Bessent May Not Be Worried, But the Market Doesn't Seem Convinced
The market bounce on Friday is promising, but uncertainties persist as an eventful week begins. Here's what's importan to focus on as we await the Fed's decision Wednesday.
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Following a powerful bounce Friday, market participants are hesitant on Monday morning as they digest comments from Treasury Secretary Scott Bessent and look ahead to the Fed interest-rate decision on Wednesday afternoon.
The market was able to shrug off some of its concerns about tariffs and slowing economic growth on Friday, but there is still substantial economic uncertainty, and Bessent's comments that "Corrections are healthy. They're normal. What's not healthy is straight up" are causing concern.
Bessent states that he is not worried about the stock market. What he is worried about is that federal spending and the growing deficit are not sustainable, and the U.S. needs an economic makeover to fix the problem. That will necessitate some short-term pain, but he is optimistic that it will produce a much healthier economy. Still, there is no shortage of skeptics who believe President Trump's economic policies will be ineffective.
The downside of Bessant's comments is that they indicate that Trump is unlikely to respond to the short-term pain that the market is suffering. In his first term, Trump was very sensitive to market weakness, but this term, he appears to be willing to let the market struggle as he figures out his tariff program and makes other moves that are going to cause short-term pain and confusion.
Wednesday's Fed decision is going to take on a very different complexion than the prior meeting. The Fed has been quite sanguine about the strength of the economy and has focused primarily on the stickiness of inflation. Suddenly, there are widespread signs of economic slowing as consumers pull back spending and GDP predictions are dropping.
An additional problem for the Fed is that there are still signs of stickiness in inflation. While both the CPI and PPI reports were lower than expected, the Fed will likely remain cautious about rate cuts for now. Powell's comments on Wednesday will be extremely important.
Technically, the big bounce on Friday is a positive, but it is just the first step toward a potential bottom. It is a signal to watch for more positive action, but the bounce could easily be just a short-lived respite. What is important now is that the lows that were hit last week are not breached and that there will be some follow-through action later this week. A positive reaction to the Fed would be ideal for a technical follow-through day.
While there is plenty of technical focus on the senior indexes, I'll be watching for indications of rotation. There has been minor relative strength in biotechnology, China, and a few other groups. There are over 130 stocks at 12-month highs, so there are a few pockets of tradable momentum.
It is going to be an eventful week, and a high level of caution is the best course of action.
At the time of publucaion, Rev Shark had no positions in any securities mentioned.
