The whipsaw continues

It has been a very disheartening and confusing time in the market. The whipsaw back and forth has been challenging to watch. It continues to play havoc with the CME’s FedWatch tool.

Earlier this week, the probability for a 25 basis point cut was above 70%. It has now moved back to a toss-up. However, it continues to price in a hard-landing with rates ultimately falling to 2.75%-3.0% by July 2025. Commodities have also spent the last month pricing in a hard-landing.

I think there are a few other headwinds for oil such as Mexico’s seasonal hedging, OPEC holding back production, and deflationary headwinds coming out of China. Because of this, oil related equities have been crushed. There is one bright spot and that is gold. Gold has been crushing it.

What made this past week especially difficult was that good news has now pivoted to bad news for the market. This week’s CPI report showed that inflation continues to moderate.

The Consumer Price Index fell to 2.6%. This is the 5th month in a row to see lower inflation readings. It is also the lowest reading since February 2021. The “core” rate stayed steady at 3.3% which is also a 3-year low. These readings are laying the groundwork for a Fed pivot but the market wants the Fed to pivot harder. It continues to expect more cuts than the Fed is ready to deliver. Why do I expect differently?

In the past, the Fed would cut the Fed Funds Rate in large chunks in response to financial crises that turned into a credit crunch and recession. The groundwork that was laid by the Fed over the past 5 years with SOFR and central bank liquidity swaps makes this time different. The Fed now has new tools to avert the credit crunch. This means they only need to cut enough to avoid a recession.

It still feels like this could be a rough landing. My expectation continues to be a 25 basis point cut next week. I feel this will underwhelm the market and continue to cause the whipsaw to continue. The other factor weighing heavily on the market is the election.

We are 52 days away from the election and the rhetoric is hitting a fever pitch. I’m not sure what this year’s October surprise is going to be and at this point, I’m scared to ask. What I took away from the recent debate was that the mainstream media is still going to bat for the DNC and they are desperate to crown Kamala queen. From a market perspective, the democrats represent big business and billionaires. The unrealized tax initiative is fluff to pander to the poors in their base. Billionaires have the ability to hire an army of lawyers and accountants to find loopholes for them. The average Joe does not. This means if they find a way to get the votes to get Harris elected, mega and large cap growth stocks will continue to perform well. These are the guys with the armies of lawyers and accountants who will find ways to stay ahead of the game. However, if Trump finds his way into the oval office once more, I believe this will aid the rotation trade as regulations and taxes will get cut. This helps the smaller guys who can’t afford to have people on staff simply searching to loopholes in the tax and regulation codes.

With this in mind, I’ve begun creating positions in a few of the following…