The Fed has “really screwed up” … why Louis believes we’re now in for 5 quarter-point cuts this year … double-dip recession risk in Europe … will the Fed kill this bull?
As I write Monday, global markets are plummeting.
European stocks are down almost 3%. The Shanghai is down almost 2%. The Korean exchange is down 9%. And Japanese stocks just suffered their largest daily loss – ever – with the Nikkei 225 index down 12%.
Here in the U.S., despite having risen off their lows at the opening bell, the three major indexes are deeply in the red. The Nasdaq leads the way, down almost 4%.
The VIX – commonly known as the market’s fear gauge – surged to 53 this morning. It hasn’t been this high since the early days of the Covid Pandemic in March 2020.
What’s behind all this?
Fears that the Federal Reserve has blown it once again, and the U.S. is headed for a recession.
With this as our intro, let’s turn to legendary investor Louis Navellier in his Flash Alert podcast from Growth Investor this past Friday:
You know, folks, I can’t fix stupid.
Someone on the Fed, they’re not thinking right. They’re not looking at the data, and it’s sad.
Sometimes the bigger the group, the lower the IQ. And they really screwed up, and that’s why the market is reacting so violently.
If somehow you missed the fireworks that began last Friday, it was a bloodbath.
The S&P had its worst decline since 2022. Meanwhile, the Nasdaq officially slipped into a correction, meaning “down 10% from its most recent peak.” And the rotation into small caps fizzled with the Russell 2000 tanking 3.6%.
But rather than a rebound here on Monday, the markets are selling off even more violently.
As noted earlier, the catalyst for the collapse was Friday’s unemployment rate that jumped to 4.3%. This stoked fears that the Fed has already gone too far with its restrictive interest rate policy and might have unintentionally tipped the economy into a recession.
As we pointed out in Friday’s Digest, the Fed’s June SEP projection showed a forecast of a 4.2% unemployment rate at the end of 2025. So, the fact that we’re already at 4.3% suggests the Fed is not just off again, but off by an embarrassing margin.
Last Wednesday, the question was “how many quarter-point cuts might we get this year?” but now the question is “what sort of interest-rate-cut triage must the Fed implement to prevent a recession?”
With this in mind, let’s return to Louis and his Friday podcast:
The biggest news, by far, is what’s happened to treasury bond yields.
The two-year Treasury note has hit an intraday low of 3.86%. The 10-year bond hit an intraday low of 3.8%.
The yield curve is almost entirely un-inverted. And rates are so low that the Fed has to cut five times now – five quarter-point cuts.
Obviously, [the Fed] is going to be cutting rates on September 18th. But they really should cut 50 [basis points], to be candid with you.
First, I’ll note that the 10-year Treasury yield has fallen even farther since then. As I write, it’s at 3.75%.
Second Louis’s call for a 50-basis point cut is echoed by an increasing number of market participants. If we look at the CME Group’s FedWatch Tool, we see that the probability that the Fed cuts rates by 50 basis points in September has exploded to 92.50%.
For context, on Thursday, before the unemployment report, those odds were just 22%.
And if we look farther out, the FedWatch Tool puts majority odds on five quarter-point cuts by December, just as Louis suggests.
It’s a mess. It really is a mess. The economy has been neglected, and it’s showing up in the data now.
I know the Fed wants to get to their 2% inflation target but they’re there already… They have to quit waiting for a one-year average.
Is the Fed already too far behind the rest of the world?
The purpose of rate cuts is to ease monetary conditions, making lending easier, which helps fuel economic growth.
In a perfect world, central banks are ahead of the curve, preemptively using interest rate policy to influence economic growth in an efficient, positive way.
But many times, due to the lag effect in between when interest rates are changed and when those changes show up in the economy, central banks find themselves behind the curve. So, their policy changes are all too often reactions to troubling data rather than proactive measures to prevent painful market conditions.
As we look around the world today, where are the interest rate policies of other central banks? How are their economies? And what does that suggest for the U.S. by comparison?
Well, as to interest rate cuts, here’s The Wall Street Journal:
The Swiss National Bank kicked off the policy-easing cycle in the developed world in March. The European Central Bank followed with a rate cut in June. Central banks in Sweden and Canada have also cut rates in recent months.
We can now throw The Bank of England into the mix. Last Thursday, it cut its key interest rate for the first time in over four years.
And let’s not forget China. Two weeks ago, China’s central bank cut both major short- and long-term interest rates.
Meanwhile, Japan has raised rates. But it’s in a unique situation where the raise was a deliberate (and somewhat panicked) effort to stop the slide of the yen against the dollar.
So, the world is already ahead of the U.S. in a shift in policy.
However, even with this head start, it might not be enough for some of these other countries to stave off recession.
Case in point, look at Europe…
While the headlines report that the European recession is over, is a double-dip recession forming?
Here’s Schwab from May:
Last week’s data revealed that Europe’s mild recession ended with the first quarter of 2024. Two back-to-back gross domestic product (GDP) declines of -0.1% in the third and fourth quarters of 2023 were followed by growth of +0.3% in the first quarter…
After five quarters of economic stagnation following Russia’s invasion of Ukraine and the European Central Bank’s (ECB) acceleration of the monetary tightening due to the related surge in energy prices, Europe’s economic growth is expected to continue over the coming quarters, according to the consensus of 50 economists tracked by Bloomberg.
But there’s growing risk of a double-dip recession thanks to the Europe’s largest economy – Germany.
Here’s Semfor from last week:
The eurozone economy grew by 0.3% in the second quarter, slightly exceeding economists’ predictions, but Germany revealed it is tipping toward a recession.
Growing gross domestic product — the total value of goods and services — in Spain, France, and Ireland helped offset a 0.1% decline in Germany, Europe’s biggest economy but lately its problem child.
The eurozone entered a technical recession in the second half of 2023, and while analysts said that the latest figures suggest it is healing, it’s still unclear how long the recovery will last.
“The question remains where the economy will head from here and recent data do not provide much confidence that the eurozone economy is further accelerating,” wrote one economist.
The risk is that Germany’s recession will spread to the rest of Europe.
If many central banks have already cut rates and yet they’re still at risk of a recession, that’s troubling for the U.S., that hasn’t begun cutting rates yet.
And now, the Fed is in a bind. Clearly, they need to cut rates, but if they do so in between FOMC meetings, then they risk appearing panicked themselves, thus triggering a massive market rout. But if they wait another full month, that’s just added interest rate restriction weighing on the economy.
Here’s Louis’s take:
If our Fed waits until September 18th to cut rates, they’re not even late to the party, it’s like showing up to the party after it’s over. Because, by then, Canada will have already cut twice, Britain will have cut twice, and the European Central Bank will have cut twice.
So, for us to be so slow to cut is irresponsible…
I’m very frustrated that the Fed did not take the advice of Bill Dudley, the former New York Fed President who demanded a cut on Wednesday.
So, where does this leave us?
Well, Louis is right – we’re in for rate cuts. The only questions are “how many?” and “how fast?”.
But is it already too late?
Whereas Federal Reserve Chairman Jerome Powell sounded upbeat and confident about the labor force, inflation, and interest rates last Wednesday in his press conference – almost stepping into “victory lap” territory – things have suddenly reversed.
The Fed appears on its heels, playing defense against a tidal wave of economic weakness that already looks beyond its control. Meanwhile, the selloff that began last Friday and is extending as I write Monday is Wall Street’s attempt to get out of the way before a larger crash materializes.
This reminds us of the old market adage that’s sad but true…
Bull markets don’t die of old age, they’re killed by the Federal Reserve.
It’s critical to maintain a level head in all this
For all we know, this is just a pullback (albeit a violent one) in an overheated market before stocks close out the year on a high note – possibly, thanks to a Fed that’s about to unleash the mother of all doves.
But we don’t know that. So, we must find the right balance between defense and offense.
From defensive orientation, mind your stop-losses and don’t let fear influence your market decisions. And as Louis notes in his podcast update, only sell on “up” days, and be careful not to get fleeced on ETF bid/ask spreads.
From an offensive orientation, begin looking at your “wish list” stocks. You don’t have to rush into them – we don’t know how deep or long this selloff will last. But keep your eyes open. We might find ourselves enjoying some fantastic buying opportunities in the coming days/weeks.
Also, as we’ve highlighted many times, trading is a fantastic way to capitalize on heightened volatility.
In recent Digests, we’ve featured the trading approaches of Jonathan Rose at Masters in Trading Live, and Tom Gentile’s Money Calendar. Markets like this are when their systems can generate enormous returns – sometimes even within just a day or two.
There’s also Luke Lango’s system in Breakout Trader, which uses price trends and volume to identify stocks that appear to be entering a period of accelerated price gains. Luke just put together a research video explaining how it works. You can watch it for free, right here.
Here’s Luke explaining more about the video:
I lay out the whole backstory of how I developed this system, the powerful data analytics behind my entire approach, as well as why I think it could be a game-changer for anyone who wants to identify breakout stocks.
So, whether you’re looking to trade this market in the short term or find buy-and-hold opportunities for the long term, keep your eyes open for great bargains. After all, though Louis is correct when he says you “can’t fix stupid,” we can profit from it.
Have a good evening,
Jeff Remsburg
