/ September 21 / Weekly Preview
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Monday:
N/A
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Tuesday:
Fed Speakers
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Wednesday:
S&P Global Services PMI Flash (56 exp.)
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Thursday:
Initial Jobless Claims (203K exp.)
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Friday:
Durable Goods Orders MoM (-0.3% exp.)
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Monday:
N/A
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Tuesday:
AutoZone, Inc.
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Wednesday:
Cintas Corporation
Paychex, Inc.
General Mills, Inc.
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Thursday:
Costco Wholesale Corporation
Darden Restaurants, Inc.
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Friday:
N/A
Fighting a Supply Shock With a Demand Tool
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The focus of the past week was undoubtedly the Fed’s decision to hike interest rates. On Wednesday, the FOMC raised the funds rate to 3.75%–4.00%, its first increase since 2023. Although broadly anticipated, the unanimous 12–0 vote and the absence of projected rate cuts in 2027 surprised markets. Additionally, Kevin Warsh indicated that further hikes remain a possibility.
The reaction was broadly negative following the decision, but stocks rallied sharply on Thursday. Friday was as sloppy trading day, as options expiration pinned prices near the market’s 50-DMA. Despite the volatility, the market closed near its starting point: the Dow at 51,778, the Nasdaq at 26,418, and the Russell 2000 at 2,874. SPY was only down -0.36% on the week.
The Sectors leaderboard tells a different story. Rate sensitive Financials (XLF) and Utilities (XLU) took a beating. Energy (XLE) also shed -1.2%, as crude prices fell below $100 / bbl.
The 10-year Treasury yield closed the week around 5%, its highest level in 19 years, while the 30-year remained near 5.34%. WTI settled at about $95.46 per barrel. Gold traded near $4,420, down around -20% from the peak. The dollar strengthened slightly, and Bitcoin climbed to $81,190, suggesting the broader liquidity-driven market trend remains intact.
Underlying internals remain an issue, as market breadth did not improve. The advance was carried by mega caps (MGK, +1.1% on the week), while most stocks (and particularly companies that borrow heavily) significantly underperformed. The Equally Weighted S&P 500 — RSP — was down -1.2% on the week.
Investor sentiment took a major hit. The most recent AAII survey found 53% of individual investors bearish on the six-month outlook — up about 14 points from the prior week and the highest level of pessimism since last spring. This aligns with our own reading of "extreme fear” that was recorded and persisted since last week.
However, fear is usually a better setup for bulls than optimism is. The reasoning is straightforward: market action now hinges on the price of oil and the cost of money, two unpredictable variables which do not inspire confidence.
Despite significant volatility, bearish headlines and a dearth of risk sentiment, bulls managed to remain in control. Technically.
SPY finished the week above the key pivot level at $760 (M-Trend & 50-DMA), not far from where it started. The Fed’s rate hike dragged the benchmark ETF lower to $754, before Thursday’s and Friday’s rebound reclaimed the pivot. The primary uptrends remain in place (2Y trend lines, rising 200 and 50 DMAs), but conviction behind them is shaky.
Banks and other rate-sensitive sectors bore most of the losses this past week, while technology, AI-related industries, and the megacap cluster were the ones to keep the market afloat. This is not the type of leadership we’d like to see in a “push to all time highs” scenario, as the tape remains more fragile than the index value suggests.
This fragility can be easily seen in our topping patterns sell signal, a study which counts the number of stocks that trade in broken chart patterns. The count spiked above 400 every time a major market deterioration was underway and is one of the most reliable indicators we publish.
As it stands, the fact that this metric reads 300 should be shocking, given the way the index trades.
As we wrap up the third quarter, the important level to hold is $760 on SPY. A failure at $754 (Wednesday’s bounce point) becomes a rude wake-up call for the bulls.
For now, the investing landscape remains lukewarm. Improving breadth, the 10-year yield firmly below 5% or lower oil prices will all land as bullish catalysts for a relief rally.
With earnings season wrapped and companies entering full blackout for the next two weeks, attention shifts to the Federal Reserve. In the coming days the first wave of Fed officials will speak since the rate increase, and their remarks will be scrutinized for clues about the committee’s pace and extent of future tightening. After a decision that pushed the dot plot toward more tightening, the tone of those comments is the week’s key catalyst.
Otherwise, economic data is second-tier and will mostly be overlooked. Wednesday brings the S&P Global flash PMIs, the first clear indication of whether the energy shock is weighing on activity. On Friday, durable goods orders and the final University of Michigan sentiment reading will be released. Attention will focus on the survey’s inflation-expectations component.
On the earnings side, Costco will give a read on consumer health, while Accenture and Nike fill in the picture on enterprise demand and the global consumer.
Enterprise, our core Asset Allocation Strategy, is starting the week in a reduced exposure regime (yellow on the chart below), after previously beginning to stutter near the recent top.
All in all, the Fed’s recent hike (by a unanimous vote nonetheless) can be framed as an exercise in credibility. It was the bond market which forced the Fed’s hand.
What often gets missed is the Fed’s actual objective with interest-rate policy. Rate changes operate primarily through regulating demand. Raising the policy rate increases borrowing costs throughout the economy, which first cools credit-driven spending: mortgages, auto loans, capital expenditures and any activity sensitive to financing costs. As that demand weakens, the economy’s ability to push prices upward diminishes and inflationary pressure eases. In the Fed’s own terms, “price stability” is largely about stabilizing “expectations”.
However, the Fed never touches the supply side of the economy. By hiking rates, the Fed does not drill a new well, open the Strait of Hormuz or end the Iran war. As such, rate hikes only impact the demand side of the economic book. When inflation occurs as primarily a supply problem, trying to fix it by cooling demand is the wrong fix in our view.
Conclusion: the Fed can only keep prices under control by compressing demand until something breaks. So why hike into a supply shock? The reason is credibility, along with several key points:
To prevent a temporary energy shock from becoming embedded in wage-setting and contracts and evolving into a self-perpetuating inflationary spiral like the 1970s;
To preserve the central bank’s image after the “transitory” misstep of 2021, when it initially ignored a shock that subsequently spread;
Because the downside of being wrong twice far exceeds the cost of tightening policy a bit too much once;
The dot plot pins the neutral rate at 3.1%. With the federal funds rate averaging 3.8% and headed toward 4.1%, the Fed is already about 0.9% in restrictive territory. As such, there is no margin for error.
Our Trading Strategy (Sigma Portfolio)
Since the late 1980s, the S&P 500 has typically dipped only about -2% in the three months following the first Fed rate hike. Then it rebounded, averaging nearly 9% gains over the subsequent year, per Goldman Sachs. LPL Financial reports an average 12-month rise of +6.7% with a median of +10.7%. The conclusion appears to be clear: rate hikes have been buying opportunities.
There is a caveat, however. The Fed has historically hiked into a strong, demand-driven economic expansion. It has rarely hiked into a supply shock. In one of the recent times that it did, the record is ugly and the damage consistent (2022). Another aspect that matters is the pace of rate increases. Charles Schwab’s strategists found that the S&P returned +10.5% over the year following slow tightening cycles and lost -3.6% after rapid ones.
The reality is that a 10-year yield at 5% raises the bar for equities in general, especially long duration growth. Ed Yardeni cut his year-end S&P 500 target to 7,900 from 8,400 on the decision, citing growth deceleration.
The macro environment does not look friendly to equity risk, but this is precisely when equity investors get paid. As such, we will maintain a slightly underweight risk profile and wait for the market to confirm either a breakout at the index level or improving breadth. As always we’ll keep our eyes on the Enterprise strategy for asset allocation and keep you apprised with our live trading.
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