Rate Cut Hopes Drive the Market to New All-Time Highs
At what point will the market fully discount a more dovish Federal Reserve?
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The consumer price index report on Tuesday morning was slightly hotter than anticipated, but it wasn’t bad enough to change the odds of a Fed rate cut in September, and that is the only thing that matters.
Early on Wednesday morning, Fed Fund futures indicate a 96% likelihood of a quarter-point cut followed by at least two more cuts. That is what drove the positive market action and some new all-time highs for the indexes on Tuesday.
Treasury Sec. Bessent added to the optimism about rate cuts by stating, “The real thing now to think about is should we get a 50 basis-point cut in September?"
The market has been running steadily higher on rate cut hopes since the downward revision in employment data on Aug. 1. There was a significant selloff that day, but the market narrative quickly focused on the likelihood of a more dovish Fed, and that is what is fueling the market.
Another dynamic that has added to the upside pressure is that the economic bears remain steadfast in their conviction that higher inflation is coming as tariffs come into full effect. Investors just aren’t buying it, and the bears have consistently found themselves on the wrong side of the action.
The big question now is at what point does the market start to fully price in the potential rate cuts? There is still the risk of some poor economic data before the Fed meeting in September, and it doesn’t help that we are heading into a period of negative seasonality.
On the other hand, one issue that doesn’t seem to be appreciated by market pundits is the strength in the Russell 2000 IWM and secondary stocks. There is tremendous momentum in names outside of the Magnificent Seven MAGS.
Many investors are obsessed with the high levels of market concentration in Nvidia NVDA and other mega caps. That is not healthy, but there are signs that the market is dealing with that issue with some rotation into smaller stocks. It will have to continue for a very long time to undue some of the narrowness, but there is some shifting. I’ll have more on the Magnificent Seven later today.
We have a mild positive open on the way and no major news flow.
At the time of publication, DePorre had no position in any security mentioned.
