Its just not good politics!
The anticipation of lower interest rates has been driving markets for the entire year. Looks like we are finally there but the fat lady has not sung yet. A September cut by the Fed has been likely confirmed by chairman Powell at the annual Jackson Hole conference as expected. Even with markets typically discounting news about 6 months in advance, this news drove a substantial rally all week peaking on Friday. This anticipated rate reduction has driven small and mid-cap stocks substantially higher attempting to catch up to large cap and growth stocks year to date. They still have some work to do to catch up to the magnificent 7. Large cap value stocks also have been catching up a bit under the radar. With lower interest rates, the assumption is that small and midsize companies borrow at variable rates so their borrowing cost should drop increasing their profitability. Also, thes same asset classes, value, mid and small stocks are cheaper on a historical basis. Meaning their price/earnings ratios are lower than large growth where the focus of gains has occurred. Lower interest rates will percolate through the economy over time. As far as markets are concerned, the reaction is much quicker than the economy.
Labor markets seem to be softening with a downside revision to the jobs created number over the last year. Markets are acting as if we will have a soft landing. Consumers keep spending and inflation is on a path to continue declining. The Fed target for inflation is 2% and how long and whether this number is attainable are questions that only time will tell.
With the Democratic nominee Kamala Harris confirmed at the Democratic National convention in Chicago this week, markets are beginning to look at how different political scenarios will work out. One looming event that is sure to receive market attention is the sunsetting in 2025. Harris is continuing Biden’s pledge to not raise taxes on income above $400k and raising the corporate tax rate. She has not been policy specific yet, but any promises will depend on control of Congress. Historically, Congress is reluctant to rescind tax cuts. No candidate is discussing our enormous and growing budget and accumulating aggregate federal debt. Why? Because it is not good politics right now.
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