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Stocks fall on 0.25 pct. cut with next move likely data dependent

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Stocks tumbled after the Fed announced a 0.25% rate cut, although more precisely it was some specific words in the press conference afterwards that started the ball rolling down the hill. The Dow lost 334-points, which was actually well off the lows, but it was a fairly broad sell-off across most sectors and indices. The S&P 500 closed back below 3000 again.

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The market was set up for some kind of "sell the news" reaction, but as we mentioned yesterday, a lot of folks were expecting that, which made it less likely to happen, but when Powell gave guidance for future cuts, the less dovish Fed opened the gates for some selling.

The Fed may have been initially misunderstood when the market interpreted Powell's comments of this being a "midcycle adjustment" to mean this could be a "one and done" move, but later he explained that they are open to more cuts, but it won't be an automatic "series" of cuts as investors may have been hoping. That was a disappointment, but stocks did close well off the "one and done" press conference panic lows.

Many have questioned the need for rate cuts considering the recent bullish and decent economic environment that we have been in, and Powell cited trade concerns and wanting to see inflation tick up to their 2% objective as motivating factors.
I heard Jim Grant of the Grant's Interest Rate Observer say yesterday that the ECB and BOJ (Europe and Japan's Central Banks) have destroyed their countries' bond markets, and because of that risk is no longer being priced into stock markets. He says the Federal Reserve is # 3 on that list, and the more they take yield away, the more vulnerable markets can get because of the "groping" for a return when interest rates are so low. When asked how this will end he says, "It ends with the consequences of the destruction of price discovery", and of the "adulteration of interest rates playing out."

To add, he's been on this kick for nearly 10 years, as have some other very smart economists who have been predicting the consequences of these unnaturally low rates, but obviously to this day it just keeps on keeping on with our stock market reaching all time highs.

The next FOMC meeting is in the third week of September and the Fed Futures are currently showing a 57% chance of another 0.25% cut at that meeting.
We'll get the July jobs report on Friday morning. Estimates are looking for a gain of about 160,000 jobs, an unemployment rate of 3.6%, and wage growth of 0.3%.



The S&P 500 (C-fund) tanked shortly after the Fed's "midcycle adjustment" statement at the press conference, and you can see by the large kangaroo tail reversal that it set up some dip buying, and the trading volume was fairly large for a midsummer day. That could be a reversal, but after the bell the futures were heading lower again so perhaps a test of that low is possible, and at this point there's no telling if a test will hold as we head into the two worst months of the years historically.




The DWCPF (S-fund) traded in a wide range and there seemed to be a bullish tint to this after new highs were made early on, but of course small caps are interest rate sensitive and any indication that rates aren't going as low as investors had hoped could let some steam out of this index, which had been doing well of late.




The Dow Transportation Index was down with the rest of the market but there was no breakdown on the chart like we saw in the S&P 500. The rising trading channel is intact and that's what I'll be watching here.




The EFA (I-fund) had gapped lower on Tuesday after the ECB did not lower rates, and yesterday it was down and the dollar was up sharply on the Fed's somewhat less dovish position, and that added pressure to the international stocks. It did fill a large open gap on Tuesday and reversed off of it (blue).




AGG (Bonds / F-fund) had a bit of a wild ride after the FOMC meeting yesterday and closed with a slight gain, but by the end of the day it closed within that narrow range it has been closing in for a couple of weeks now. Bond yields dipped and the yield on the 10-year Treasury fell back down toward 2.0% again, closing at 2.01%.




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Thanks for reading. We'll see you back here tomorrow.

Tom Crowley


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S&P500 (C Fund) (delayed)

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DWCPF (S Fund) (delayed)

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EFA (I Fund) (delayed)

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BND (F Fund) (delayed)

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