By Steve Goldstein
Critical information for the U.S. trading day
Thomas Lee, the usually optimistic co-founder and head of research at Fundstrat Global Advisors, has been more right than wrong this year.
Heading into 2024, he forecast another strong year for the stock market, though he anticipated a pullback around February and March and that gains would be led by small caps.
So far, there's been another strong year for the stock market - that's a much better call than his peers at JPMorgan and Morgan Stanley, for instance - albeit with the rotation to small caps IWM only coming over the last month, and the correction coming later than Lee anticipated.
Now Lee says that the market will make another rally after the Federal Reserve decision - with a potential gain of 4% to 5%, or even more.
"The key premise is the Fed is likely to commit to a September rate cut of at least 25bp (1 cut). A possibility of more than that is not necessary," says Lee. "And while bond markets have priced in 100% probability of this, equity investors likely will not be convinced until the Fed affirms this as such."
Lee notes that the median five-day return for the S&P 500 index SPX over the last six decisions was +2%. He says this gain will be unusually strong because the Federal Open Market Committee has yet to reflect the "super soft" May consumer price inflation index numbers or what he called the astonishingly soft June CPI figures. With the labor market and general business activity slowing, that means there will be softer future inflation as well, Lee says.
Heading into the decision, there's been a "painful" 5% correction in the S&P 500 and 10% in the Nasdaq 100, while the small-cap Russell 2000 has been flat. But over the last 24 months, when stocks are down heading into the FOMC rate decision, they rallied in four of the five times outside of the 2022 hike cycle.
The Russell 2000, he adds, had traded at least 1% higher or 1% lower in 11 of the last 12 sessions before Tuesday. That's only happened 10 times since 1979, and each year they did - 1987, 1998, 2009, 2011 and 2020 - were clear "risk on" and "early cycle" years.
Over one month, the signal has a win ratio of 90%, and it's 100% for 3, 6 and 12 months. Over 12 months, those gains averaged 51%.
"Overall, we believe risk-on moment is coming. And this will be led by small-caps. The body of evidence is growing for a sizable move for small-caps over the next 8 weeks," he says.
The market
U.S. stock index futures (ES00) (NQ00) rebounded on Wednesday as big tech results offered relief from recent earnings worries. Treasury yields BX:TMUBMUSD10Y were stable ahead of the Fed decision later Wednesday.
Oil futures (CL00) rose after Hamas's political leader was assassinated in Tehran, and Iran vowed revenge. The dollar (USDJPY) slumped vs the Japanese yen after a Bank of Japan interest rate hike as it also said it would reduce the pace of bond buying.
Key asset performance Last 5d 1m YTD 1y S&P 500 5436.44 -2.15% -1.32% 13.98% 18.78% Nasdaq Composite 17,147.42 -4.72% -4.89% 14.23% 20.05% 10-year Treasury 4.142 -15.10 -22.20 26.11 5.44 Gold 2465.2 2.82% 4.22% 18.99% 25.09% Oil 76.78 -0.93% -8.16% 7.64% -3.71% Data: MarketWatch. Treasury yields change expressed in basis points
The buzz
The Federal Reserve's latest interest-rate decision comes at 2 p.m. Eastern, with markets convinced the U.S. central bank will keep interest rates steady but suggest it may cut them as early as September.
In its quarterly refunding announcement, the Treasury said it won't have to increase coupon auction sizes for the next several quarters.
The employment cost index rose 0.9% over the last three months and by 4.1% over the last 12, the Labor Department reported., as ADP said private-sector payrolls rose by 122,000 in July.
Microsoft (MSFT) reported slower-than-expected cloud services growth as it ramped up its own spending on artificial intelligence.
Advanced Micro Devices (AMD) was a beneficiary of the AI capex surge as the chipmaker lifted its full-year revenue guidance. That gave a boost to Nvidia (NVDA), which reports its own results in a month's time.
Opinion: Microsoft and AMD earnings show that AI remains a game of optics
Wednesday mornings earnings highlights include Boeing (BA) naming a new chief executive, DuPont's (DD) surprisingly strong earnings, and GE HealthCare's (GEHC) revenue disappointment.
After the close, Meta Platforms (META) and Arm (ARM) are set to report results.
ASML Holding (ASML), the Dutch chip-equipment maker that's a Nasdaq-100 stock, surged in Amsterdam after Reuters reported the U.S. will exempt allies including the Netherlands and Japan from a rule next month that limit exports to China.
Best of the web
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Top tickers
Here were the most active stock-market tickers as of 6 a.m. Eastern.
Ticker Security name NVDA Nvidia MSFT Microsoft TSLA Tesla AMD Advanced Micro Devices GME GameStop TSM Taiwan Semiconductor Manufacturing AAPL Apple AMZN Amazon.com AMC AMC Entertainment NIO Nio
The chart
One recession indicator used at the Fed calculates recession probabilities over the next 12 months using just three variables: the 10 year yield, the 3 month yield and the current federal funds rate. Right now, that indicator points to a 70% probability of a recession. The blog Political Calculations joked that a triple top was forming in the indicator. But its author, Johns Hopkins professor Jonathan Wright, says now is "exactly the economic story" behind why the slope of the yield curve does have forecasting power for recessions.
Random reads
The parents of this four-time Olympian want her to get a real job.
This Italian deserves a medal for the rare feat of pulling airplanes (three!) while walking on his hands.
A long-lost portrait of Henry VIII was found in the background of a social-media post.
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-Steve Goldstein
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07-31-24 0838ET
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