The week of August 12th–15th was a great week for stocks. The S&P 500 closed the week with a gain of 3.65%, the NASDAQ with a gain of 4.91%, and the small-cap Russell 2000 with a gain of 3.21%. The only up volume day was Thursday, and I attribute that to computer buying at the end of the day because both the S&P 500 and the NASDAQ were above their 50-day moving average into the close. The Small Cap Russell 2000 was also up. The gain of 3.21% for the week seemed impressive, but the action was not. I did not observe any urgency to buy small-cap stocks in advance last week. This leads me to believe it will take some serious lumps when the other two averages test their bottoms in the coming weeks. I must note, that I have no opinion on how the market will react when the Federal Reserve cuts next month (hopefully). I expect market volatility before or around this time (Sep. 17–18).
NOTE: I expect the Small Caps to soar towards year-end and into next year if we see at least 2-3 rate cuts this year
In my opinion, most of the gains on all exchanges can be attributed to short covering and very little new institutional money returning to the market. Don’t be stubborn about raising cash now if you’re a trader. After Labor Day, I expect the market to be extremely volatile.
It’s too early for a bottom to the recent sell-off. MARK THESE WORDS. The market will again return near the bottoms I called on July 9th (they have already been there once). Be smart if you’re a trader. For long-term investors, this is nothing more than a back-and-fill correction. I have a great buy list I will release in the next 90 days (at least that’s what is planned).
Interest Rate Outlook
As of this writing, it looks like the market perception is looking for a ¼ of a point interest rate cut in September (that’s down from a previous writing expecting a ½). I think he will do a ¼ cut. The market is currently doing the Federal Reserve’s job. The 2-year Treasury yield is down ¾ of a point from just 1 month ago. This points to the belief that the market is expecting 3 rate cuts by year-end. So why would the Federal Reserve cut more than ¼ with the market doing its job for him? The fact is, he won’t unless some unexpected event occurs. I still believe the Federal Reserve is behind the curve. The lower-end income bracket is feeling the squeeze, and it’s starting to move into the middle-income bracket. REMEMBER: Interest rate cuts and interest rate increases are lagging indicators. The last rate hike was approximately 1 year ago, which means the economy has felt the full effect of a restrictive rate environment for a year now, and it is evident in the data. Look at economic activity, and inflation as a 100 car train. Once moving in any direction, it takes time to change its direction. Economic activity is the same; it takes time.
Federal Reserve
I am writing this because it is extremely important, and most likely, 99% of people don’t know this. The Federal Reserve needs to change its target for inflation to a range! A range that he conveys to the market. Right now, they have a target of 2%. If inflation now goes up in any one specific month, this market will sell off (briefly). It’s not a matter of if! It’s a matter of when! Although a one-month transitory inflation number is normal,! It would spook a fragile market. Setting a range of say 2%–3%, would give the markets confidence that the Federal Reserve is doing its job diligently.
Here is the kicker! Guess where the 2% target number came from! The 2% target widely adopted by central banks today originated in New Zealand, and it did not come from any academic study, but rather from an offhand comment during a television interview during the 1980s, when New Zealand was going through a period of high inflation. SO: A range makes sense, correct? When something is as transitory as inflation from month to month, a target makes sense. NOTE: Three consecutive months of something is not transitory, it’s a trend.
The Economy
As of this writing, the economy is OK. Things have slowed down considerably, but we are not yet in recession mode (I haven’t yet checked the S&P 500 projections for year-end, but I will eventually). Anyway, the Atlantic Federal Reserve model, predicts 2.9% growth for the third quarter.