The Federal Reserve Open Market Committee – or FOMC – is a group of 12 Fed governors and regional Fed bank presidents. These are the ones that determine what the Fed’s interest rate on overnight lending to banks is. The FOMC’s September meeting starts tomorrow and will conclude Wednesday at 2 pm, at which time Fed Chair Jerome Powell will announce whatever policy moves the Committee has decided upon.
Last month, Chair Powell told us that the Fed would be cutting interest rates at the September meeting. There’s still plenty of intrigue about how big of a rate cut will get delivered…will it be a quarter-point (25 bps) or will the Fed go big with a half-point (50 bps) cut?
Those focused on inflation favor the smaller quarter-point cut because the headline inflation numbers have not yet fallen back to the Fed’s 2% target. The half-point crowd are focused on employment and the concern about rising unemployment and falling job gains.
Both sides have pretty good arguments. But I can tell you right now: the market will sell off if the Fed goes small with a quarter-point cut…
We saw it happen last week when the latest Consumer Price Inflation (CPI) index was released on Wednesday before the market opened. The CPI came in as expected, which was interpreted to mean the Fed would opt for the smaller quarter-point cut…
And stocks got pounded.
The Dow Industrial Average was down nearly 1,000 points after the first hour of trading.
But then stocks rallied. The Dow finished with a 100-point gain. Pretty impressive reversal…and we found out why stocks rallied out of the hole the next day…
Jerome Powell’s Fed never comes right out and puts an exact number on its actions before an FOMC announcement, especially during the “quiet period” that extends two weeks prior to an FOMC meeting. Instead, Powell & Co. uses back channels to “leak” the number before the actual announcement.
These back channels are the Wall Street Journal and Goldman Sachs.
So last Wednesday, while markets throwing their little tantrum, Goldman Sachs came out and said “Probably quarter-point, but maybe half-point.” Then Thursday, the Wall Street Journal was out saying “probably half-point…”
Mission Accomplished
The Fed may have even added a new mouthpiece. In an article for Bloomberg this morning, former Fed Governor for New York wrote “I expect the Fed will do 50.” Of course, he can’t come out and say “Powell told me he was cutting by 50 bps.”…
We’ve talked plenty about how to play a rate-cut cycle. Here are some top choices:
Utilities – Utilities are already the best-performing sector of the market this year. Yes, that means the Utes are beating tech – now that some big tech stocks have given back the lion’s share of their 2024 gains.
Utilities are an old standard for rate cut cycles. For one, they pay nice dividends which make them attractive versus bonds because lower rates push bond yields lower. Plus, utility companies are capital-intensive, meaning they have to borrow a lot of money to do business. That’s especially true now as utilities are investing to increase their electricity production. Lower rates mean lower borrowing costs and better profits.
Finally, utilities are a “picks and shovels” play on the insane electricity demands from AI applications. We’ve discussed several, like Vistra (NYSE: VST), Brookfield (NYSE: BEP)and its +5% dividend, Southern (NYSE: SO), and Dominion (NYSE: D).
Precious Metals – Lower rates typically mean a lower U.S. dollar. A falling dollar, in turn, is good for commodities. Especially precious metals because they have the added benefit of acting as a store of value. That’s why gold is at all-time highs and likely going higher. But Christian DeHaemer is even more bullish on silver. He’s been laying out the case for silver recently, and back in May.
Speculative Small Caps – think of this category as short-term trade idea rather than a long-term investment. But lower borrowing costs are usually as boon for small caps.
Here are a couple ideas – two from the nuclear power area. We’ve talked about NuScale (NYSE: SMR) and its small modular reactor technology a few times. The stock trades just below $10, and has been acting frisky. So has Nano Nuclear (NASDAQ: NNE). It popped up on my screen last week at $9.50. Currently $14, it was up to $30 back in July.
Cheers,
Briton Ryle
Chief Investment Strategist
Outsider Club
X/Twitter: https://twitter.com/BritonRyle
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