“It seems unlikely that the labor market will be a source of elevated inflationary pressures anytime soon.” -Jay Powell
Jay Powell came out swinging on behalf of the long-neglected dovish camp in the FOMC. His Jackson Hole speech was perhaps the most Dovish in the history of the event. It appears he has secured the consensus he needs to begin cuts. His message was even more Dovish than what had been anticipated by markets. Instead of sticking to the expected language other FOMC members had been showing in days leading up to Jackson Hole that included the term 'gradual,' Powell left the door open to 50 bps cuts in September. It is all but certain now that a cut is coming, and markets certainly liked what they heard.
Powell has stuck the soft landing. The only thing left to do is cut, and it would take a might bad miss to reverse his course at this point. This is incredibly bullish for markets. Not only is it supportive of stock valuations, but it will also provide some relief to the real economy. The Fed will now be focused on the labor side of the mandate, and this is a very good thing for markets. Powell specifically said he does not welcome further cooling of labor conditions. We have entered the cutting cycle during a period of slowing, but robust growth.
In some respects this historic speech was the inverse of Powell's curt and Hawkish message two years ago where he famously said some pain may be required for the economy. His assessment now: pain is likely not necessary to bring inflation to the 2% target. There are many reasons for that, but the economy has largely evolved since our last great bout with inflation and corporations and households were largely able to insulate themselves from the effects of higher rates.
Powell essentially committed himself to rate cuts. The market received this warmly, and despite the recent bout of extreme volatility, the market appears fundamentally sound from an earnings perspective. Inflation expectations are anchored, the labor market is deteriorating but is still producing jobs and isn't out of control by any stretch. The Fed has squarely turned its focus to the labor side of the mandate as well, and while its main tool may have been ineffective at bringing economic pain, the famous Fed put and the ability to cut in a pinch can deliver real relief to the economy in an instant if needed. The infamous Fed put is now very much back in play.
Why I'm So Confident in Markets: It's the Earnings, Stupid
One of the facts about stock markets that might remain elusive to many folks is that the majority of kurtosis occurs outside of market hours. What does this effectively mean? Most of the price movement occurs when markets aren't even open, and this is mostly because earnings occur outside of market hours. And many other catalysts occur outside market hours as well. This earnings season has been pretty exceptional among several metrics. Behind all the scary catalysts that stalk markets, Q2 earnings grew at very healthy 13.3% from a year ago.
Many folks claim to be wedded to 'fundamental analysis' but then they completely disregard the message from the most fundamental piece of data there is: earnings. The bearish disposition seems to be largely a choice, and if you're bearish after this earnings season and a spate of re-assuring economic data then I just don't know what to tell you. This economy and the US consumer have been showing impressive resilience.
But one of the things that gives me the greatest confidence in markets is that valuations are still well below the highs that usually signal a retreat. This is in spite of the index being very close to all time highs. This is a very bullish setup, particularly given the strength of earnings and the vanquishing of inflation as a major threat to asset returns that was solidified by Jay Powell's ultra-dovish speech today.
The same is true with Nvidia. Despite prolific stock gains, amazingly, the Street is still behind the stock's earnings power time and time again as it releases its results. Fundamental investors who simply stick to valuation like glue will miss the major gains of our times given the changing importance of things like intangible assets to a company's future earnings power. The earnings power of the S&P 500 is seeming very healthy. With the Fed in easing mode, markets could very well see a melt-up in the final quarter of the year.
Punk Rock Traders is off to an auspicious start. We have recommended four trades so far and their performance is below.
$VIX November 20th $23 put option recommended on August 6th is up 37%
$VIX November 20th $18 put option recommended on August 13th is up 26%
$NVDA long strangle recommended on August 8th is up 140%
$VIX September 18th, $15 put option recommended on August 20th is down 10%.
