This headline from Bloomberg gives a good summation: “After So Many False Dawns, the market is convinced the Fed will finally cut rates.” Maybe that is the reason for the recent strength and the march toward new all-time highs for the Dow and S&P 500 but I’m not so sure. To me this is no more convincing an argument than we were getting two years ago when the experts were saying that the Fed move to fight inflation (and normalize rates which was really never articulated) was going to throw us into a deep recession … a recession that we are still awaiting.

What happened?

What is wrong?

It seems the naysayers were unaware of the “multiplier effect” and the massive impact of the $7 trillion worth of stimulus that had been pumped into the economy over the previous four years. Here is one SeekingAlpha contributor’s mea culpa for that oversight:

“Given this recent data and forecasts for more of the same, it’s easy to see how analysts, economists, and many investors have been fooled by the resilience of the US economy. The primary reason is simple. Everyone who fell into that camp (myself included) did not factor in the long-lasting effect of the monumental stimulus that was doled out. We now see how this is still being worked off.”

What else has happened?

Photo by Nathan Dumlao

I call it getting back to normal. This is an excerpt from a Kort Session dated 4/7/2022:

THE FED IS MOVING RATES OFF EMERGENCY LEVEL LOWS, AND IN THE CASE OF THE BALANCE SHEET, IT IS BEGINNING TO REDUCE IT FROM EMERGENCY LEVEL HIGHS. AS THERE IS NO EMERGENCY WHY IS THERE SO MUCH FEAR AND NEGATIVITY ASSOCIATED WITH THESE MOVES? THE ONLY ANSWER I CAN COME UP WITH IS MEDIA HYPE AND MIS-INFORMATION! 

This concept of ‘normalization’ would appear to be lost on most of the pundit class in the market. Ergo, lack of understanding should have marked negative impact on stock prices if the ‘Fed-soon-to-cut’ narrative does not pan out.

Advice

It actually may be worse if the Fed moves to cut rates soon as this may mean that they see the economy being weaker than I would expect. Nonetheless, I would advise that you not be afraid of the market, whether or not the narrative plays out. At this point, because of the tremendous outperformance they’ve enjoyed, I would avoid putting new money in large cap growth and tech names. If you use the S&P as an equity proxy, use the equal weight version of the index. This will minimize your exposure to the large cap, high growth sector. The tremendous bifurcation we’ve seen in the past few years provides great opportunities in value, mid-cap and small-cap names. Meanwhile, if the Fed holds the line on rates, don’t let the media scare you out of your stocks. Fed reticence to cut rates will be a sign of a strong economy which should eventually be reflected in stock prices.

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