The Fed Will Not Stop a Jumbo Recession

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Hakyung Kim and Brian Evans of CNBC report Dow rises to close at fresh record, posts winning week after big Fed rate cut:

The Dow Jones Industrial Average eked out a gain and closed at a record on Friday, capping a big rally for the week that came after the first major easing of interest rate policy by the Federal Reserve in four years.

The 30-stock Dow inched up 38.17 points, or 0.09%, for a new closing high of 42,063.36. The S&P 500 pulled back 0.19%, ending at 5,702.55, and the Nasdaq Composite

dropped 0.36% to end at 17,948.32. On Thursday, the Dow hit a record above 42,000, and the S&P 500 climbed above 5,700 for the first time.

The three major averages notched weekly gains. The S&P 500 rose 1.36%, posting its fifth positive week over the past six weeks. The index is up more than 19% in 2024. The Dow ended the week higher by 1.62%, while the tech-heavy Nasdaq advanced 1.49%.

On Wednesday afternoon, the Federal Reserve slashed interest rates by a supersized half point, its first cut since 2020. In a delayed reaction, the market climbed higher Thursday as investors crowded into tech names such as Nvidia and shares set to benefit from lower rates such as Home Depot.

Fed Governor Christopher Waller, in the first comments by a member of the Fed since Chair Jerome Powell’s press conference, said to CNBC on Friday that inflation is coming down faster than he expected, causing him to be in favor of the half-point cut.

“Investors viewed the aggressive rate cut as positive catalyst,” said Nationwide chief of investment research Mark Hackett.

“The Fed was able to effectively convince investors that the sizable cut is a proactive measure to sustain economic momentum, rather than a reactive move to stabilize it. The strong market reaction indicates investors have confidence in the Fed and have a ‘glass half full’ mentality,” Hackett added.

FedEx dented sentiment a bit on Friday after the shipping behemoth cut its earnings outlook. Shares dropped more than 15% and competitor UPS shed 2.7% in sympathy. 

Shares of Intel jumped in late afternoon trading and were last up 6% after The Wall Street Journal reported that Qualcomm had approached its fellow chip company about a takeover deal.

The report, citing people familiar with the matter, said the move was made “in recent days.”

Shares of Qualcomm were last down more than 3%.

It's Friday, the big news this week was the Fed cutting rates by 50 basis points.

Stock markets reacted favourably on Thursday, the day after the announcement, but I wouldn't read too much into that.

In fact, as William Watts of MarketWatch reports, a Fed rate cut when stock market is at a record high isn't necessarily a bad sign except if a recession lies ahead:

The Federal Reserve on Wednesday cut interest rates with U.S. stocks trading near a record high, leaving investors searching for historical clues to the path ahead for markets.

The S&P 500 briefly traded above its record close from July 16 after the Fed delivered a rate cut of 50 basis points before erasing its gain to end 0.3% lower. Stock-index futures pointed to sharp gains that could see the S&P 500 and Dow Jones Industrial Average take another run at record territory.

Do rate cuts with the stock market at or near all-time highs provide bulls additional fuel or do they portend trouble ahead? Dow Jones Market Data ran back the tape.

They found that since 1990, the Fed has cut rates seven times while the S&P 500 was at or near (within 1%) of an all-time high (see table below).

In those instances, stocks tended to rise on decision day (not including Wednesday) — up 71.4% of the time with a median gain of 0.51%. Six months later, the performance is mixed, rising 57.1% of the time with a tepid median gain of 0.62%.

Analysts at JPMorgan ran the data back 40 years, finding the Fed has cut rates 12 times with the S&P 500 within 1% of an all-time high. The market was higher a year later all 12 times with an average return of around 15%.

That’s interesting, but does it really tell investors much about the stock market’s direction over the course of the easing cycle? As countless market watchers have pointed out, it really tends to depend on the economic backdrop.

“Historically, only half of the bond rally has occurred by the time the first cut arrives. The direction of the equity market is less clear-cut — wholly dependent on whether the Fed has staved off a recession or whether this rate relief came too late, as we have witnessed so many times in the past,” said David Rosenberg of Rosenberg Research, in a Wednesday note.

”The danger this time around,” he wrote, ”is the extreme level of complacency and the widespread consensus that the business cycle has been repealed.”

I agree with Rosie, the danger this time around is people believing the Fed can engineer a soft landing.

He spoke with MarketWatch following the Fed’s decision on Wednesday, detailing his view on what the Fed decision means for the US economy and investment markets:

Rosenberg says he doesn’t believe the Fed will move aggressively or urgently enough to keep the U.S. economy out of recession. He reasons that since the Fed was slow to fight inflation, it will be behind the curve to combat an economic slowdown. So Rosenberg is steering investors towards rate-sensitive assets that, while not necessarily recession-proof, are better-positioned to benefit from a Fed monetary easing cycle that he expects will take the federal funds rate down to a pre-Covid level of 1.75%.

Said Rosenberg: “The recession has been delayed but it has not been derailed.”

MarketWatch: So what’s your verdict on Wednesday’s rate cut? Did the Fed finally get it right this time?

Rosenberg: There’s two things to consider. This rate cut was already on the table at the last Fed meeting in late July. But they decided not to pull the trigger. So ordinarily they would have cut by 25 basis points then and 25 basis points now. The 50 basis-point cut basically acknowledges that they missed the opportunity to engage in the first rate cut six weeks ago; so they doubled down.

The U.S. stock market was already priced two-thirds of the way for a 50 basis point cut. So they basically delivered on what they market was already discounting. It was probably the appropriate move based on what they were thinking then and how the data have evolved since. So the 50 basis point cut made perfect sense to me.

MarketWatch: Does this move get us closer to the elusive “soft-landing” that Powell & Co. want for the economy — or is there another shoe to drop?

Rosenberg: The base-case scenario is that we are in a soft landing as things currently stand. If you pay attention to the tone in Fed Chair Jerome Powell’s post-meeting press conference, the move was nothing more than a down payment, insuring that the soft landing, or the “goldilocks economy,” remains intact.

MarketWatch: Do you believe that?

Rosenberg: No. I don’t believe in fairy tales.

The FOMC is suffering from a classic case of cognitive dissonance. Monetary policy is still inordinately tight. The Fed moving 50 basis points was nothing more than an acknowledgement that it had stayed too tight for too long. All Powell did was do his best to sugar-coat the situation. How can he talk about the U.S. economy being solid at the same time he talked about downside risk to the labor market outweighing upside risk to inflation?

MarketWatch: Are you still concerned about an impending recession, or does the Fed’s move here ease your mind?

Rosenberg: The Fed’s move does not ease my mind one iota. Although they moved marginally less behind the economic curve, they are still way behind. In view of the 500 basis points-plus increase in the federal funds rate from the lows, this move, as large as it was, was only a dent. Even as the Fed eases, the impact of what it has done in 2022 and 2023 is still staring us in the face. There is no “get out of jail free” card for the economy, coming off the most acute tightening cycle since the Paul Volcker years of the 1980s. The recession has been delayed but it has not been derailed.

Look at the long list of anomalies in what Powell said. He calls the labor market solid, yet in his opening commentary he discusses how the employment data have been artificially overinflated. It’s ridiculous to be discussing how solid the labor market is and at the same time how the data is overinflated. Powell was talking out both sides of his mouth.

What else did Powell do? At his press conference he invoked the Fed Beige Book. He wasn’t asked. He brought up the Beige Book on his own. The Beige Book is not subject to revision. It provides tremendous color about what’s happening around the country. It recently revealed that half of the country is in recession. We’ve applied data science to the latest Beige Book, and we see the same recessionary thumbprint we had in July 1990, March 2001 and December 2007. So yes, they are way behind the curve.

Amazingly, there are people who believe the Fed just convinced markets it's not behind the curve.

Total nonsense, the Fed is way behind the curve, those rate hikes are only now working their way into the economy and the unemployment rate is about to soar over the next 12 months.

What Powell and company are trying to do is mitigate the damage from staying overly tight for too long. 

Rosie (Rosenberg) is right, Powell was talking from both sides of his mouth this week but come next month when labor market continues to deteriorate, he will be hard pressed to continue doing so.

And Rosie isn't the only one worried about a recession.

In a post on LinkedIn on Wednesday, Peter Berezin , Director of Research and Chief Global Strategist at BCA Research noted this on Wednesday after the Fed cut by 50 basis points:

Let me repeat it for those of you who cannot see it properly:

The Fed cut rates by 50 bps today and penciled in another 50 bps of cuts by yearend.

Will that ensure a soft landing? I have my doubts.

The Fed lowered rates by a cumulative 100 bps from January 2001 to March 2001, and the recession started one month later. Likewise, the Fed cut rates by a cumulative 100 bps from September 2007 to December 2007, only for the Great Recession to begin in January 2008.

Investors are hoping for a repeat of the 1994-95 episode, where Fed easing paved the way for an economic boom. However, there are at least three differences between now and then:

First, the 1994-95 tightening phase was fairly mild. The Fed raised rates by a cumulative 300 bps between February 1994 and February 1995. This time around, the Fed hiked rates by 525 bps.

Second, the unemployment rate fell from 1993 onwards. In contrast, unemployment is already increasing (and contrary to all the happy talk about how rising unemployment is due to growth in labor supply, more than half of the increase in the unemployment rate has been due to job loss).

Third, and perhaps most importantly, the second half of the 1990s featured a massive disinflationary capex boom coupled with rapid productivity growth. Although things could change, nothing comparable is evident in the data so far.

I remember the 1994-95 episode, this isn't anywhere near the same thing but Wall Street desperately wants you to believe so.

Still, not everyone is convinced a hard landing lies ahead.

In a LinkedIn post, Joaquin Kritz Lara, Managing Director and Chief Economist at Numera Analytics notes this:

He rightly notes the terminal rate is anchored at 3% and the Fed is playing catch-up to other G7 central banks and that there's a perception that inflation risks are under control but he doesn't see a downturn around the corner and thinks there are "way too many cuts" priced in by the markets between now and mid-2025.

Again, I believe unemployment is about to soar, companies will see a material downturn in earnings projections, and I think the market is pricing in the right amount of cuts, perhaps not enough if a financial crisis erupts over the next two years (a credit crisis to be more specific).

That all remains to be seen, it's still early innings for this recession and bear market, so pay attention to all risks across public and private markets.

And another recession indicator is Warren Buffett's portfolio. Valerie Noel, Head of trading at Syz Group, posted this on LinkedIn earlier:

Given his holdings across public and private markets, Buffett has a lot more information on the true state of the US economy than most investors so pay attention to his big moves. If he's shedding bank shares, not exactly a positive sign.

I'm also wondering if Berkshire dumped Apple shares in the last minute of trading today as that was a massive and strange dump for this mega-cap tech stock:

And shares of FedEx plunged today after the company reported weaker-than-expected earnings: 

Not exactly a sign of a healthy global economy when FedEx shares are plunging like that. 

Two more tidbits in case you're still not convinced we are headed for a major US recession:

Now, it's Friday, so I don't want to sound all gloom & doom.

There are plenty of interesting stocks to watch starting with Intel which popped late this afternoon after news that Qualcomm is looking to acquire it:

I'm not sure the antitrust and national security people would allow such a merger but if they do, it will be a powerhouse company.

What else? On Thursday, I was pleased to see PayPal shares make a new 52-week high and think they have a lot more room to run higher before the recession kicks into full gear:

I'm also keeping an eye on shares of CrowdStrike which had a terrific day today and seem to be breaking out here (too early to tell):

I also noted this week that shares of 3M made a new high and are doing relatively well:

So it's not all terrible, you need to pick your spots carefully and manage your risk accordingly.

Alright, there's a lot more but I'm not paid enough to share all my wisdom on markets.

Below, watch Fed Chair Jerome Powell's press release from earlier this week and note he said the economy is dong well but they still cut by 50 basis points.

Next, Jeffrey Gundlach, DoubleLine Capital CEO, joined 'Closing Bell' on Wednesday to discuss the Federal Reserve's decision to cut rates by 50 basis-points, the impact to treasury markets, and more.

Third, Dan Greenhaus, Solus Alternative Asset Management chief strategist and economist, joins CNBC's 'Closing Bell' to discuss the Fed's rate cut decision, market outlooks, and more.

Fourth, Edward Yardeni, president of Yardeni Research, joins ‘Closing Bell’ to discuss warning signs of a melt-up, the markets' response to Wednesday's rate cut, and more.

Fifth, Tom Lee, Fundstrat Global Advisors co-founder and head of research, joins CNBC to discuss how the Fed's rate cut decision may impact markets over the next few months, how to position, and more.

Sixth, Neuberger Berman senior portfolio manager Steve Eisman says he has "no idea" who will the US presidential election. He earlier said Donald Trump would win. Eisman also talks about the rate cut by the Federal Reserve and shares his take on big tech stocks. Eisman, 62, rose to fame as one of the “Big Short” fund managers who successfully bet against subprime mortgages before the 2008 financial crisis. 

Lastly, "I wouldn't count my eggs," JPMorgan Chase CEO Jamie Dimon says about the prospects for a US soft landing. Speaking at The Atlantic Festival event in Washington, Dimon also says Donald Trump's views may create some uncertainty in the world.

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