It’s that time of year again as the summer comes to a close and the kids get back to school. Wall Street is also learning its lessons when it comes to tariffs, supply chains, inflation and interest rates as there is much debate on the best monetary policy for this environment. The experts have been all over the map this summer but there is now a consensus that we will get a 25bp rate cut at the Fed’s September 17th meeting.
The uncertainty is over the potential for the labor markets weakening while inflation remains above the Fed’s 2% target (now around 3%). Which is more important to the Fed? However, Fed Chair Powell made a speech on Friday at the annual Jackson Hole Economic Summit where he said “the shifting balance of risks may warrant adjusting our policy stance.” This means they are going to prioritize labor market weakness over inflation which means we should see at least one and maybe two 25bp rate cuts before winter break. This was received very well by the markets.
So, the next few weeks will be packed with important metrics with the August labor report, more inflation (CPI & PPI) and a rate decision by the Fed.
The Stock Market
The stock market loves lower interest rates and responded on Friday with excellent breadth (broad based buying) and a solid rally looks to have ended a few weeks of sideways price action. If we look at the chart below of the S&P 500, we can see two major pullbacks – one in 2022 and one from this year.
Drawing trendiness from these corrections, we can see there may be a diagonal forming but based on the very strong breadth readings on Friday, it does look like we will get another leg higher into September. How high?
One very interesting thing I noticed about these two corrections, their Fibonacci extensions overlap at the same price at $6975. If you don’t know much about Fibonacci analysis, just know corrections of significance tend to have an ‘echo’ where prices can gravitate towards. In this case, I think that the $6975 level could be achieved in September which may also act as a brick wall of resistance. We will see and I will keep you updated in the coming weeks. For now, stocks look good to push higher until the next Fed meeting.
Hope you all enjoy the end of your summer and thank you for being a reader!
President, Kisco Capital
