We are in a very choppy trading environment since the government shutdown has precluded the market from seeing data such as inflation and jobs numbers. It doesn’t look like this condition will end soon and it is possible that Federal Reserve officials will make their next interest-rate decision without key economic data that could reconcile a debate over how far and fast to cut rates.
The Labor Department is calling back some furloughed workers to prepare the consumer-price index (CPI) which will be released late on October 24th but prior to the next Fed meeting on the 29th. “From our standpoint, we’ll start to miss that data,” Powell said at an economics conference on Tuesday. “If this goes on for a while, they won’t be collecting it, and it could become more challenging.”
At this appearance, Powell also went on to say that they may stop reducing the size of the balance sheet in a signal of further easing by the Fed. At the next meeting, odds are rising that we will see a 25bp rate cut and an end to quantitative tightening. There are still concerns over tariff inflation and a weakening labor market but the Fed looks to be picking the side of setting policy to address an economic slowdown.
The S&P 500
At first, markets love rate cuts but Fed easing is normally a signal that something may be weakening in the economy. Today, we are left with an unusual situation of being cut-off from the data so earnings reports in the coming weeks will act as the next best thing.
Trading has been choppy over the last month as potential negatives weigh on the market’s outlook. In the chart below, we can see that downside momentum is near to taking over the direction of the market. A cross to the downside of the MACD momentum indicator at the bottom of the chart would be a reliable negative signal. Even if there is another push higher, upside looks limited in this environment as valuations are priced for all good news.
In the meantime, it is likely earnings reports and forward guidance will dictate the tone of the market before the Fed meeting later this month. And it still possible for further upside if we can hold October’s low in the coming days before the Fed meeting. If stocks get ugly, the Fed will bang the liquidity drum at the next meeting. Stay tuned as the second half of October will be interesting.
Valuation From a Long-Term Perspective
The CAPE ratio, or Cyclically Adjusted Price-to-Earnings ratio, is a tool used to measure whether a stock market, like the S&P 500, might be overvalued or undervalued. This tool was invented by Yale economist Dr. Robert Shiller to measure valuations over very long periods of time.
This ratio uses data that goes back to the 1800s so we can compare peaks in CAPE ratio across the last 100+ years including 1929 and 2000. The correlation is not perfect but easy to observe and this signals that forward 10Yr returns after a peak are likely to be negative. However, the CAPE ratio is not a good timing tool so we will have to be on the lookout for a catalyst that could be a long-term negative.
The catch is that the CAPE is based on 10Yr data so it demonstrates the condition of a market and not a signal to buy or sell a market.
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President, Kisco Capital
