The 50 Basis Point Cut Is In
Alright, the Federal Reserve has decided on a 50-basis-point rate cut. Which certainly leans towards the aggressive side…
Now, this raises an important question: Is this decision just right for our current situation, or is it a reactionary move almost out of panic in response to market pressures and poor economic reports?
What we’ve been discussing recently is now unfolding. A tale of two potential outcomes that, frankly, don’t clear up the overall market picture much. Certainly not in the longer term view anyway…
In the short term, I think it leans pretty bullish.
Folks wanted a rate cut… They wanted an aggressive rate cut… They got one.
And it lines up with what I have been saying for over 6 months now: I think the Fed will do what it must to try to keep this market as healthy as possible through the election.
So, in the short term, sentiment is positive. Especially for sectors that benefit most from lower interest rates.
Sectors like IWM (small caps), XLRE (real estate), and retail should theoretically prosper in this lower-interest environment. We’ve also seen gold and dividend-focused investments get a boost from these developments.
My Concerns
However, the more concerning aspect might be that this rate reduction seems to be a reactive adjustment to an economy that’s not exactly thriving.
The recent reports have been mediocre at best. So this rate cut isn’t really signaling that things are looking up, but rather a rushed measure to appease market demands and prevent potential chaos.
It’s indeed a tale of two scenarios.
You might expect the market to react positively now that the long-anticipated rate cut has finally arrived.
That seems likely, and it’s probably what we’ll see at least until the election, with the S&P maintaining highs.
But then there’s the looming giant, which is the realization that we’ve cut rates as a sort of overreaction, or to stop the bleeding in an economy that’s not showing substantial improvement. (Yes, I know the market has been bullish all along outside of some dramatic volatility drops, but a bullish market and a good economy are two very different things.)
Over the next couple of months — particularly as we head into the election — these are the dynamics we’ll have to navigate.
For my part, I’ll be following the momentum as always. There seem to be some promising opportunities in the sectors I’ve mentioned, particularly IWM, which is my favorite.
However, we must remain alert and ready to adapt if there’s a major downturn that reflects the reality that maybe we shouldn’t really be cutting rates after all.
We’re implementing these rate cuts not because the economy is strengthening but as a way to bolster sentiment, attempting to generate self-fulfilling prophecy:
Make people feel good about the economy so that they participate as if it were a healthy economy, therefore creating a healthy economy.
I’m just not sure that’s how things will play out in the longer term.
— Nate Tucci
P.S. I am updating a few trade ideas today based on this so keep an eye on my Telegram channel here.