Powell's recalibration on rates may bring 1995-like boost to stocks: strategist

By Steve Goldstein

Critical information for the U.S. trading day

The immediate reaction in the stock and bond market was frosty to the Federal Reserve's 'hawkish' 50 basis point cut, if there can be such a thing, but optimism is back in the air on Thursday morning.

Dario Perkins, managing director for global macro at TS Lombard, says he never doubted Fed Chair Jerome Powell's ability to sell a half percentage point rate cut more as a victory lap in its fight against inflation than a warning that the U.S. economy was about to implode.

"It is important to remember that the monetary settings we have today were administered in the face of a macro environment that was very different from what we have currently - inflation was at 50-year highs, the labor market was massively unbalanced , and central banks were fearful of repeating the experience of the 1970s. Given the complete reversal of all those trends, it was clear that Fed officials would be able to justify a 50bps reduction without unsettling markets or creating an undue sense of panic," he said.

That the U.S. no longer needs "emergency levels of monetary squeeze" should be bullish for risky assets, he adds.

He says a 1995-like outcome is now back in play, for the economy and the market. "Not only was it the textbook example of the soft landing the Fed is hoping to achieve today, but it was a midcourse 'recalibration' in monetary policy - rather than a full monetary reversal - where the central bank cut interest rates back to neutral after a period of deliberately restrictive policy," he said.

Perkins doesn't rule out a recession but says it would be mild, given a lack of deep financial imbalances as well as fiscal policy support. "We think that investors are underestimating the resilience of the U.S. economy and that even if there is a recession, it is likely to be extremely mild by historical standards," he says.

Perkins says the bond market is pricing in too much monetary easing. "We see a secular bond bear market, which will play out as higher lows and higher highs in yields during the 2020s (even if monetary policy has overshot that path in the near term)," he says.

On the stock market, he is still constructive. He has previously come up with his own recession indicator, creatively dubbed the Perkins rule, which states that it's a contraction in employment rather than a gradual drift higher in the unemployment rate that is the signal of a recession.

He says investors should only sell stocks if payrolls turn negative. "Remember, you do not need to be able to forecast a recession to trade equities - you just need to recognize the recessionary process once it has started," he says. "Given investors' confidence in the Fed put, the equity market always gives you an opportunity to get out of risk assets before it is too late."

The market

U.S. stock index futures (ES00) (NQ00) were pointing to a strong opening Thursday after Wednesday's wobble. The yield on the 10-year Treasury BX:TMUBMUSD10Y rose 3 basis points. Bitcoin (BTCUSD) surged.

   Key asset performance                                                Last       5d     1m      YTD     1y 
   S&P 500                                                              5618.26    1.15%  -0.05%  17.79%  27.62% 
   Nasdaq Composite                                                     17,573.30  1.02%  -1.93%  17.07%  30.47% 
   10-year Treasury                                                     3.706      2.80   -15.10  -17.49  -78.82 
   Gold                                                                 2615       1.08%  3.75%   26.22%  34.80% 
   Oil                                                                  70.64      2.11%  -3.21%  -0.97%  -21.14% 
   Data: MarketWatch. Treasury yields change expressed in basis points 

The buzz

Initial jobless claims in the week ending Sept. 14. dropped 12,000 to 219,000, further underscoring that companies are not laying off many workers. The Philadelphia Fed's manufacturing index crawled above zero, to a 1.7 reading.

The Bank of England voted 8-to-1 to keep interest rates on hold, at 5%, after a cut last month.

Darden Restaurants (DRI) reported a 1.1% slide in same-restaurant sales, though the Olive Garden parent company said its sales trend has improved after a big decline in July.

After the close, FedEx (FDX) and Lennar (LEN) report results.

The European Commission called on Apple (AAPL) to open up its iPhone operating system to third-party developers.

Best of the web

Tech jobs dried up and aren't coming back soon.

The loser from the Fed decision is Berkshire Hathaway.

Proposed rules from the federal government will tackle one of the last frontiers of vehicle safety - SUV and truck size.

The chart

Are electric vehicle sales really stalling? Citing data from the Argonne National Laboratory, Princeton University professor Jesse Jenkins posted this chart showing the U.S. in August sold the most battery electric vehicles ever, alongside record hybrid sales. The market share of internal combustion engines meanwhile fell below 80%, likely for the first time ever.

Top tickers

Here were the most active stock-market ticker symbols on MarketWatch as of 6 a.m. Eastern.

   Ticker  Security name 
   NVDA    Nvidia 
   TSLA    Tesla 
   GME     GameStop 
   PLTR    Palantir Technologies 
   AAPL    Apple 
   NIO     Nio 
   TSM     Taiwan Semiconductor Manufacturing 
   DJT     Trump Media and Technology 
   AMZN    Amazon.com 
   AMD     Advanced Micro Devices 

Random reads

A feud over a fantasy football league led one man to falsely claim his rival was planning a shooting rampage.

The Thai zoo that features a popular baby hippo named after a meatball is trademarking the name.

Lego is cutting back on making Lego business cards for its executives.

Need to Know starts early and is updated until the opening bell, but sign up here to get it delivered once to your email box. The emailed version will be sent out at about 7:30 a.m. Eastern.

Check out On Watch by MarketWatch, a weekly podcast about the financial news we're all watching - and how that's affecting the economy and your wallet.

-Steve Goldstein

This content was created by MarketWatch, which is operated by Dow Jones & Co. MarketWatch is published independently from Dow Jones Newswires and The Wall Street Journal.

(END) Dow Jones Newswires

09-19-24 0838ET

Copyright (c) 2024 Dow Jones & Company, Inc.