Can Powell Restart the Bull? (Market Top Update)

Will rate cuts give us new Crypto & Stock ATHs?

Author

Kyle Barnoff
September 14, 2024

*Reminder, this post is for informational purposes only, it is in no way personalized financial advice for the reader.

On Friday, stocks and crypto JUMPED on rumors the fed might cut rates by 50 basis points, or 0.50%. Rate cuts are still bullish for markets, and that is the good news. However, history tells us rate cuts can be bad in the long term. Let’s tease out why before anticipating ATHs for stocks and crypto.

Rate Cuts Are Bullish, at First

Rate cuts are logically bullish for stocks and crypto, however in 2000 stocks topped before rate cuts began, but in 2007 stocks topped after a couple rate cuts. So the question is, will fed rate cuts be a buy-the-rumor, sell the news type of event? Or, will rate cuts be a catalyst to propel markets higher?

Charts aren’t giving us a clear answer, so we have to look at fundamentals.

To understand, we have to talk about the Fed-economy delay. Lower rates are great for the economy. It means lower lending costs for businesses and consumers, meaning more buying of goods and houses. This buying would theoretically be unequivocally bullish for stocks and crypto. Unfortunately, it's not that simple.

Here is a catch: the economy reacts very slowly, it is a lot like a heavy freight train. A freight train takes a long time to get it up to speed, and a really long time to stop once you apply the breaks.

Creating a Hot Economy

Back in Covid days, the Fed and US government stimulated the economy with low interest rates and stimmy checks. This money created huge demand for goods (as evidenced by the large shortages).

It took 1-2 years for businesses to catch up to demand and get the freight train running at full speed.

This is a great example of the slow reaction time of the economy. It takes time for businesses to take out loans, order new products, then build out the supply chains to deliver those products (i.e. shipping).

What did the stock market do after the Fed and government stimulated? It went up quickly! Risk-on assets react quickly because they are liquid. The difference between speed of markets vs. the economy is important!

Cooling the Economy

Recently, the Fed was forced to cool off an overheating economy and fight inflation. They did this by increasing interest rates to make borrowing more expensive for businesses and consumers. This caused increased spend on interest for loans, decreasing spending cash and drying up savings. This moves slowly too however… like a freight train traveling full speed laboring to stop.

Effect of Rate Cuts Now

The problem with this time delay is it’s hard to get it right. Time it perfectly, soft landing. Get it wrong, recession. Even if the Fed were to drop rates to zero today and start quantitative easy (aka money printing), we know it takes 1-2 years for the economy to catch up!

The problem is, the Fed will only cut rates by 25 - 50 basis points (0.25% - 0.5%) in September. That is tiny in the eyes of the economy, and more hopium for stocks and crypto than a material impact for the economy.

Housing is Painting the Picture

For real-time proof, take a look at housing. Mortgage rates are down 1.5% to 6.2% from highs a year ago, but buyers are not re-entering the market. That’s a clear sign a small cut won’t materially impact the economy. Let me be clear, I don’t think we’re headed to a residential housing crisis again, but housing is often a canary.

Home sales are in a clear downtrend, and are not recovering YoY despite significant decline in mortgage rates.

Stock & Crypto ATHs or More Pain?

To know if we’re headed to ATHs, or into a bear market for stocks and crypto, we need to figure out the current psychology of investors. When will half of investor money decide we are heading toward negative GPD (the definition of a recession)? The challenge is finding the tipping point. That is hard, but I’ll be damn if we’re not going to try.

Adding up Psychological Clues

The first clue is the elevated VIX, which tells us a small subset of investors thinks there is something structurally wrong (see my last video for the explanation). The next clue we need to look for is investor confidence. We can use the reaction to a catalyst to give us an idea of where investors heads are at. The next catalyst will be the Fed rate decision on Wednesday, September 18th, but on Friday we got some clues!

If the Fed rate decision pushes us to new ATHs, I think there may be more steam in this market. If not, I am not sure there is a catalyst that will take us there. We got a sign of things to come on Friday, and I think it could give us ATHs and even a short alt season.

Friday was Good for the Bulls!

On Friday, rumors of a larger than anticipated rate cut sent Bitcoin and stocks higher. Bitcoin was up 3% on the rumor, not to shabby! Bond futures markets show the market hasn’t priced in a 50 basis point rate cut yet, let me show you why.

The September 0.50% rate cut probability increased by 15% on Friday 9/13, causing the market rally on Friday. This tells us if the market prices in a 90%-100% probability of a 50 basis point cut, markets should continue rally. See the chart below:

I grabbed this chart on Saturday, unfortunately, but look at the table at the bottom. The increase in a 0.5% cut is 20% higher WoW, it’s probability jumped ~15% on Friday causing the Friday rally!

Rate Cut PROJECTIONS could be Bullish!

Another item that could be bullish is the Fed’s Summary of Economic Projections. In this summary, the Fed projects rates over the next 3 years.

They will release this at 2pm EST on Wednesday the 18th. This is released a couple times a year, and in June the Fed decreased the number of rate cuts they anticipated in the future due to sticky inflation. That is why soft inflation numbers became a catalyst for stocks and crypto!

June’s summary of economic projections. This is the second page - the numbers to watch are underlined in red.

Anticipating the Market’s Reaction Next Wednesday

Since inflation has leveled off, I anticipate the Fed will increase the number of rate cuts for 2024 and 2025. This is only bullish if the number of rate cuts is larger than the market expects. Futures markets move daily, and right now the market is undecided on future rates, so this is my take:

I anticipate a 25 basis point cut (0.25%) will be bearish. A 50 basis point cut (0.50%) will be bullish and should at least get the S&P back up to the old ATHs. Aggressive rate cut projections in the Economic Summary could rally stocks and crypto past old ATHs (although crypto has more ground to make than the S&P).

The only question left is how many rate cuts in the Economic Summary will it take to get us to new ATHs? We won’t know until Wednesday morning - we need to know what bond futures markets are predicting. As it stands today, four 25 basis point cuts in 2024 will be mildly bullish, and anything over five 25 basis point cuts extremely bullish. I don’t see the Fed giving us hope for more than 3 in 2024, however.

If you want a simple indicator, watch how investors react to the Fed decision. If investors sell on the news, we are likely headed for pain in both stocks and crypto in the medium term, but after Friday I’m more hopeful for ATHs (60%/40%). Remember, markets are volatile during Powell’s press conference (2:30 PM EST), so I’m not making decisions until after his speech unless a trend is large and clear.

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