The S&P 500 equal-weighted index has been going nowhere fast since the Fed cut the federal funds rate (FFR) by 50bps on September 18 (chart). The same can be said for the Russell 2000. The stock market rally has stopped broadening since the Fed's rate cut! Why is that given that the current earnings season has been mostly upbeat?
The problem is that the bond yield has been rising and tightening credit conditions ever since the Fed eased credit conditions! That's a rather unusual response to the first rate cut in a monetary easing cycle (chart). The bond market agrees with our opinion that the Fed cut the FFR too much, too soon. Indeed, the latest economic indicators have been strong, as we expected. In addition, the US Treasury Department plans to raise a whopping $1.3 trillion over the next six months.
The S&P 500 is up 3.8% since September 18. We expect that it might go nowhere fast over the rest of this year too, hovering around 5800. The outlook for fiscal policy will probably remain unsettling after the election and the Fed might not lower the FFR over the rest of this year after all.
Let's dive into today's relevant developments:
(1) GDP. Q3 real GDP grew 2.8% (saar) to a new record high (chart). Though the first estimate of Q3 growth was a tad softer than the 3.0%+ we were expecting, the 3.2% increase in real final sales to private domestic purchasers suggests the two-year streak of strong quarterly growth is on solid footing. Consumer spending rose 3.7%, the strongest quarterly increase since Q1-2023, led by a 6.0% rise in goods spending.
