And that folks is that
What was described by analysts as a hawkish statement from Powell after the Federal Reserve left interest rates unchanged for the second month in a row, was not greeted as such by the rank-and-file investment community. Stocks and bonds rallied in unison, as the two-year US treasury yield fell below 5% and the 10-year now trades nearer 4.5% than 5%. With hindsight the state of both the bond and equity markets sentiment levels, almost anything Powell and the fellow members of the FOMC came up with was likely to result in something of a rally. Historically two consecutive pauses from the Fed usually signal the peak. All sectors enjoyed the rally.
The Bank of England likewise left interest rates unchanged and Andrew Bailey sang from Mr Powell’s song sheet claiming it was too early to start considering cutting interest rates but nonetheless, here we saw a sharp rally in government debt and stock prices.
Apple came out with numbers last night that showed sales had fallen for the 4th straight quarter. Anything that sells something and does not quite meet expectations usually ends up blaming China these days, as was the case with Apple. The reality is also, that the gains from a new phone from a technology standpoint, aside from possibly a smarter camera, are marginal, unlike a few years ago, and the cost is dramatic.
Where do we head now after this quick bounce, probably back to reality? Not much has changed except stocks and bonds had become a little oversold, and sentiment a little too negative in the short term. Rates may start to fall at some point next year in the US, but it must be remembered the Fed does not get too heavy-handed either way with interest rates during election years. And if they do start to cut it will be only in response to a weakening economic outlook. That does not provide much of a positive outlook for stocks.
Economic cycles start, as we pointed out a few weeks ago, with rising bond prices, which initially help support other asset prices, but that needs time to feed through, so after the initial bounce other assets lag, particularly equities, then they catch up. All things being equal are we likely to see another major selloff from here into the year end? Aside from some unseen event that’s unlikely, is there a catalyst for another big leg up, again not sure where that catalyst comes from. The probability the range trading will continue. Anything close to 4000 for the S&P 500 will attract capital closer to where we are now and probably feels enough. The trouble will come when the tide does turn for money managers, if you are not in it’s going to be hard.