McDonald’s (MCD) reported earnings early Monday morning and the results suggest the economy is rolling over into recession. Comps have been decelerating for a year now and went negative in 2Q24. US Comps were -0.7% compared to +10.3% a year ago. With a market cap of nearly $200 billion and a favorite of lower and lower-middle class consumers, MCD is an excellent barometer of consumer spending. And it’s clearly flashing red at this point…..

Greg Ip wrote a spot-on column in the WSJ two Friday’s ago (7/19) about “Why Fed Should Cut Interest Rates Now” [SUBSCRIPTION REQUIRED]. After a careful cost-benefit analysis of the risks of reaccelerating inflation versus a decelerating economy, Ip concluded – correctly IMO – that the Fed should cut rates this Wednesday.

However, Fed Futures markets suggest that they will hold steady on Wednesday while signalling that they plan to cut in September. As you can see in the chart above, the market is placing a 100% probability of at least one 25 basis point cut after the conclusion of the September 18 meeting.

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As a paradoxical as it sounds, the real economy is now dependent on the financial markets which are dependent on The Magnficent 7 (see “The Global Economy Rests On 7 Stocks”, Top Gun Financial, July 11). That’s because what’s keeping the real economy afloat is the spending of the asset rich who feel free to spend due to the rising value of their stock and real estate holdings. Those who depend on their jobs and income to support their spending are struggling as evidenced by MCD’s report this morning as well as Pool Corp’s (POOL) warning a month ago about weak spending on swimming pools – and other data points as well.

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The current narrative is that investors are rotating out of Big Tech and into small caps in a healthy broadening of the bull market. The reality is that with the economy rolling over small caps are in no position for a sustained rally and the market has likely topped. Were the Fed to surprise the market and cut rates on Wednesday, it is possible that the market could push higher one last time. But that would only forestall the inevitable…..

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