WASHINGTON. Rumors that the Fed might actually cut interest rates soon – something President Trump has been demanding for nearly 9 months now – continue to drive the US stock market significantly higher for the second straight day. Traders today appear convinced that the Fed will cut interest rates, and soon. As of the 1 p.m. hour ET Friday, all three major averages are up well over 1 percent as Thursday’s Wall Street party resumed. For its part, the tech-heavy NASDAQ is currently up nearly 2 percentage points on the day.
Our latest Wall Street party: Relief rally or the real deal?
It’s all likely a relief rally. Particularly for the NASDAQ. After days of battering over the China-US trade and tariff war and the Federal government’s interest in taking on Silicon Valley with the potential aim of some serious trust busting looming ahead.
The action thus far
Fox Business gives us a quick synopsis of today’s market action thus far. Including some of the likely reasons behind this latest surprising Wall Street party.
“Wall Street interpreted a surprisingly weak May jobs report — 75,000 jobs added instead of the 185,000 expected — as putting more pressure on the U.S. central bank to cut the federal funds rate. The Fed could act as soon as next month to cut interest rates and give the economy a boost.
But wait! There’s more…
“Besides topping 26,000 in midday trading and then hovering just above and below that level, the Dow was on pace to break a six-week string of losses, while the S&P 500 and the Nasdaq Composite were on track to break a four-week string of declines.
“The big miss in May job creation could add pressure on the Federal Reserve to cut interest rates, perhaps as soon as next month.”
Truth be told, it’s probably that awful jobs number that’s making the Fed more eager to consider a rate cut, not President Trump’s importunings. Although a rate cut this month or next would certainly make it look like the President’s jawboning really worked.
Traders and investors seem convinced the Fed will cut interest rates. And soon
But we think today’s Wall Street party, aka” irrational exuberance,” needs a little perspective. The Fox Business report already cited would seem to concur.
“‘This is the type of read the doves will really take to, as it supports the argument for cutting rates beyond politics or trade issues, which were never part of the Fed’s mandate to begin with,’ Mike Loewengart, vice president with E*TRADE Financial,” said in a statement.
“‘That said, our historically low unemployment rate hasn’t moved, and even though the number came in low we’re still creating jobs, which supports the case that the economy is still expanding. So the Fed will have to walk a really thin line.’
“Cliff Hodge, director of investments for Cornerstone Wealth, said that the downward revisions of job creation in March and April ‘put July squarely in play for a rate cut.’”
Shining beacons in the distance
Along with the increasingly credible rate cut rumors, two other beacons of hope kept blinking in the distance. Both added more enthusiasm to Friday’s Wall Street party mood.
First, the administration announced they’d give the Chinese a couple more weeks to finish exporting current orders to the US before this country actually lowers the latest tariff boom.
Second, optimism continues to grow that the US and Mexico will achieve some kind of more-than-halfway agreement on controlling, and ultimately staunching, the ongoing illegal immigration tsunami. It’s been washing over our porous southern borders, largely due to political and partisan judicial opposition to the Trump administration’s attempt to stop it. No less a figure than Vice President Mike Pence offered an optimistic outlook on the current US-Mexico negotiations.
Monday looms, and the weekend is fraught with headline risk
Nonetheless, while bulls like yours truly continue to enjoy the current Wall Street party, many investors are still using it to slip out of stock positions that might not hold up over any political or fiscal disappointments next week. Anyone opening positions today in the middle of a big market rally might be well advised to cool his or her jets and wait to see what happens Monday.
In other words, if the Chinese make more nasty anti-US speeches over the weekend, or if Monday dawns without an immigration agreement with Mexico, look out below. Likewise if the Fed disappoints. If they fail to lower rates this month, the market could instantly sustain a modest whack. But if the Fed fails to lower rates in July as well… Well, I don’t want to be fully invested if that happens. Neither, I suspect, does anyone else. The very thought of an extended Wall Street party by the bulls could vanish in a New York minute.
Time to hedge portfolios with SDS?
I’m considering putting on a token position in the double-short S&P 500 ETF (trading symbol: SDS) at or around today’s market close. This would be of particular interest if, in the market’s waning moments today, a heavy batch of selling hits the tape: perhaps a harbinger of a nasty Monday morning market setback.
I made a few bucks flipping out of a small SDS position Thursday as the market began to regain altitude. So if I do put on another SDS position today, it should be easy to flip out of it quickly Monday morning should negotiators clear up the Mexico situation.
The potential of a small loss here is amply countered by the chance of a big gain in this short hedge if Mr Market doesn’t like what he sees on the trade front when Monday rolls around.
Meanwhile, have a nice weekend. It’s easier to have one, too, if we can close today’s action on a notably positive note.
– Headline image: Partying hearty. Image via Pixabay.com. In the public domain, CC license 0.0.