I am on the Board of Advisors for a company which held a very nice dinner this past Tuesday. The firm’s founder gave all of the Board members in attendance a brief introduction, and asked us to stand so the crowd could acknowledge us. Trust me, I could get used to that sort of thing. A round of applause simply for standing up?
The rest of my family doesn’t realize how fortunate they were/are to have not been there to witness this. If they had been, I would forever be telling them: “you guys should really do yourselves a favor, and listen to everything I have to say. I mean, I sometimes get ovations just for showing up, and I think it is high time we start doing that sort of thing around here.”
Now, the downside to getting the applause, if you want to call it a downside, was fielding questions about the economy as I was trying to make an Irish exit. After all, everyone now knew who I was and what I did for a living. Don’t get me wrong. I love to have an opinion in public, as I rarely get to have one in private.
Even so, several queries about the potential for “an emergency 50 basis point (0.50%) rate cut in between FOMC meetings” as I was trying to hit the bricks was a little unusual. The prospects for an emergency rate cut? My answer to everyone was essentially the following: “I sure hope not. That would mean the economic data the Fed is privy to is much worse than what the government has been giving us. If that is the case, how could we trust the official data moving forward?”
Now, I am not so naïve as to think Jay Powell and I are dealing with the exact same information. That would be as surprising to me as the applause was. However, based on my experience, interim changes to monetary policy – almost always rate cuts – happen when the data/ news comes in surprisingly, shockingly even, weaker than anyone envisioned. I am talking about many, many standard deviations to the left of the median analysts’ estimates.
To that end, I can’t remember a single time in my career when the Fed changed its policy stance because the stock market had a few bad days in a row.
Yes, last week’s Employment Situation wasn’t great, but it wasn’t a knockout punch either. To be sure, the rout in the Japanese Nikkei on Monday was concerning. However, Japan’s economic clout isn’t what it once was, and its stock market has been, um, unpredictable for decades.
But embarking on an easing policy because domestic investors get skittish after a very impressive run in their stock portfolios? While that might be nice in the short-term, would it be a good thing in the long-haul? That is, do we really need to have the central bank mandate the price of money, arguably somewhat artificially, in the financial system?
I have a hard time with that.
Think of it this way. Have you ever been to an all-you-can-eat buffet? If so, you know the food on them is almost universally mediocre. If it were truly bad, no one would eat there. If it were good, the restaurant owners wouldn’t allow you to eat as much as you want for a set price. Think about it. It doesn’t matter if it is Shoney’s, Golden Corral, Sizzler or any number of China Kitchen/Garden/Moon/Palace joints dotting our nation’s landscape. They are all mediocre, even if you want to convince yourself one way or the other.
If you can envision that, you can also envision what the economic data has been thus far in 2024. You could argue the same about corporate profitability as well. Just as some buffets are marginally better than others, so have been the economic reports and the earnings of various companies. Combined, however, few would seriously contend the U.S. economy has been hitting on all cylinders over the last couple of quarters.
Conversely, the domestic stock market has been. Sure, a fistful of companies were outsized contributors to the eye-popping 15%+ return the S&P 500 posted for the year-to-date through July 2024. However, a lot of individual investors simply use index or target-date funds in their retirement accounts. So, they have enjoyed the ride regardless of the reasons.
Now, imagine your favorite Chinese buffet has decent egg rolls, and further imagine you have had at least 4 of them already. That should be enough. Come on man, you have kids. However, your wife isn’t with you, which is key, and the buffet has a set price, so why not have some more? That is sort of how the market has performed this year.
So, you waddle back up to the steam table to find it is out of egg rolls. You ask someone who works there when there will be more, and they reply with: “the kitchen is making some, and it should be about 5 minutes. Not long now. You really like them, don’t you? We have all noticed.” Ouch. If having to wait a few minutes for the things weren’t bad enough, they had to call you out on being a pig!
Who wouldn’t be a little indignant, huh? Who wouldn’t grab their check, pay without saying anything to the cashier and vow never to come back to Emperor’s Golden Chinese Jade Palace & Buffet? Well, maybe not everyone would be THAT rude outwardly. But inwardly? I am pretty spot on target.
That, my friends, is how the markets behaved during the recent, shall we call it, unpleasantness.
As I type this on August 7th, there has been nothing in the official, economic data which would mandate the Fed make any changes to monetary policy before the upcoming FOMC meeting on September 17th and 18th. Sure, a lot can happen between now and then. Perhaps we get a truly dreadful Employment Situation report for August. Maybe next week’s inflation releases are well below 0.0%. The ISM Reports on Business could plummet to 40 (the over/under is 50). Shoot, the world could become embroiled in a much bigger conflagration in the Middle East.
A lot can happen over the next 5 weeks which could force the Fed to make a change. However, up through my Irish exit on Tuesday night, I hadn’t seen anything which would give the Fed any reason for panic. Of course, we could debate the wisdom of keeping the overnight rate at 5.50% when the 10-Year Treasury Note is hovering around 4.00%, but that is beside the point.
Interim Fed moves are always “oops” moves, as in: “well, that was a surprise. We sure didn’t see that one coming.” To date, the most surprising thing about 2024 has been just how strong the U.S. stock markets were for the first 7 months of the year. Hey, don’t get me wrong. I have loved it. Making crazy money off of average results? What is not to like?
It has almost like getting a round of applause simply for doing nothing more than standing up. It is great when that happens. However, you shouldn’t go all “no egg rolls on the buffet” nuclear when it doesn’t happen.
Have a great weekend.
Thank you for your continued support. As always, I hope this newsletter finds you and your family well. May your blessings outweigh your sorrows on this and every day. Also, please be sure to tune into our podcast, Trading Perspectives, which is available on every platform.
John Norris
Chief Economist
Please note, nothing in this newsletter should be considered or otherwise construed as an offer to buy or sell investment services or securities of any type. Any individual action you might take from reading this newsletter is at your own risk. My opinion, as well as those of our Investment Committee, is subject to change without notice. Finally, the opinions expressed herein are not necessarily those of the rest of the associates and/or shareholders of Oakworth Capital Bank or the official position of the company itself.