The Federal Reserve cut its target interest rate by 25 bp to 3.75-4.00%. The action was widely expected and followed a 25 bp cut at the previous meeting. The Central Bank also noted in the accompanying statement that the reduction in the Fed’s balance sheet will stop in December. Other changes were more reflective of an adjustment in the timing of data and still characterized economic activity as “expanding at a moderate pace” and noted that job gains have slowed but unemployment remains low. The statement also continues to not that inflation has moved up “since earlier in the year and remains somewhat elevated.” There were two dissents to the decision, one member wanted a 50 bp cut and one wanted to hold steady.

There was no Summary of Economic Predictions released at this meeting.

In the Chairman’s press conference following the release, Chairman Powell pointed to expectations for inflation in the coming years as a reason why the Committee believes that inflation will resume a downward trend. He followed those inflation comments with the observation that goods inflation has risen, which is largely due to tariffs and temporary, while inflation on services continues to ease. The Chairman also noted that there were “strong” disagreements as to potential Fed moves at the December meeting, while appearing to make a special effort to dissuade investors of the notion that a December cut is a “foregone conclusion.”

FinDec Take—This was a widely expected move, with the stopping of the reducing of the Fed’s balance sheet also anticipated after comments from Fed Chair Powell in recent weeks. Investors may have been disappointed slightly by the emphasizing that a December cut was not assured. Ending the “quantitative tightening,” which is what the shrinking Fed balance sheet was, may have a modest impact on longer-term yields, which stand about where they were before the two recent cuts of the shorter-term Fed Funds rate. With inflation above the Fed’s 2% target, there is a risk in loosening monetary policy, but, for now, the Committee clearly views the risk to employment as the more important one. Only time will tell, but if inflation stays stubbornly high, the Fed could be forced to reverse course.

• – Stocks moved solidly higher in October, with technology issues reasserting leadership. Investors were buoyed by a good start to earnings season and hopes of trade deals.
• – The government shutdown will have a more significant impact should it continue well into November.
• – The health of the consumer will be in focus as the holiday shopping season begins.

In a month that has seen some of the most famous stock market crashes in history, the bulls managed to stay in charge and push stocks solidly higher on the month. The US government shutdown stalled many economic reports, but corporate earnings season provided investors with the fuel they needed. The initial weeks of reporting season featured several estimate beats and upbeat commentary. The big banks noted both consumer and corporate strength, which helped to ease concerns that the tariff situation would drag on activity. Additionally, in another instance of what’s been called the “taco trade”, the President threatened a big tariff hike on China, pushing stocks lower, then backtracked and scheduled a meeting with the China’s leader to talk about better trade terms, pushing stocks higher. Lastly, the Federal Reserve cut the Fed Funds target rate by 25 bp as expected, while also noting that the Central Bank is going to stop letting bonds fall off its balance sheet—both of which are easing actions in terms of monetary policy. Stocks generally respond positively to monetary easing, but the one government economic report released in October showed that inflation continued to move away from the Fed’s 2% goal, which could start to concern investors if the trend doesn’t reverse.

The US government shutdown has been largely ignored by investors but that could start to change should it continue into November. A stop in payments to lower end consumers, along with the continued delayed payment of non-essential government workers will have an economic impact and cause consternation among investors. As a reminder, this fight is about a short-term funding bill to give Congress time to complete the budget and will likely involve an additional round of fighting down the road. The evolution of the trade situation with major trading partners such as Canada and China will also have an impact on sentiment and we believe recent history has shown that cooler heads are likely to eventually prevail and palatable deals will be reached. As mentioned above, technology issues reasserted their leadership position, led largely by the enthusiasm over AI developments. While we don’t believe that a classic “bubble” is forming, as these companies’ earnings are rising rapidly, helping to justify at least some of the stock gains, there is little doubt that some “froth” has developed, and the growth trajectory can’t continue at this pace forever. Recently, we’ve seen some of the bigger AI-related companies invest in other tech companies so those companies could invest more in the big AI-companies. While there’s nothing illegal about these arrangements, it does point to a potential near-term top as the ability to continue spending is questioned.

Source: WSJ

While a near-term pullback is quite possible as the AI market starts to mature and investors become more discerning, the longer-term bull market appears set to remain intact as a supportive Fed and a solid US economy bolster investor sentiment.

Week in Review 10/27-10/31

Fed Interest Rate Decision—The Federal Reserve cut the Fed Funds rate by 25 bp as expected to a range of 3.75-4.00%. Additionally, the Committee announced that the Fed would end its quantitative tightening program in December. This was the process of reducing the Fed’s balance sheet, which reduces the amount of cash in the economy, resulting in a modest tightening impact.

• • FinDec Take—Although the Fed acted generally as expected, the Chairman’s press conference following the meeting took a more surprising turn. Chairman Powell noted that there was serious disagreement in the Committee about the course of action that may be appropriate at the December meeting. He then went on to emphasize that nothing should be assumed about the outcome of that meeting, resulting in investors dropping the odds of a cut closer to 50%, down from nearly 90% before the meeting. The Fed is walking a tightrope, with employment softening on one side, and inflation trending in the wrong direction on the other.

Corporate Earnings—This week marked the peak week of earnings releases and multiple members of the famed Magnificent 7 were included in that mix.

• • FinDec Take—Earnings have been quite positive, with over 80% of S&P 500 companies beating estimates. The AI-related MAG 7 names continued to report strong growth, but there was some consternation among investors over the levels of capital spending some of these companies forecasted. The concern is only a blip to this point but could become more severe if revenues from these projects don’t start to justify the spending.

Week Ahead 11/03-11/07

Monday—ISM Manufacturing—This survey of manufacturing will give a look at how the sector is dealing with the everchanging tariff situation.

Wednesday—ADP Employment—With the government employment report delays due to the government shutdown, this is the widest ranging private employment report available.

Wednesday—ISM Services—Heading into the crucial holiday shopping season, investors will see how the largest sector of the US economy is feeling.

Market Recap

Stocks moved higher on the week after jumping on Monday on eased tariff concerns and largely treading water the rest of the week on a plethora of earnings announcements and what may be considered a “hawkish cut” by the Fed. Earnings season is winding down and investors will increasingly look to Washington to reopen the government as impacts increase. The bull market remains intact, but hints of higher inflation or weakening employment could start to dent positive sentiment.

Chart of the Week—The sector chart tells the story of the week, with tech leading the way as earnings beat estimates, while real estate led the decliners as future Fed cut hopes were dampened.