The Federal Reserve is widely expected to slash interest rates — here’s what it means for the market.
Transcript:
CAROLINE WOODS: Joining me now Brian Levitt, global market strategist at Invesco Brian, great to have you back at the desk.
BRIAN LEVITT: Thank you. Great to be here.
CAROLINE WOODS: All right. So we’re looking at an S&P 500 at another record high. Does S&P. It’s above 6600. Make sense to you or is this market overpriced?
BRIAN LEVITT: I think it makes sense to me. I mean the thing about market highs is you’re going to hit a lot of market highs in your life. They happen about once every two weeks on average. Valuations are a bit extended, but at the same time, it’s still a good economic backdrop. Inflation at least inflation expectations are relatively stable. Fed’s going to cut supportive for equity markets. And retail sales actually came in better than expected. So even though the jobs market is cooling the consumer is still holding up. The consumer is still holding up. So the job market is cooling, the demand for workers is cooling, but the supply is also slowing as people are entering into retirement as there’s less immigration in the country. So the job market is slowing, but not particularly out of balance. Unemployment rate is low, wages, real wages are still positive, still positive growth on real wages. All of that supports the consumer.
CAROLINE WOODS: What is it though that’s driving this market higher right now? Is it the economy?
BRIAN LEVITT: Well you’ve had a lot of you had the concentrated move in the big tech names. That’s really a bit more of a 2024 story than this one. I mean, Yes, technology has done very well. But if you look at the percentage of stocks above their 200 day moving average, it’s not like it’s 20% right? You’re you’re well above half. So it’s a broader market. You’ve seen financials the big banks participate. The industrials are participating. So those sectors are usually attuned to a better economic environment. And so it’s Yeah it’s not just tech.
CAROLINE WOODS: It sounds like U.S.-China trade deal could be coming maybe even ahead of the November deadline. Things seem to be going well on that front based on what we’re hearing. What could that mean for this market?
BRIAN LEVITT: Well, seeing as we’re already, what, 36% off the liberation day lows. Yeah, this is a market that’s already forgotten about trade for the most part. And so that would just be another additional positive. I don’t think it’s a huge catalyst to move the markets significantly higher because, for the most part since liberation day, or really. April 9th, this market has come to the view of we will get some outcome. It may not be optimal to the free trade folks, but we will get some outcome that we can live with and move beyond. So again, the way to think about tariffs is it it will slow growth. The market assess that it will raise prices. But inflation expectations are contained. As long as businesses know the rules of the game will be OK. China US would just be another big step in that direction. So a positive but not a huge catalyst.
CAROLINE WOODS: How should we be thinking about a potential rate cut tomorrow. The Fed of course, kicking off a two day meeting today, the market widely expecting at least 25 basis points. How will the market react to that?
BRIAN LEVITT: Well it’s expected it’s already been baked. The way I would look at it, people are like why does the Fed have to ease. It’s not a big easing move. You’re still trying to get back to normal, right? We’re in a restrictive stance right now with the Fed funds rate well above the two year Treasury rate above the 10% year rate. So you want to start to move it lower to reflect what the bond market is already telling you, which is that you’ve had some slowdown in the economy. So start to bring rates down to what you would consider neutral. To be neutral can be debated, right? A lot of bright people can sit around and argue what neutral is, but it’s not for 25 to for 50. So we’ll start to lower rates to normalize the yield curve and look to re-accelerate economic activity from this period of, of moderating growth…..
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