{"id":13941,"date":"2024-10-15T11:41:03","date_gmt":"2024-10-15T11:41:03","guid":{"rendered":"https:\/\/mycryptomania.com\/?p=13941"},"modified":"2024-10-15T11:41:03","modified_gmt":"2024-10-15T11:41:03","slug":"the-rate-outlook-wont-derail-the-sp-500","status":"publish","type":"post","link":"https:\/\/mycryptomania.com\/?p=13941","title":{"rendered":"The rate outlook won\u2019t derail the S&P 500."},"content":{"rendered":"

Recent economic reports spanning the Federal Reserve\u2019s dual mandate is suddenly clouding the interest rate\u00a0outlook<\/strong>.<\/p>\n

Concerns over the strength of the labor market played a big role in the Fed\u2019s pivot toward easing monetary policy and last month\u2019s 0.50% rate cut<\/strong>. But then the September payrolls smashed estimates<\/strong> with a gain of 254,000 jobs during the month along with the unemployment rate falling slightly.<\/p>\n

And just last week, reports on both consumer and producer price inflation came in higher than expected<\/strong>. The Consumer Price Index (CPI) gained 2.4% year-over-year for the month of September, while the core measure that strips out food and energy prices jumped by\u00a03.3%.<\/p>\n

Although the headline figure was the smallest gain in three years, it\u2019s the core figure that stopped moving lower recently<\/strong>. The core measure accelerated compared to the prior month\u2019s increase. The chart below also shows the breadth of core CPI category gains. About 38% of core categories saw annualized inflation over 4%, which is up from\u00a034%<\/strong>.<\/p>\n

Chart from Liz Ann Sonders<\/a> on\u00a0X<\/p>\n

A similar trend is emerging with the Producer Price Index (PPI). While the headline figure is trending lower over the last couple of months, the core measure stopped decelerating in July and has moved higher the last two months<\/strong>. The chart below shows the yearly change in core CPI (red line) and PPI (blue\u00a0line).<\/p>\n

A combination of strong labor market reports along with stubbornly high core inflation is calling the interest rate outlook into question<\/strong>. Atlanta Fed President Raphael Bostic even said he\u2019s comfortable skipping a rate cut next month<\/strong> \u201cif the data suggests that\u2019s appropriate.\u201d<\/p>\n

Not only has market-implied odds for a larger half point cut at the Fed\u2019s November meeting disappeared (which was 50\/50 at one point), but odds are also pricing a small chance of no cut at all<\/strong> (chart\u00a0below).<\/p>\n

Growing investor optimism around interest rate cuts have a been big driver of the recent rally in the S&P 500. So the concern is that an uncertain outlook for monetary policy could derail the\u00a0rally<\/strong>.<\/p>\n

But the drivers behind the muddled rate outlook are masking key catalysts that can drive the bull market forward<\/strong>. Here are three reasons why the bull market can persist even if the Fed doesn\u2019t reduce rates as much as initially expected<\/strong>.<\/p>\n

Stocks Can Shrug Off Rate\u00a0Concerns<\/h3>\n

With the Fed relying on data dependency to adjust monetary policy, recent economic data might dampen views on how much and how fast the Fed will cut\u00a0rates<\/strong>.<\/p>\n

But recall that once the Fed starts reducing interest rates, the path of the stock market ultimately comes down to the performance of the economy<\/strong>. That\u2019s because stock prices follow earnings over the long-term.<\/p>\n

The Fed has a history of acting too late on monetary policy, with the economy sometimes tipping into recession shortly after an easing cycle. A recessionary backdrop has a negative impact on the earnings\u00a0picture<\/strong>.<\/p>\n

But if the economy avoids recession, then the S&P 500 has responded favorably<\/strong> as you can see in the chart below. The purple line shows the average movement in the S&P 500 before and after rate cuts when the economy avoids a recession, while the orange line is the average when a recession hits.<\/p>\n

If anything, recent data on payrolls supports the view that the economy is humming along just fine<\/strong>. That\u2019s also evidenced from the nation\u2019s largest bank. Late last week, an executive on JPMorgan Chases\u2019 earnings call pointed to strength in consumer and corporate lending as being consistent with a \u201csoft landing\u201d<\/strong>.<\/p>\n

The Fed\u2019s own GDPNow estimates current quarter GDP growth from incoming economic data. The annualized quarterly growth rate now stands at over 3% for the third quarter and is well ahead of estimates<\/strong> as you can see\u00a0below.<\/p>\n

It\u2019s also important to point out that while the pace and magnitude of rate cuts may be called into question, a key leading indicator of monetary policy still suggests more cuts are on the\u00a0way<\/strong>.<\/p>\n

I recently reviewed<\/a> how to use the 2-year Treasury yield as a leading indicator for where the fed funds rate<\/strong> could be heading. The 2-year started rising well ahead of fed funds in late 2021 as inflation picked\u00a0up.<\/p>\n

And the 2-year yield fell below fed funds back in early 2023, which signaled the pause in rate hikes. The 2-year then accelerated to the downside in July, which was two months ahead of the first rate cut<\/strong>. While the 2-year yield has rebounded following the latest round of labor and inflation data, it remains approximately 100 basis points below the current level of fed funds<\/strong> as you can see\u00a0below.<\/p>\n

Another positive feature of the overall backdrop for the stock market is linked to financial conditions. Financial conditions reflects the cost and availability of credit. Cheap and readily accessible credit is stimulative for both the economy and stock\u00a0market<\/strong>.<\/p>\n

The Chicago Fed maintains a measure of financial conditions that looks at metrics spanning equity and debt markets. Financial conditions are already loose as the Fed starts cutting interest rates<\/strong> as you can see below. The zero line represents the average, with a reading below zero pointing to looser than average conditions.<\/p>\n

I would also point out that in each of the last seven recessions, financial conditions were tighter than average just before or during the recession<\/strong>. That\u2019s not the case now, with conditions receiving another boost as the Fed pivots toward easing monetary\u00a0policy<\/strong>.<\/p>\n

So while the outlook for the speed and magnitude of further rate cuts might be uncertain, solid evidence that the economy will avoid recession coupled with already loose financial conditions should remain supportive of corporate earnings and the bull\u00a0market<\/strong>.<\/p>\n

Now What\u2026<\/h3>\n

As the S&P 500 hits the 2 year anniversary of this cyclical bull market, historical precedent suggests that there is room to run<\/strong>. The chart below plots the past 27 cyclical bulls, along with the median gain and duration. Based on both measures, the current cyclical bull has more room to reach just the\u00a0median<\/strong>.<\/p>\n

Chart from Jurrien Timmer<\/a> on\u00a0X<\/p>\n

But there are a few reasons to be cautious in the near-term. I shared recently<\/a> how volatility tends to spike within 30 days of the election. Despite the S&P 500 moving out to new all-time highs, the CBOE Volatility Index (VIX) is trading above its long-term average<\/strong> of around 19 that you can see in the chart below. A sustained move over the average could bring selling pressure from volatility-targeting and risk-parity funds trying to stay within their risk\u00a0budget<\/strong>.<\/p>\n

At the same time, near-term market breadth has been deteriorating recently<\/strong>. As the S&P 500 made new highs last week, at one point there were just 45% of stocks across the market trading above their 20-day moving\u00a0average.<\/p>\n

We can also track breadth with the McClellan Oscillator, which tracks advancing versus declining stocks on the NYSE over a trailing period. You can see in the chart below that the oscillator turned lower in mid-September and fell below zero<\/strong>. I would also note it\u2019s starting to rebound from oversold territory.<\/p>\n

Lagging breadth alone isn\u2019t a reason to turn bearish on the market, but it\u2019s a condition to monitor <\/strong>as we enter a historically volatile stretch for the S&P 500. But at this point, I continue to expect any pullback to be a pause in the broader market\u00a0uptrend<\/strong>.<\/p>\n

That\u2019s especially the case as more cyclical stock market sectors are setting up favorable breakout patterns<\/strong>. That includes banks and mid-cap stocks. I posted a note in my chat about the trade setup in mid-caps that you can read\u00a0here<\/a>.<\/p>\n

The chart below shows the SPDR S&P Bank ETF (KBE). You can see that KBE broke above a major resistance level at $48 back July. Price came back to test that level as support, and is now creating a new pattern to watch. KBE is now making an ascending triangle pattern, with resistance at the $55 level. Price is turning back toward that level just as the MACD turns higher from resetting at the zero line. I\u2019m now now watching for a move over $55, which would also be a positive message from another cyclical sector on the economic\u00a0outlook<\/strong>.<\/p>\n

That\u2019s all for this week. The coming week will be relatively quiet on economic data, but the pace of 3Q earnings reports will pick up. There are 43 companies in the S&P 500 reporting this week. But I\u2019ll be watching volatility markets heading into the elections, and if cyclical sectors can keep breaking\u00a0out<\/strong>.<\/p>\n

I hope you\u2019ve enjoyed The Market Mosaic, and please share this report with your family, friends, coworkers\u2026or anyone that would benefit from an objective look at the stock\u00a0market.<\/p>\n

For updated charts, market analysis, and other trade ideas, you can visit me here: <\/strong>www.mosaicassetco.com<\/strong><\/a><\/p>\n

Disclaimer: these are not recommendations and just my thoughts and opinions\u2026do your own due diligence! I may hold a position in the securities mentioned in this\u00a0report.<\/em><\/p>\n

The rate outlook won\u2019t derail the S&P 500.<\/a> was originally published in Coinmonks<\/a> on Medium, where people are continuing the conversation by highlighting and responding to this story.<\/p>","protected":false},"excerpt":{"rendered":"

Recent economic reports spanning the Federal Reserve\u2019s dual mandate is suddenly clouding the interest rate\u00a0outlook. Concerns over the strength of the labor market played a big role in the Fed\u2019s pivot toward easing monetary policy and last month\u2019s 0.50% rate cut. But then the September payrolls smashed estimates with a gain of 254,000 jobs during […]<\/p>\n","protected":false},"author":0,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[2],"tags":[],"class_list":["post-13941","post","type-post","status-publish","format-standard","hentry","category-interesting"],"_links":{"self":[{"href":"https:\/\/mycryptomania.com\/index.php?rest_route=\/wp\/v2\/posts\/13941"}],"collection":[{"href":"https:\/\/mycryptomania.com\/index.php?rest_route=\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/mycryptomania.com\/index.php?rest_route=\/wp\/v2\/types\/post"}],"replies":[{"embeddable":true,"href":"https:\/\/mycryptomania.com\/index.php?rest_route=%2Fwp%2Fv2%2Fcomments&post=13941"}],"version-history":[{"count":0,"href":"https:\/\/mycryptomania.com\/index.php?rest_route=\/wp\/v2\/posts\/13941\/revisions"}],"wp:attachment":[{"href":"https:\/\/mycryptomania.com\/index.php?rest_route=%2Fwp%2Fv2%2Fmedia&parent=13941"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/mycryptomania.com\/index.php?rest_route=%2Fwp%2Fv2%2Fcategories&post=13941"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/mycryptomania.com\/index.php?rest_route=%2Fwp%2Fv2%2Ftags&post=13941"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}