/ September 22 / Weekly Preview
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Monday:
Fed Speakers
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Tuesday:
Fed Chair Powell Speech
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Wednesday:
New Home Sales (0.65M exp.)
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Thursday:
Initial Jobless Claims (235K exp.)
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Friday:
Core PCE Price Index MoM (0.2% exp)Personal Income MoM (0.3% exp.)
Personal Spending MoM (0.5% exp.)
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Monday:
N/A
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Tuesday:
Oracle CorporationSynopsys, Inc.
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Wednesday:
Chewy, Inc.
Manchester United Ltd.
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Thursday:
Adobe Inc.
Kroger Company (The)
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Friday:
N/A
The Fed Cut Rates - Prudent or Mistake?
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Last week, the Federal Reserve implemented its first rate reduction of 2025, decreasing the target range for the federal funds rate by 25 basis points to 4.00%–4.25%.
The market was entirely expecting this move, but it represents a meaningful shift in tone from the Fed nevertheless. While inflation had been the primary concern for the past 2 years, the FOMC statement now emphasized that “downside risks to employment have risen”. This framing tells us that the Fed is becoming more concerned about the job market than it is about inflation.
In other words, policymakers are willing to risk higher inflation if it means avoiding damage to the job market. With Unemployment at 4.3%, and a number of continuing and initial claims that have steadily risen, the Fed wants to get ahead of any major deterioration.
The market’s reaction wasn’t exactly straightforward. Before the announcement, many commentators were speculating on a “sell the news”-type price action. Stocks did whipsaw on the day, but finished mixed.
Yields initially fell and the dollar strengthened modestly. Thursday morning, stocks rebounded, supported by enthusiasm related to the NVIDIA - Intel deal. Then, on Friday, there was one of the largest options expiration days on record. More upside was eventually attained after news broke that the White House struck a deal with China on TikTok.
Technically, markets continue to set new all-time highs. Support climbs to $652, with resistance near $690 to serve as a potential year-end target. Volatility remains unusually low, and signs that investors are “chasing” this market out of FOMO are all over the place. When part of the crowd eventually starts selling, we could see a slightly deeper retracement to the 50-DMA, at $639.
Goldman Sachs noted in its latest weekly report, odd lots, or transactions with fewer than 100 shares of stock and a proxy for retail trading, just hit 66% of all US equity trades in Q3. That is up from only 31% in January 2019, representing more than 20% of notional volume and 8% of total executed shares!
Summing up - the market reception was positive. But the question still remains: is the Fed correct in cutting rates now or are they making a mistake?
Many analysts see the rate cut as a cautious step to get ahead of a possible slowdown in the labor market without going fully dovish.
Seema Shah from Principal said it helps prepare for a slowdown without overreacting.
Gregory Faranello of AmeriVet called it a careful move toward a neutral stance.
Jack McIntyre from Brandywine described the Fed’s position as difficult, calling this a risk-management cut. Lowering rates while inflation is still high, especially if tariff costs increase, could create problems for the Fed.
In short, Powell’s Fed is carefully attempting a balancing act. If the labor market weakens sharply, the Fed will seem slow to respond. If growth picks up, the cut might be seen as unnecessary and could encourage risky behavior, even more than we’re currently seeing.
The lack of a firm market response in equities and the rise of the dollar suggest investors are unsure if the Fed’s approach is the right one.
Speaking of which… the U.S. Dollar (UUP) is clinging to its technical channel, and still rising to the tune of 2.9% / year versus other currencies. In the past, similar periods of relative weakness in the USD coincided with positive stock returns over the medium term.
USD Weakness is associated with positive 6-Months and 1-Year returns;
This week, a couple of key catalysts will help us determine if the Fed is on the right path or not.
Investors will get early snapshots of September activity through the S&P Global flash PMIs, fresh readings on housing and durable goods, and the third estimate of Q2 GDP, including revisions to corporate profits.
The week ends with the release of August personal consumption expenditures (PCE), the Fed’s preferred inflation gauge. All of these metrics will be scoured for confirmation that the economy is slowing enough to warrant the cut. Higher than expected inflation will complicate the Fed’s position, however.
Either way, markets are entering a period where every data point has the potential to shift policy expectations sharply.
In any case, the current rally is entirely based on unprecedented earnings growth optimism stemming from AI. “Wall Street analysts have increased estimates for Q3 and Q4 2025 and Q1 and Q2 2026. As a result, analysts now expect the S&P to post record earnings every quarter over the next year.
According to Data Trek: ‘Positive S&P 500 earnings revisions are very uncommon unless the US economy is coming out of a recession, so the Street’s recent bullishness on future index earnings is nothing short of remarkable.‘”
For perspective, the AI trade is as stretched as it has ever been. AIQ (Global X Artificial Intelligence & Technology ETF) has simply gone parabolic since the start of September, pushing its RSI to near maximum levels. 1-Month returns tend to be weak after such runs.
Our Trading Strategy
Stocks, tech, gold, and miners have rallied simultaneously. There is probably excess investor optimism priced in at the moment, and the AI trade is very crowded. A correction can be triggered by any event - an economic release, sentiment shift or government mis-step are all factors that can “pop the bubble” (at least temporarily).
Bull markets are more fun than bear markets. Our strategies are firing on all cylinders, and we’re setting NAV records of our own in portfolios. Times like these don’t last forever, but we do need to make the most out of bull runs when they occur.
We’ll wait for tomorrow’s rebalancing in the Enterprise strategy to determine if we need to step off the gas. Harvesting some profits might be smart given the circumstances. So would diversifying exposure meaningfully into value and defensives.
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