TAKEAWAYS
- The Fed cut interest rates by 50 basis points and shifts focus to the economy.
- Stock market rallied after the Fed's interest rate cut decision but closed lower.
- Treasury yields rose while bond prices fell.
The stock market received what it expected from the Federal Reserve—a 50 basis point interest rate cut. Stocks rose initially, but the broader stock indexes—Dow Jones Industrial Average ($INDU), S&P 500 ($SPX), and Nasdaq Composite ($COMPQ)—closed lower. Small- and mid-cap indexes followed the broader indexes and closed slightly higher, with the S&P 600 Small Cap Index ($SML) rising by 0.09%. All S&P sectors except Energy closed lower.
It was a case of "buy the rumor, sell the news" after the Fed's announcement. The stock market rose in anticipation of an interest rate cut, so a selloff after the announcement shouldn't be a big surprise. It's almost as if the anticipation fizzled off.
The selloff wasn't too damaging, though. Equities are still holding up. The S&P 500 hit a record in Wednesday's trading, but closed below its blue dashed trendline (see chart below).
CHART 1. S&P 500 CONTINUES TO BATTLE AGAINST RESISTANCE. After hitting an all-time high, the S&P 500 fell and closed below its downward-sloping trendline. The stochastic oscillator in the lower panel is starting to turn lower.Chart source: StockCharts.com. For educational purposes.
The stochastic oscillator is starting to turn lower, but is still above the 70 level. The S&P 500 is trading above its 21-day exponential moving average, which is still sloping higher. There still needs to be a series of higher highs to break the gentle downward-sloping trendline. Remember, it's still September, and the latter part of the month tends to be weaker than the first half.
US Economy in Good Shape
Fed Chair Jerome Powell remarked that the economy is holding up well and heading toward a soft landing. His comments shifted from inflation, which continues to decline, to the labor market. The committee will closely watch the labor market, which is at 4.2% unemployment. That's close to full employment.
Investors can expect another 50 basis point rate cut this year and an additional 100 basis points in 2025. Chairman Powell pointed out that investors shouldn't expect 50 basis point cuts at the next meeting. The pace may be slower, going forward.
Earlier in the day on Wednesday, housing data painted a positive picture of the housing market. Housing starts and building permits rise, probably because of a fall in mortgage rates.
A strengthening housing market, falling inflation, and a stabilizing labor market point to economic stability.
Bonds Pull Back
Treasury yields rose after the rate cut decision, resulting in falling bond prices. It's worth watching the bond market. The daily chart of the iShares 20+ Year Treasury Bond ETF (TLT) shows that Wednesday's selloff was sizable. If TLT falls further, watch the upward-sloping trendline (blue dashed line) as a potential support level.
CHART 2. BOND PRICES ARE STILL IN AN UPTREND. Watch TLT's price action at the blue trendline. This could be a viable support level at which the ETF could bounce off and move higher.Chart source: StockCharts.com. For educational purposes.
Ideally, when interest rates fall, bond prices should go up. If TLT bounces off the trendline and moves higher, it would be an opportunity to accumulate more positions in TLT.
Closing Position
Now that the stock market has received what it wanted, it's taking a breather. Allow some time for the news to digest, which could take a couple of weeks, and look for signs of a market bottom. Toward the last hour of trading, there was much selling across the board. Let's see if the selling continues tomorrow or abates.
Disclaimer: This blog is for educational purposes only and should not be construed as financial advice. The ideas and strategies should never be used without first assessing your own personal and financial situation, or without consulting a financial professional.
Happy charting!
