Is the Fed too relaxed about rate cuts? … the difference between hard data and soft data … how to trade earnings without knowing the direction a stock will break

This past Sunday, on CBS’s “Face the Nation,” Minneapolis Fed President Neel Kashkari said that it’s a “reasonable prediction” that the Fed won’t cut rates until December.

From Kashkari:

It’s really going to depend on the data. And we’re in a very good position right now to take our time, get more inflation data, get more data on the economy, on the labor market, before we have to make any decisions…

You know, I think that’s a reasonable prediction [that one quarter-point cut] would likely be toward the end of the year.

This leisurely attitude toward rate cut has created some anxiety on Wall Street. Should there be more urgency to cut?

Let’s jump to Luke Lango’s Daily Notes from Innovation Investor last Friday:

While Fed Chair Jay Powell did sound dovish in his press conference, the Fed’s new Dot Plot also did skew hawkish, underscoring that this Fed presently does not feel any urgency to cut interest rates. 

But recent economic data suggests that they should get some urgency soon. 

[Last week], we learned that jobless claims in the U.S. economy soared to a nine-month high. [Last Friday], we learned that Consumer Sentiment in the U.S. economy plunged to a six-month low and is currently in the midst of its biggest three month drop since summer 2022. 

That data adds to a long list of evidence that the U.S. economy is slowing rapidly right now.

The list is growing so long that investors are worried that if the Fed doesn’t cut rates soon, the economy will spill into a recession.

Now, let’s avoid a misunderstanding – Luke doesn’t believe this recession will materialize. He’s confident that the Fed will cut rates in September which will help restore the economy.

But how is it that Luke can be so confident of a September cut while Kashkari appears somewhat dismissive of cuts prior to December?

One possibility is because our economy has plenty of evidence to support two conclusions at once: it’s reasonably strong…and it’s increasingly weak.

The question is where do you want to focus?

The different pictures painted by “hard data” and “soft data”

Hard data are quantitative and easily measurable. Soft data, while somewhat quantitative, are often more qualitative and subjective.

Though I don’t know what data reports Kashkari is focusing on, the nature of his comments suggests he’s looking at hard data that shows a reasonably strong economy.

I wonder what he’d say if presented only with softer data reports – for example, the consumer sentiment survey that Luke noted above.

It just fell to a multi-month low. But it’s less the number and more the speed and scope of the sentiment collapse that’s the real story.

According to Morgan Stanley, the spread between the measure of current conditions and expectations just hit an all-time low, going back to the early 1980s.

Here’s the chart:

Here’s MarketWatch, beginning with a quote from Mike Wilson, CIO at Morgan Stanley:

“This is hard to dismiss as an errant data point, in our view, and it lines up with our persistent call that the health of the economy and consumer is not nearly as strong as the headline GDP data has suggested,” say Wilson and team.

“Instead, we believe we are dealing with an unbalanced economy of ‘haves’ and ‘have nots.’”

The cause is simple enough — while inflation may be receding, price levels are not, and that’s led consumer expectations of real income gains over the next five years to tumble.

The divergence between hard data and soft data loosely parallels the divergence between the “haves” and “have nots” that Wilson just highlighted.

Today, better-off U.S. consumers are doing rather well despite inflation, and spending robustly. This manifests in various retail sales reports and economic growth figures.

Yet simultaneously, less well-off U.S. consumers are struggling and clamping down on unnecessary spending. This manifests in various sentiment surveys.

The result is this “unbalanced economy of ‘haves’ and ‘have nots’” that we see illustrated through hard data and soft data.

Here’s more from MarketWatch:

A Z-score measures a piece of data relative to its own history. The more technical definition is that it shows how many standard deviations a data point is from its average.

The Z-scores of hard data, like core capital-goods orders, industrial production and retail sales, are flat to negative, while soft data including the University of Michigan’s consumer sentiment survey, the ISM manufacturing survey and the ISM survey are more steeply negative…

“The consumer was more resilient over the last year for longer than we would have expected, but various indicators, such as rising delinquency rates for credit-card and auto loans, indicate that some consumers are feeling the pressure of inflation and higher rates,” said Gisela Hoxha, an economist at Citi. “Recently deteriorating perceptions of the labor market could also lead to softer spending.”

So, let’s follow the breadcrumbs…

The stock market is watching the Fed… the Fed is watching the data… but might the Fed be too focused on hard data, blind to the troubling weakening of soft data?

This is what we’re watching as we look ahead toward the fall.

Now, this also prompts a question…

Is there a way to remain in this market for shorter opportunistic gains, without being married to it if a misstep from the Fed results in a sharp correction?

Absolutely – and this points us to one of the newest members of our corporate family, Jonathan Rose of Masters in Trading Live.

One of the best – and most profitable – approaches to the market during uncertain times

So, here’s a question…

What if you didn’t need to correctly guess which way a stock was going to move to generate a triple digit return?

Well, with one of Jonathan Rose’s favorite trading styles, this is reality. I’ll show you how it works in a moment.

First, for newer Digest readers, Jonathan is the latest addition to our corporate family, helming Masters in Trading Live.

He’s a world-class trader, having pulled millions out of the market over the last decade. But more important to you and your bank account, he’s a world-class teacher of how he’s made these millions.

And candidly, in today’s market environment, his trading approaches need to be in your investment toolkit.

Returning to this trading idea of profiting regardless of direction, let’s look at one of Jonathan’s favorite methods.

How the pros trade earnings season

Let’s be clear up front – Jonathan uses options.

But if that makes you nervous, please give me a moment to offer a fuller perspective on this misunderstood investment vehicle.

Yes, there are many stories of amateur gunslingers using options inappropriately, losing fortunes in the process.

This is NOT how to use options wisely, nor safely.

The way Jonthan and other pros use them, they actually reduce your risk. This is because they offer 100% control over how much money you’re willing to expose to losses.

So, you want to risk no more than $100 on a trade? Fine – you can engineer that.

But risk management is just the start of why Jonathan’s approach is so powerful. However, don’t take my word for it. Let’s walk through an example and you can decide for yourself.

Let’s say that the hypothetical company, ACME, is 30 days away from its earnings announcement

And let’s say that a study of ACME’s earnings over the past three years shows that the stock has consistently moved at least 10% in the wake of earnings.

Maybe it’s “up 10%” one year, followed by “down 13%” the next year, then “up 14%” the third. Though the numbers have bounced around, we know that “+/- 10%” has been the baseline move.

Now, this doesn’t guarantee that ACME will move 10% this time, but it’s a reasonable expectation given historical precedent.

So, what would it mean if the options market was pricing, say, only a 7% move in ACME after its earnings report?

Well, it would suggest an incorrect pricing. A savvy investor who knows ACME’s history could buy this cheaper option with the expectation of a bigger move (which means a profitable move) after earnings.

This is the simplified essence of one of Jonathan’s favorite ways to play earnings.

A recent example is the trade on Pure Storage (PSTG) when it reported earnings back in February (its 2023 Q4 earnings report).

Jonathan noticed a pricing imbalance. What was less clear was whether PSTG would rise or fall in the wake of its earnings announcement.

To cover both outcomes, Jonathan recommended his subscribers buy a bullish trade if PSTG soared, and a bearish trade if it crashed.

“Soared” won the day, and Jonanthan’s subscribers walked away with 193% gains in just over three weeks.

But how did this trade make money if the bearish side of it ended up being valueless?

Because when the move is big enough, the absolute dollars you make on the winning side of your trade dwarf the dollars lost on the losing side.

Here are the PSTG details to illustrate:

To be clear, the gains aren’t always this big. But they happen – and with greater frequency than you might expect.

For example, in May, Jonathan closed out another similar earnings winner on Remitly Global Inc. (RELY) for 77%. In the same month, there was also MacroGenics Inc. (MGNX) with its 156% return.

Bottom line: Let the amateurs gamble away their money with risky options bets that are little more than highly leveraged guesses about market direction.

Meanwhile, wise traders who recognize the smart way to use options are generating significant, consistent gains that can snowball into major wealth.

If you’d like to begin learning more about the many ways Jonathan trades the market, you can start tomorrow morning – for free

Every day that the market is open, Jonathan airs a live video at 11:00 AM Eastern as part of his free service, Masters in Trading Live.

• They’re short – about 15 minutes each, so they won’t eat up your morning…
• They highlight attractive trading opportunities that Jonathan sees materializing…
• They’re chock-full of explanations, education, and context so that even newer traders can benefit…
•  And again, they’re free.

If you’re curious, just sign up for Masters in Trading Live and see for yourself how it all works. If it’s not for you, no problem, cancel whenever you want.

But I suspect that if you’re like so many of Jonathan’s devoted followers, you’re going to have an “AH HA!” moment when you realize just how powerful and profitable this approach can be.

Now, there’s one extra benefit to signing up today…

Jonathan has just put together a three-part video series that explains why earnings matter, the wrong way to trade them, and the way Jonathan trades them. By clicking the link below, you’ll get immediate access to his first video on why earnings matter.

Also, when you click below, you’ll instantly be registered for Jonathan’s free Masters in Trading Live service and will start receiving email reminders about his daily live streams.

Click here to instantly access Jonathan’s free video and join him in Masters in Trading Live.  

Stepping back, will we get the first cut in September or December?

Well, it partially depends on how the hard data or soft data come in…and whether the Fed is watching both equally.

Hopefully, Luke is right and the Fed’s first rate-cut is just around the corner. If not, then Wall Street is likely to be very disappointed.

If this leaves you unsure how to play the market, click this link to automatically sign up for Jonathan’s free daily videos and see how a pro handles uncertainty.

We’ll keep you updated.

Have a good evening,

Jeff Remsburg