The Fed Will Be Forced to Cut...and THEN What?
By Dr. Duru written for One-Twenty
September 10, 2007
So the jobs numbers on Friday came in ugly, and suddenly the market no longer has the guts to climb up the proverbial "wall of worry." I have always loved that saying because it is absolute nonsense that only gets referenced when it works. When the market actually goes down on bad news, the wall suddenly looks insurmountable, and no one mentions it. We now hear incessant speculation of a recession. Many of those who called an 8% correction from the S&P500's all-time highs an amazing buying opportunity are now seriously considering joining the large number of institutions who have been spending the last two months or so readily selling stock. (Again, just check in on the institutional selling statistics for your favorite stocks. Stats are available on Yahoo!Finance). Nevermind that at its worst, the market merely dipped to the lows seen earlier in March of this year.
We find ourselves at an odd juncture where the market is still riding high but emotions are running low. A lot of people are moaning and groaning as if the stock market is behaving similarly to the painful swoons we experienced in 2001, 2002, and even 2003. More and more people are trying to get ahead of the increasing likelihood of economic malaise. Unlike the top in 2000, the last time the S&P was around these levels, we don't have rampant, "irrational exuberance," we seem to be teetering on a (credit) panic. The homebuilder stocks have been sinking like stones since the bounce from the 2006 lows failed in February, 2007. Also, the stocks of many retailers have been sinking all year. The signs are spreading of weakness in the domestic economy. Under these conditions, the Fed will be compelled to start cutting rates again or risk an all-out revolt on Wall Street. To wit, 2-year Treasury bills have been drop-kicked to 3.9%, and the Fed futures market is predicting cuts in rates for the rest of the year to around 4.5% by December (subtract the futures number from 100 to get the implied rate).
When the Fed meets on September 18th and begins cutting rates, the market should respond with a rally. However, this sharp rally will probably result in one of the largest fades of the year. Why do I say this? Well, I have my suspicions:
Be careful out there!