The S & P 500 has gained about $15 trillion since its April lows, an advance partially predicated upon the predictions of a more docile Federal Reserve that could potentially bolster the outlook for corporate earnings.
As noted last week, there is a very weak consensus of a dovish Federal as almost half of the Committee is suggesting only one or less additional rate cuts. FRB Chair Powell stated it will take the next rate decisions on a meeting-by-meeting basis based upon the data “and other factors.”
Will volatility rise as the data has consistently missed expectations for a myriad of reasons including the lack of responses to perhaps outdated modeling that may not reflect an accurate makeup of the economy?
The S & P 500 is trading about 22 times forward earnings, a multiple that is “lofty at best.” According to Bloomberg, among companies that have provided guidance for third quarter results, more than 22% were expected to beat expectations, the highest reading in a year. In addition, the share of firms issuing worse than expected profit forecasts was the lowest in four quarters.
Bloomberg, however, did not quantify how many firms offered actual outlooks.
Longer dated Treasuries have sold off moderately since the Fed lowered the overnight rates. Some might state this is counter intuitive, but it is not. There is little precedent of the Central Bank lowering interest rates in a rising inflationary environment. Moreover, inflation is still about 50% higher than the mandated FOMC speed limit.
Some would argue that the overnight rate is restrictive based upon the prevailing inflation rate, an inflation rate that has remained in a stubborn range for several years.
And then there is political interference. It is naive to think the Fed is apolitical, but the intensity and scope of recent Executive Branch intrusions is unprecedented. Is this interference impacting the Fed’s credibility, credibility that is already severely damaged given continued missed forecasts?
What will happen this week?
The economic calendar is comprised of several housing statistics and manufacturing data points, a sentiment survey and monthly PCE statistics.
Last night the foreign markets were mixed. London was up 0.12%, Paris down 0.26% and Frankfurt down 0.64%. China was up 0.22%, Japan up 0.99% and Hang Seng down 0.76%.
Futures are down about 0.4% on post Fed euphoria. Gold hit another record. The 10-year is up 1/32 to yield 4.12%.
