5% Friday and up 6.1% this week. Iron Mountain is leading the group in all of 2024 with a 67% gain.

What a week in stocks, after the worst start to September in a long time, stocks bounced big this week led by -- you guessed it -- Nvidia (NVDA) and Broadcom (AVGO), the two megacap tech stocks that got clobbered last week.

I warned my readers last Friday that these two stocks might bounce this week because if they didn't, it would be game over for chip stocks.

Unfortunately, this 20%+ bounce this week was just a bounce driven by big hedge funds and highly doubt we will see new 52-week highs on either stock:

I know, Nvidia bulls are going to throw a bunch of arguments my way to tell me I'm wrong and this time is different but I remain highly skeptical.

We are in a recession, the bear market is just getting underway, you're going to see a lot of weeks like last week and this week, volatility is picking up in markets and that's not a good thing.

Add to this rising geopolitical risks and you are adding fuel to the volatility fire:

Still, markets didn't seem to care today and stocks like Oracle and RH had a phenomenal week too:

Will this exuberance continue next week as the Fed gets set to cut rates in a widely anticipated meeting?

I'm skeptical but here are my three scenarios:

  1. The Fed cuts 25 bps and stocks pop initially and then sell off (likely)
  2. The Fed doesn't cut and stocks take a beating at first and then pop back up (unlikely)
  3. The Fed cuts by 50 bps and traders panic and a selloff ensues (unlikely)

Whatever occurs, the Fed will be front and center next week and that means volatility.

But the truth is the Fed has dragged its feet far too long and no matter what it announces, I agree with this bond king,  it will not engineer a soft landing:

The fact that Real Estate, Utilities and Staples have been the leading sectors over the last three months as bond yields have dropped should also worry investors:

Meanwhile, Energy shares have struggled and the recent hiccup in big banks suggests a recession lies ahead.

Of course, if bond yields back up again for any reason going into year-end, Utilities, Real Estate and Staples will get clobbered.

We shall see what October brings, I'm looking forward to seeing how this all plays out, hopefully nothing crazy occurs.

Speaking of crazy, shares of Summit Therapeutics (SMMT) shot up over 120% this week after it reported positive results from the phase III HARMONi-2 study, which compared its investigational antibody ivonescimab (SMT112) with Merck’s MRK blockbuster drug Keytruda (pembrolizumab) in certain patients with non-small cell lung cancer (NSCLC):

Any drug that can potentially displace King Keytruda is seen as gold which is why I think this biotech rallied so hard this week and might continue heading higher, but be warned, it's nowhere near the finish line and I've seen plenty of biotech pump 'n dumps over the years and this feels like another one.

I will reiterate, when it comes to biotechs, my money is on Iovance Biotherapeutics (IOVA), a biotech with leading biotech funds invested heavily in it, one with an FDA approved therapy for melanoma and a leader in TIL therapy:

It's biotech, it's volatile but I wouldn't be surprised if this gets bought out by a big pharmaceuticals at $50++ a share, if not a lot more.

And last but not least, how about shares of Walmart (WMT) soaring more than 50% this year, making a new all-time high:

I don't know if the Fed is looking at that chart but highly doubt they'll cut by 50 basis points until the unemployment rate jumps higher.

Alright let me wrap it up there but before I do, my two favourite strategists -- Francois Trahan and Martin Roberge will be at the St-James Club here in Montreal on October 17th to present their macro and market views at a luncheon:

The event is to support ANEB (Anorexia and Bulimia Quebec) and you can sign up here.

Please join them and let's all support a good cause (I'll be there).

Below, Jeremy Siegel, Wharton School of Business professor, joins 'Closing Bell' to discuss markets, the Fed and inflation.

Second, Tom Lee, Fundstrat Global Advisors co-founder, joins 'Closing Bell Overtime' to talk the week's market action.

Third, Darrell Cronk, Wells Fargo CIO for wealth and investment management, joins CNBC to discuss what market outlooks ahead of Fed rate cuts, how to position, and more.

Lastly, Steve Eisman, Neuberger Berman senior portfolio manager, joins 'Squawk Box' to discuss the financial companies' current state, his feelings about the banking sector, and what to anticipate for the Federal Reserve next week.

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