The S&P 500 is up 18% and powering toward its biggest first half since 1997. For bulls, things are great. Will they get any better? To a handful of cross-asset strategists who turned skeptical on stocks before this week’s manic sessions, that’s becoming the most pressing question. Increasingly, their answer is: not likely.However spectacular the real-time reaction … gestures like Federal Reserve Chairman Jerome Powell’s dovish pivot don’t engender confidence for the long term, says Sophie Huynh, a cross-asset strategist at Societe Generale in London. They ring more as a warning, she says, perhaps marking the beginning of the end to economic and market cycles that have lasted a decade.
It is one thing for stocks to go up in the middle of a recession because the Fed is lowering rates, which would ordinarily mean there is hope of coming out of recession a little easier. It is the exact opposite when the Fed lowers rates at the end of a recovery when it means the Fed is making a pre-emptive move because it sees recession as likely. Stock market investors do not currently understand that distinction. The Fed quit simply does not ever preemptively lower rates during what it claims is a strong economy when rates are already this low unless it believes a very negative economic shift is likely and imminent.
As I’ve noted several times in recent articles (with graphs to back it up), the Fed’s first rate decrease is typically only a few months ahead of recession at best. To think that its first rate decrease this time around will be any different is to bet against all historic evidence. Yet, that is exactly the bet the market has already fully priced in. Almost all analysts agree that the stock market now sees a July rate decrease as a 100% certainty.
However, live in a time when many market analysts have never seen a rate cut made during a time when recovery is considered to be fully in place and the Fed has been recently raising rates on a protracted basis, ostensibly to keep the economy form overheating. So, we have a lot of wet-behind-the-ears quants and analysts who think that rate decreases can only be good for stocks. They are ignorant of the historic fact I just laid out in the last paragraph. We know what happens to those who are ignorant of history.
Read the rest here: The Great Recession