Welcome to moody Monday, with stock futures down and oil prices getting hit hard after a batch of downbeat data from China, alongside a surprise rate cut.
Some say that the global growth engine’s economic issues belong in a different box from the rest of the world, owing to Cihna’s self-imposed slowdown via COVID restrictions. But it’s just more evidence that the global economy remains wobbly.
On Wall Street, meanwhile, increasing investor bets on a soft economic landing and a less aggressive Fed pushed the S&P 500
SPX,
and Nasdaq
COMP,
to their best run of weekly wins since November 2021. That’s as inflation obediently dropped, albeit to a still nosebleedish 8.5% in July for consumer prices.
So what if you’re an investors harboring doubts about stocks continuing this winning run and looking to cash out, at least for now? Our call of the day from Michael O’Rourke, chief market strategist at JonesTrading, says a window of opportunity is about to open.
“For the next two weeks, the Federal Reserve should be preparing markets for a reminder from the Fed Chairman at Jackson Hole that the FOMC needs to get to a positive real policy rate, which means rates will be higher for longer,” O’Rourke told clients in a note.
“That messaging will start in a meaningful way this Wednesday with the FOMC minutes. The Cold War with China is escalating, thus inflation will be more stubborn than hoped for. If there are investors who are looking for a second chance to exit this equity market, this is it,” said O’Rourke.
In five weeks, he expects the fed-funds rate will be at its highest level of 14 years, and continue to rise, while the balance sheet continues to shrink. “There were parts of the equity market that realized this last week as value – led by energy and financials – outperformed growth,” said the strategist.
Read: Inflation surge cools in July. Should you still play defense with your portfolio?
O’Rourke also notes that while the S&P 500 is down 10% year to date, it has surged 18% in the past two months, and is trading more than 20 times trailing earnings. “According to Standard & Poor’s, earnings growth is now forecast to be 1%, and that will likely wind up in negative territory,” he said.
Also warning of a hawkish Jackson Hole gathering is Tim Duy chief economist at SGH Macro Advisors.
“I don’t know who is really thinking this, but Federal Reserve Chair Jerome Powell is not going to take a victory lap on inflation based on a single data point,” Duy said in a note. He said investors should expect a “dirt dull policy speech” that doesn’t allow for any dovish takeaways.
Some are harking back to a June interview with 68-year-old investing titan Stanley Druckenmiller, who said when inflation gets to 5%, “it’s never gone down without a recession,” or the fed-funds rate exceeding the CPI.
Druckenmiller also said a soft landing bet…
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