The opinions expressed below are my own and do not necessarily represent those of Visdom Investment Group, LLC.
What now?
Having slept on the Fed cuts for a night, investors went to work on the long side this morning. Futures were about +30 at midnight and +50 by 8 AM. Headlines were uninteresting and not material for markets. The S&P printed new all-time highs again, as did the NASDAQ-100, highlighting the continuing role of tech stocks as leaders of the bull market. Treasury yields climbed a little but didn’t get much attention from the stock market. Capital flow was heavy again, 120%.
Without a gangbusters headline, investors were left to figure out what to do now that the Fed made the interest rate cut and kicked off an apparent easing cycle. The verdict? Buy stocks. Investors need to allocate capital and they may have been holding back in the run-up to the FOMC decision. With the decision behind us, capital went to work. It makes sense that stocks were a beneficiary of the flows.
If we look ahead a few months or more, we see lower rates and higher GDP and *potentially* higher inflation. That is a less attractive environment for owning fixed income but a nice one for owning stocks. So if you’re allocating capital now, what will you do? You will trim bonds and add to stocks.
The fact that the trend is your friend only makes the decision that much easier.
For US equities, the future is bright. Valuation is high but that never matters until the fundamentals turn. That’s a big risk *when* they turn but they aren’t turning anytime soon.
The economy is getting an assist from the Fed. The economic situation, despite talking-heads throwing shade at each other, has been steady and positive. That fact that things have been humming along for a couple of years, has important implications *when the Fed makes it clear that it will not interrupt the party.*
What am I talking about?
I’m talking about people thinking about buying a home or a car or something else significant. With rates likely coming down, two years of a healthy economy in the books, and no major worries on the horizon, people will increase their economic activity. I don’t think we’re kicking off a 1920s-style era of booming consumerism but I think we’ll ramp up a healthy amount.
Bolt-from-the-blue shocks are the only risks to contend with. Considering that those are omnipresent, asset allocators are looking at an outlook for stocks that is about as fundamentally attractive as it could be.
See you tomorrow.
-Mike
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