The Buzz on Business for August 25th, 2024

Like Darth Vader finally blurting out that he was indeed the baby daddy, Federal Reserve Board Chairman Jerome Powell, in his speech to the Jackson Hole confab on Friday could no longer keep the secret: Interest Rates, he exclaimed, are going down.

While giving us no clues as to size of any pending cuts or how low rates might ultimately go, Powell said, “the time has come” for a change in Fed policy.

Lower rates generally mean assets can have higher valuations, the discounted present value of future cash flows is higher, and businesses have access to cheaper capital and can, therefore, grow sales, profits and headcount. It’s a wonderful thing.

But lower rates mean an expanding money supply which is, all things being equal, inflationary. So, the Fed has—it always has—a bit of a tightrope to walk.

We happen to think that no matter how this coming change in Fed policy happens to play itself out, the effect on asset prices, such as stocks, will be muted, less dramatic than the market might hope or expect.

First, rates have already come down quite a bit. Last year, at this time, the yield on the 20-year treasury was about 5.4%. It’s at 4.2% today. That’s a dramatic decrease in less than a year. We would not be surprised to see an increase in longer-term rates, at least initially, when the Fed does finally move on short-term rates.

Another reason we speculate that asset prices might not budge is that they are already pretty high.

The value of your house is 50% higher than it was two years ago. The S&P 500 is up almost 57% since October of 2022.

Finally, we can’t help but wonder and can’t help but wonder if the market wonders, if the inflation beast has really been beaten. The Federal Government continues to borrow hundreds of billions of dollars, every month. And that is inflationary for more reasons than one.

Stock Market Report

A very good day for stocks on Friday. The indexes were up across the board on decent volume and an advance/decline line, which was higher than at any point this year and the third higher level in the last two years. Good breadth and good volume mean a good market.

• The Dow Jones Industrials were up 1.1%, that’s 462 points, and they start the week at 41,175.
• The S&P 500 gained 64 points, that’s 1.2% and it closed at 5,635.
• The NASDAQ Composite was up 1.50% and closed at 17,878, a 258-point gain.
• And the small caps had a really good day. The Russell 2000 was up a stout 3.20%, that’s 69 points on the Russell and they finished the week at 2,219.

Bond Market Report

Rates were down across the board on Friday.

• The yield on the 2-year treasury was down 9 basis points and closed at 3.920%.
• The 20-year was off 4 ticks and settled at 4.183%.

Oil, Gold, and Bitcoin

• Oil rallied for the 2^nd straight day. It was up $1.82, and a barrel now changes hands at $74.83.
• Rates were down, gold was up. It was up $28.20, and a troy ounce will now set you back $2,546.60.
• And Bitcoin continued the trend. It was up $3,280.15 and at 4:00 PM ET Friday stood at $63,633.72.

PCE on Tap

A busier economic calendar this week culminating in the release of the Personal Consumption Expenditures Index complex beginning on Thursday. If there is anything that might throw the Fed’s plans for interest rates off track, it would be a PCE inflation number that comes in higher than expected.

We will do what we do here at the Ministry of Truth. All you’ve got to do is keep it right here on the Buzz.