Dr. Ed was interviewed on Bloomberg Surveillance this morning. Ace journalist Lisa Abramowicz noted that during the summer, we were saying that the economy is resilient and doesn't need much monetary stimulus, which might cause a meltup in stock prices.
Now we are saying that if the Fed cuts the federal funds rate (FFR) by 50bps instead of 25bps on September 18 stock prices might go down.
Lisa asked me to explain what changed. Well, we did have a meltup in the stock market through July 16, when the S&P 500 hit a record high as investors anticipated easier monetary policy.
But in early August, the carry trade started to unwind when a weak July employment report convinced many market participants that the Fed would turn more dovish (as confirmed by Fed Chair Jerome Powell's Jackson Hole speech on August 23) at the same time as the BOJ was turning more hawkish.
We didn't see that unwind coming, but we recognized it immediately and concluded that stock market prices might be choppy for a while through the November 5 election.
The second round of unwinding occurred last week, especially on Friday, and again after a weak August employment report. In any event, we anticipate new highs in stock prices after the elections if gridlock wins, as we expect.
There wasn't much news today and what there was wasn't new. So the stock market recovered some of last week's losses, led by the Magnificent 7 and technology stocks.