{"id":7756,"date":"2024-09-18T13:02:00","date_gmt":"2024-09-18T13:02:00","guid":{"rendered":"https:\/\/mycryptomania.com\/?p=7756"},"modified":"2024-09-18T13:02:00","modified_gmt":"2024-09-18T13:02:00","slug":"can-the-sp-500-survive-fed-rate-cuts","status":"publish","type":"post","link":"https:\/\/mycryptomania.com\/?p=7756","title":{"rendered":"Can the S&P 500 survive Fed rate cuts?"},"content":{"rendered":"

For today\u2019s update, I want to highlight several key charts I\u2019m watching for the capital markets and how they are impacting the near-term outlook<\/strong>.<\/p>\n

I also have a quick summary and links to recent posts that remain impactful for monitoring the markets. And after that, you can find a few trade ideas and chart updates<\/strong> on setups that I\u2019m monitoring.<\/p>\n

Big Picture<\/h3>\n

A \u201cGoldilocks\u201d economy is giving the Federal Reserve the green light to start cutting interest rates<\/strong>. As evidenced by the most recent payrolls report, the labor market is cooling with the three month average payrolls growth the lowest since 2020 (but still positive). And last week\u2019s Consumer Price Index (CPI) for the month of August showed consumer inflation at 2.5% year-over-year, which is the lowest level since March 2021 and below CPI\u2019s recent cycle peak at nearly 9% in 2022<\/strong> (chart below). That shows progress on the Fed\u2019s price stability mandate, while high interest rates pose a growing risk to the Fed\u2019s full employment mandate<\/strong>.<\/p>\n

As the Fed tries to balance achieving its two mandates across low inflation and a healthy labor market, the short-term fed funds rate has been on hold at the 5.25\u20135.50% level since last August. Right now, that\u2019s the highest above inflation since just before the 2008 financial crisis <\/strong>(chart below). That means the central bank has scope to reduce interest rates, but the Fed has given few details on the pace and magnitude of rate cuts<\/strong>. Based on current market-implied odds, there\u2019s a 50\/50 chance between a 0.25% and 0.50% rate cut at the Fed\u2019s meeting this\u00a0week<\/strong>.<\/p>\n

While economists debate over the the size and speed of upcoming rate cuts, the 2-year Treasury yield is sending a clear message. The 2-year yield has a history of leading changes in the Fed\u2019s policy rate, and right now the 2-year is plunging<\/strong>. You can see in the chart below that the 2-year has fallen to 3.57% compared to 4.35% at the end of July. That puts the 2-year nearly 200 basis points below the current fed funds upper target of 5.50%<\/strong>, and shows the bond market expects a relatively quicker pace of rate\u00a0cuts.<\/p>\n

When the Fed starts cutting rates, the path of the stock market over the next 12 months comes down to the performance of the economy<\/strong>. The stock market takes a diverging path that depends on recession and the impact to corporate earnings<\/strong>. If a recession can be avoided, then small-caps in particular deserve attention. The chart below shows the performance of small-, mid-, and large-cap stocks over multiple forward time periods after the Fed starts cutting rates historically. Small-caps outperform other capitalization ranges over all shown timeframes<\/strong>.<\/p>\n

The high yield bond market is currently signaling an \u201call clear\u201d for the economy<\/strong>. Total return high yield indexes are hitting fresh highs, and were holding up in early September even as the S&P 500 was selling off. High yield spreads are also near historic lows<\/strong> (chart below). Spreads represent the level of additional compensation that investors demand over a safer security like Treasury bonds<\/strong>. When that spread widens, it shows investors becoming more concerned about the economic outlook by demanding more compensation to lend to risky companies. But low spreads translate to a positive outlook, with spreads currently hovering near historic\u00a0lows<\/strong>.<\/p>\n

Chart from Jim Bianco<\/a> on\u00a0X<\/p>\n

Once the Fed starts cutting interest rates, traders should also keep an eye on the U.S. Dollar Index<\/strong> (DXY). The dollar put in a small rally off support at the 100 to 101 zone that you can see at the arrow in the chart below. That\u2019s resetting the MACD below the zero line while the RSI is turning lower from the 50 level. That shows price momentum remains weak, where a break below 100 could have significant implications<\/strong>. A lower dollar helps boost S&P 500 earnings<\/strong> (international profits become worth more in dollar terms), while commodities priced in dollars can see a tailwind<\/strong>. That includes gold and silver prices that are rallying over key breakout\u00a0levels.<\/p>\n

Mosaic Tidbits<\/h3>\n

Here are a few of my recent posts that are still impactful and relevant to the stock market\u2019s next\u00a0move:<\/p>\n

The S&P 500 posted its best week of the year with a gain of 4% last week. But stocks are now <\/strong>entering the worst two week stretch of the year based on historic seasonality trends<\/strong><\/a>.The forward path of stocks is heavily dependent on the earnings picture<\/strong>, especially once the Fed starts cutting interest rates. Earnings are highly correlated to economic activity, with recessions having an outsized impact on S&P 500 earnings drawdowns<\/strong><\/a>.Following the action in cyclical sectors can provide an edge in forecasting the economic outlook<\/strong>. Here are the types of sectors to follow, and what they\u2019re now saying about the state of the\u00a0economy<\/strong><\/a>.Stock market breadth is sending a mixed signal. While breadth is surging on the rally off the August lows<\/strong><\/a>, another measure is pointing to a pullback in participation on the S&P 500\u2019s test of a key\u00a0level<\/strong><\/a>.<\/p>\n

Chart Updates<\/h3>\n

Century Communities (CCS)<\/strong><\/p>\n

After moving over the $90 level, the stock is consolidating gains and back testing that level as support while creating a bullish pennant pattern. The MACD is resetting and turning up at the zero line with the relative strength line is holding near the high. I\u2019m watching for a move over\u00a0$105.<\/p>\n

PulteGroup (PHM)<\/strong><\/p>\n

Another homebuilder emerging from a constructive continuation pattern. After moving over the $120 level, the stock created an ascending triangle pattern with resistance at the $135 level. Price is breaking above that level on higher volume with the relative strength line at new\u00a0highs.<\/p>\n

Ford (F)<\/strong><\/p>\n

If we get seasonal weakness in the stock market during the last two weeks of September, I\u2019ll be watching the $10 level on Ford (F) for a potential short trade. The chart below shows $10 being tested a couple times since last October. The stock is turning lower after a MACD reset below the zero line. Take the chart back several years and you\u2019ll see it\u2019s a key support level to\u00a0watch.<\/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

Can the S&P 500 survive Fed rate cuts?<\/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":"

For today\u2019s update, I want to highlight several key charts I\u2019m watching for the capital markets and how they are impacting the near-term outlook. I also have a quick summary and links to recent posts that remain impactful for monitoring the markets. And after that, you can find a few trade ideas and chart updates […]<\/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-7756","post","type-post","status-publish","format-standard","hentry","category-interesting"],"_links":{"self":[{"href":"https:\/\/mycryptomania.com\/index.php?rest_route=\/wp\/v2\/posts\/7756"}],"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=7756"}],"version-history":[{"count":0,"href":"https:\/\/mycryptomania.com\/index.php?rest_route=\/wp\/v2\/posts\/7756\/revisions"}],"wp:attachment":[{"href":"https:\/\/mycryptomania.com\/index.php?rest_route=%2Fwp%2Fv2%2Fmedia&parent=7756"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/mycryptomania.com\/index.php?rest_route=%2Fwp%2Fv2%2Fcategories&post=7756"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/mycryptomania.com\/index.php?rest_route=%2Fwp%2Fv2%2Ftags&post=7756"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}