Palumbo Pulse August 26th, 2024: Turning Point

In Friday’s speech at the Jackson Hole Economic Symposium, Fed Chair Powell confirmed what the stock market has been anticipating – it is time to adjust monetary policy, that is, lower interest rates. By the time the first cut is made in September, it will have been almost a year since the Fed first signaled this move was coming and almost exactly a year since the market began to anticipate it. While the stock market often makes very sudden moves, the economy is slower to respond – the proverbial turning around a battleship.

The change was hardly unexpected, but the stock and bond markets rallied hard on the news anyway and stocks were creeping back to the mid summer highs on Friday morning. Given the large market move from October of last year when talk of rate cuts first started, it’s hard to imagine the pending rate cuts are not already ‘priced-in’, but never say never.

What is Market Action Telling Us?

With inflation heading back toward the 2% target and weakness creeping into the labor market, the decision to begin the rate cuts is obvious. What is less obvious is whether the Fed’s actions are late, early or just in time. As always, the markets have an opinion, and as is often the case they have divergent opinions.

The stock market is telegraphing that all is good; a soft landing is at hand. We are late in the economic cycle and economic growth should continue. The bond market has a different spin and is anticipating as many as four 25 basis point (bps) cuts in the final months of the year (a basis point is 1/100 of a percent) with additional cuts expected in 2025. That would imply that we are headed for some sluggish economic activity. Such steep rate cuts would only be required in that kind of scenario. This article from Morningstar is recommended for more detail on the subject, but the conclusion is that where we are headed from here is about as clear as mud.

NVIDIA Earnings Next Week

In a market driven forward by AI, next week is important as the biggest AI stock, NVIDIA (NVDA) reports earnings on Aug. 28 after the market close. Revenue and profit growth should easily exceed 100%, but the critical question is whether they can beat expectation that are already quite high. And even more important, what will the forward guidance look like? Even a mild disappointment could send this market leader reeling from such a high perch. But the stock is still off from the recent highs, so a solid quarter could put in new highs for the stock. Options pricing suggests that a 9% reaction in the stock price is possible. With each passing quarter, the stakes get higher and higher.

Have a great week!

What We’re Reading

Nvidia will be in the spotlight next week as Wall Street wraps up a tumultuous August

America’s Energy Divide: How Democrats and Republicans Feel on Energy

RFK Jr.’s supporters could still alter a tight presidential race.

Palumbo Wealth Management (PWM) is a registered investment advisor. Advisory services are only offered to clients or prospective clients where PWM and its representatives are properly licensed or exempt from licensure. For additional information, please visit our website at www.palumbowm.com.

The information provided is for educational and informational purposes only and does not constitute investment advice and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell a security. It does not take into account any investor’s particular investment objectives, strategies, tax status or investment horizon. You should consult your attorney or tax advisor.

The views expressed in this commentary are subject to change based on market and other conditions. These documents may contain certain statements that may be deemed forward‐looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected. Any projections, market outlooks, or estimates are based upon certain assumptions and should not be construed as indicative of actual events that will occur.

All information has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy, reliability or completeness of, nor liability for, decisions based on such information and it should not be relied on as such.

All information has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy, reliability, or completeness of, nor liability for, decisions based on such information, and it should not be relied on as such.

 The views expressed in this commentary are subject to change based on the market and other conditions. These documents may contain certain statements that may be deemed forward‐looking statements. Please note that any such statements are not guarantees of any future performance, and actual results or developments may differ materially from those projected. Any projections, market outlooks, or estimates are based upon certain assumptions and should not be construed as indicative of actual events that will occur.

 Past performance is no guarantee of future returns.

Different types of investments involve varying degrees of risk. Therefore, it should not be assumed that the future performance of any specific investment or investment strategy will be profitable.