Were Powell’s Comments Really That Bullish?
Markets surged following Powell’s more-dovish-than-expected comments on Friday, as his openness to a September rate cut fueled aggressive rate-cut assumptions and that propelled cyclical sectors and indices as well as the broad markets (Russell 2000 rose 3.9%!).
Given the huge Friday rally, it’s reasonable to think that Powell introduced a new, bullish catalyst to the markets, but that is not actually the case. In reality, all Powell did, beyond the short term, is reinforce existing expectations for a September rate cut (remember, Fed Watch had those odds near 100% pre-Powell). The reason Powell’s comments sparked that rally was because they helped diffuse what was pretty “hot” inflation data last week (and for most of the month of August).
Numerous inflation metrics have run hot in the last few weeks including the CPI, the price indices in the August flash PMIs, as well as some insight from retailers (Walmart especially, which said tariffs are now pushing prices higher and that will continue for the next few months). Powell signaling an openness to a September cut pushes back on those inflation concerns and instead let investors enjoy the solid economic data from last week (the headline flash PMIs were strong as were most other metrics).
Point being, Powell’s openness to a September rate cut allowed investors to enjoy this market environment, i.e. stable growth, some inflation pressures and the Fed still cutting rates in the coming weeks. That’s a positive recipe for stocks in the short term and combined with some momentum and that’s what drove Friday’s rally. And with the S&P 500 at new highs, clearly market momentum is higher in the short term.
But the risk profile for this market has not changed beyond the short term. And in reality, it’s probably a bit worse than it was. I say that because stagflation risks are actually rising, not falling. Price metrics are seeing upward pressure, while the labor market is showing more signs of losing momentum (continuing jobless claims and the monthly jobs report are going in the wrong directions).
None of this is bad enough, yet, to impact the markets. From a market positioning standpoint, I don’t view these risks as enough to warrant getting more defensive or dramatically reducing volatility in portfolios. However, I do think it again speaks to the need for balance in stock portfolios and making sure that we have solid cyclical exposure (industrials, financials, materials), as well as large-cap AI and AI-tangent exposure (mega-cap tech, consumer discretionary, utilities). With our moves in the portfolios last week we have all of those positions. Bottom line, this market wants to go higher right now, and Powell’s openness to a rate cut helped to reinforce a largely stock-positive near-term setup.
I don’t want to confuse that with an environment where stagflation risks are falling. They are not. And while they aren’t big enough to disrupt the rally, they are moving in the wrong direction. We will continue to watch them closely because the impact on this market if stagflation becomes a real worry will be substantial if realized. I suspect we will not be making any moves before the end of the year since I don’t believe the risks outweigh the opportunity to value from the current positives in the market.
"This material is provided for general information and is subject to change without notice. Every effort has been made to compile this material from reliable sources however no warranty can be made as to its accuracy or completeness. The information does not represent, warrant or imply that services, strategies or methods of analysis offered can or will predict future results, identify market tops or bottoms or insulate investors from losses. Past performance is not a guarantee of future results. Investors should always consult their financial advisor before acting on any information contained in this newsletter. The information provided is for illustrative purposes only. The opinions expressed are those of the author(s) and not necessarily those of Geneos Wealth Management, Inc."