Things you need to know.

–        The FED Paused – you would have to be living in a cave to be surprised

–        The FED remains Hawkish – you would have to be living under a rock to be surprised

–        Algo’s not happy….stocks declined and are declining again today

–        End of Quarter only days away…

–        Try the Greek Style Filet of Sole

Don’t worry, Be happy…. If he said it once, he said it a dozen times…. the ‘FED can now proceed carefully’ yet the message was more hawkish than not….

The soft landing that the FED thinks they can navigate is due to arrive sometime in 2026! (that’s not a typo).   That’s the good news…..the not so good news is that while JJ did suggest that the FED is close to done raising rates (which was expected)– he told us that they will hold them there for longer than what the market expects…and that has been the risk all along, right?

Now all he needed to do was define longer……because we all know – any definition is in the eye of the beholder……. Does longer mean 3, 6, 12, 18…. months?  It’s kind of like when they use the word ‘speedy’ to define the pace at which they raised rates…. – which is always curious to me – because was it really speedy?  Again – that definition is confusing…..Speedy to me would have been raising rates by 100 bps starting in January 2022 and then doing so for the next 5 meetings which would have gotten us to where we are much sooner….think 5 moves…vs. the 12 it took…That to me would have been speedy…. But 12 moves – that were well telegraphed – over 17 months – THAT is their definition of speedy?  I never really understood that – but if that’s what they say, then it must be true…. which now leaves us to define ‘longer’….and as of yesterday – longer is now defined as 12 months…. vs. the 8 it was defined as only 3 days ago. 

Remember – the cuts (of which there were supposed to be 4)  were ‘expected’ to begin in May 2024 (8 months from now), but yesterday – JJ made it clear that 4 is out and right now it appears as if there will only be 2 (and that is not a guarantee by any stretch) and they won’t start until the fall of 2024 – (which is 12 months from now) the ‘other’ cuts got pushed to 2025 and beyond…..…..and so the algos ended up being disappointed…. And that put pressure on risk assets across the board……stocks fell, bonds fell, gold fell, and oil fell – all while the dollar index and bond yields rose….

After thrashing around all day – reacting to nearly every sentence that JJ uttered – stocks ended lower across the board…the Dow down 77 pts or 0.2%, the S&P down 42 pts or 0.9%, the Nasdaq got punched in the face again (of course they did) – falling 210 pts or 1.5%, the Russell lost 16 pts or 0.9% while the Transports bucked the trend – adding less than 1 pt – essentially flat – which is still surprising….

Bonds plunged and that sent yields to 15 yr. highs…… the 2 yr. yield is 5.16% (up from just 5% on Monday), the 10 yr. ended the day yielding 4.40% – up from 4.3% on Monday.  But don’t worry – the FED can ‘proceed carefully’…so I guess – the FED is going to proceed carefully.  But do not discount the challenge of higher rates on investor psyche and on valuations….…. I mean 5.15% ‘riskless’ for 2 yrs. for a portion of your money? And if you want shorter duration – the 3- and 6-month bills yield 5.51% and 5.58% respectively.  That will, and is, causing investors to reprice risk – watch what happens when those yields approach 6%……. Thus, the weakness in stocks.  But we talked about this…this is not new….

Now – while JJ kept the inflation target at 2% – there are some that still think he will ‘adjust’ that target in the months ahead…. taking it from the 2% goal to 3% – but let me be clear – that did not happen yesterday.

Now what JJ was also NOT very clear about is what happens if we get that 1970’s style ‘wage price spiral’ inflation (something else I have been warning about) …  because when wages are getting higher companies need to ‘find that money to pay workers’ and where do they do that???  Oh right – they raise prices….…. Just remind yourself what happened recently…. The UPS Teamsters National Master Agreement included ‘historic wage increases. The pilots union just got 34%-40% wage increases….UAL raised wages by 40%, AAL gave 21%, Delta up 34% and now the UAW workers…they want 36% in wages but they only want to work 4 days/week vs. 5 days…so that 36% is really closer to a 70% increase….Are you beginning to see how Wage/Price Spiral inflation works?   Because that is what I think is going to throw this off the rails….and while he never addressed directly it has to be on the back of his mind……But, let’s see because in the end it is inflation that will drive the policy….or at least that is what he tells us.

So, yesterday’s action caused a move into those defensive (underperforming) sectors that I have been talking about….  Utilities, Consumer Staples, Real Estate and Healthcare – all sectors that are not ‘sexy’ and have underperformed all year…. – all ended up (very slightly), but they weren’t down like Tech -1.5%, Communications -1%, Consumer Discretionary -1%, Homebuilders – 1.2%, Disruptive Tech – 1.8%, Semi’s -1.7%, and some of this year’s big winners: NVDA lost 2.8%, AI -3.2%, AMZN -1.7%, AAPL -2%, MSFT -2.4%, META -5.4%, GOOG -4.2%  etc.….  And remember – it is approaching the end of the quarter…so there will be some end of quarter window dressing…which means that asset managers will take some profits in the outperformers and reallocate that money among names that will now be expected to stabilize and advance in the months ahead….It’s called risk management….and that is what they get paid for.

This morning futures are down…. Dow futures -180, S&P’s -30, Nasdaq -125 and the Russell is down 15 pts.  More hawkish central bank moves around the world confirm what we heard from the FED.  Sweden and Norway both raised rates and suggested that there could be more to come…….Switzerland held rates steady, the BoE is due out at any moment….– and they did NOT raise rates today…but they left the door open to further hikes all while mimicking the FED saying that in any event – rates will remain higher for longer.  European markets are all lower by more than 1%.

Now, investors here have to reconsider the latest FED policy…and the extent of the hawkishness that we heard…. He suggested that there would be at least one more hike this year and hinted that we could see more hikes in early 2024 (if the data demands it)….he then cut  the idea of rate cuts by 50% for next year….taking expected rate cuts from 4 to 2…and even that is not cast in stone….so – investors need to reconsider what they are willing to pay for stocks in this new picture….Currently stocks are trading at 19.8 x’s 2023 earnings – which is well ahead of the historical average of closer to 16 x’s….and with 2 yr. rates now at 5.15% and likely going higher…..and a hawkish FED – what will investors be comfortable with paying?  I guess we are about to find out…. The 200 dma trendline at 4188 represents 18.8 x’s current year earnings…. Just sayin.’ 

The intermediate term trendline is at 4373 – down 29 pts from where we closed yesterday….and with futures under pressure this morning I suspect we are about to test it…- Now we have to see – will it hold?  Remember – it is September….and it is the end of the quarter…. I still think the path of least resistance is down, not up. 

Oil is trading at $88.70; Gold is trading at $1945 and the dollar index is up 21 cts at 105.55….The VIX – fear index – is UP 20% from 3 days ago….and this morning it is up again…..and all this confirms is that investors are more anxious today than they were earlier in the week. And that makes sense…. It is now about to test long term resistance at 17.63…. which is a 16% move up from here…. My gut says that we kiss it but do not pierce it….

The S&P ended the day at 4402 and this morning it looks like we are going to test the intermediate trendline support at 4373….  I’m suggesting that it doesn’t hold and that we move a bit lower before stabilizing……Which is why being patient is always a virtue….

We still have the potential gov’t shutdown staring at us, but like I said – this is all about the drama, this will not price stocks in the long term….it may though, provide opportunity in the short term as a shutdown will cause some he said/she said chaos….

And then there is the UAW strike…which is still not settled and appears to be on a longer path as well.  But don’t worry – the analysts are already predicting a BIG Holiday shopping season…. I mean you can’t make this up – who in their right mind would believe you. 

The quarter is coming to a close – Expect to see some repositioning among asset managers…. selling some of the big winners and adding to the underperformers as we move into yr. end and the new year.  

Take good care.

Chief Market Strategist
kpolcari@slatestone.com

“The market commentary is the opinion of the author and is based on decades of industry and market experience; however, no guarantee is made or implied with respect to these opinions. This commentary is not nor is it intended to be relied upon as authoritative or taken in substitution for the exercise of judgment. The comments noted herein should not be construed as an offer to sell or the solicitation of an offer to buy or sell any

financial product, or an official statement or endorsement of Kace Capital Advisors.

Greek Style Filet of Sole

This is a simple yet delicious dish to make.  Takes no more than 30 mins – start to finish. 

You need:  fresh squeezed lemon juice, plus one thinly sliced lemon rounds, olive oil, butter, shallots – thinly sliced, capers, s&p, garlic powder, 2 lbs. of filet of sole – (10 – 12 pieces), scallions – trimmed and sliced in half lengthwise, and chopped fresh dill. 

Preheat your oven to 375 degrees. 

Now in one bowl – mix the lemon juice, olive oil, melted butter. Stir in the shallots, garlic, and capers.  

In another bowl – mix the s&p, and garlic powder – now rub the filets with this dry mix.

Next – place the filets on a lightly oiled baking dish.  Using a pastry brush – rub the juice mixture on both sides of the fish and then pour the balance on the fish.  Take the sliced scallions and sliced lemon rounds and place on top of the fish pieces.  

Place in the oven and cook for 10 mins – maybe 15 mins max – but do not overcook.   Remove and present on warmed plates – garnish with the chopped dill.   Serve with roasted potatoes and a tossed mixed salad – dressed in fresh lemon juice, olive oil, s&p, and oregano.  

Buon Appetito