The stock market is ready to test all-time highs on bets the Federal Reserve Bank is a lot more pessimistic than investors are.
Major U.S. equities pushed out of their recent trading range Thursday and Friday on weaker job trends, expecting the softer growth will prod the Federal Reserve to implement another quarter point rate cut this month. That leaves the S&P 500 needing just a 1.6 percent rise to set a new all-time high. It’s as if everyone in the market are the happy forest inhabitants of Winnie the Pooh but for poor ol’ Jerome Powell, who plays, Eeyore, for whom everything is bleak.
While the end of week action wasn’t quite the “bust out” some characterize it as – volume was fine, not enthusiastic going into the weekend – the market’s in a better spot right now than it has been in weeks. Thursday and Friday’s equities action was a double breakout of sorts, breaking through two technical areas of resistance at once, the recent range ceiling (the green line in the accompanying chart) and the 40-day moving average (the orange line). Breaking a convergence of resistance is better than just breaking one, and that now should provide a base for the market to shift higher.
In fact, over the past month we’ve seen the broad market indexes – the NYSE Composite, the Dow Industrials and the Dow Transports among them – go from chipping through major support at their 200-day moving averages to ending the week back over their high, 50-day moving averages. And to think it was just Wednesday when the most-active gold futures contract (December) hit a six-year high of $1,560 on increasing pessimism.
But just as the old dynamic that the Fed wouldn’t cut rates with equities bullish and employment is great shape seems to be out the door, is it possible gold and stocks can rise concurrently, and bullishness in one doesn’t have to mean bearishness in the other, as has been the historical relationship? Quite possibly. For one, cheaper and easier money that comes with the Fed rate cut powers equities as a basic fact of the markets. The dollar is also continuing to strengthen relative against world currencies, so the Fed probably wants to cut rates to weaken the dollar (for export reasons) to keep pace in the world’s race to the bottom of interest rates. Low interest rates, it turns, out also tend to be good for gold prices.
If the S&P can rally to its all-time high, full-throated optimism should take over, and clear the path for a strong rally to over 3,150 in quick succession. The risks here are two fold, though. News and hope-driven moves like we had this past week are going be highly susceptible to actual bad news, like continued trade dysfunction between the U.S. and China and the possibility the Fed doesn’t actually cut rates further. Right now, stock investors are discounting both of those possibilities away.
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