What happened last week
- Stocks Rebound: U.S. large caps posted their best week of the year, up about 4% and mostly reversing the worst week of 2024 at the start of this month.
- AI Leads: After poor performance in the prior week, AI outperformers and growth led U.S. stocks last week.
- Bigger Fed Cut: Rate cut odds shifted strongly in favor of a 50 bps rate cut to kick off the Fed’s easing cycle this week following purported leaks to the press.
What we’re watching this week
- Fed Decision: The size of their first rate cut, a reworked statement, and interest rate projections will give the market plenty to digest on Wednesday afternoon.
- Retail Sales: This key barometer of consumer activity will give a good update on the growth outlook.
- Politics & Polls: Investors will be watching incoming polls to see how much Harris is set to benefit from last week’s debate, as well as the Sunday news from Florida.
Horizon’s Investment Management Views
This September is living up to its reputation for volatility. AI outperformers and growth stocks, which led losses in 2024’s worst week at the beginning of the month, roared back to life and pushed the S&P 500 to its best week this year. This volatile price action was not driven by any definitive catalysts but rather uncertainty across many areas: economic growth, earnings, valuations in the AI theme, the upcoming election, and Fed policy, just to name a few. Clarity on all of these topics would help solidify a trend; unfortunately, we will only get clarity along one of those vectors this week, leading us to expect more choppy, positioning-driven trading in the near term.
Speaking of uncertainty, this is the first Fed meeting in a while in which the market is not settled on what the Fed will do. News leaks in the Wall Street Journal and Financial Times late last week moved market odds from favoring a 25 bps cut to slightly favoring a 50 bps cut. Our expectation has changed from 25 to reflect the news flow and our analysis of the Fed’s biases. We believe that the Fed wants to preserve as much optionality as possible, and they can achieve that through a 50 bps cut with a relatively hawkish rate projection. Regardless of the outcome, we expect volatile price action on Wednesday, as someone will be disappointed. But don’t lose sight of what matters to the big picture – lower rates as supportive for risk assets.
The Fed is the highlight of this week; in addition to the size of the first rate cut, we are assessing their policy statement and updated economic projections. Nine other central banks, including the Bank of Japan on Friday, will also meet this week. Retail sales and FedEx’s quarterly earnings will provide investors a much needed update on the consumer with implications for soft landing odds. Lastly, investors will digest updated polls incorporating the first (and likely last) Trump-Harris debate in addition to Sunday’s news out of Florida.
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