Potential for New All-Time Highs After Powell’s Remarks at Jackson Hole
Our Views
![Tom Lee, CFA](https://cdn.fsinsight.com/wp-content/uploads/2023/07/tomlee.png)
- Fed Chair Jerome Powell’s comments at Jackson Hole were very dovish. Powell acknowledged the weakening labor market and said that it was “time to ease” interest rates. We believe investors will take heart from these remarks, particularly since the context around them is very different from what accompanied his remarks in recent years.
- It is notable that real rates have never been this restrictive at a time when inflationary pressures are ebbing and when labor markets are softening. Relatively restrictive “real rates” preceded the Jackson Hole symposium three out of the last five years – 2019, 2020, and 2023. In each of those years, markets rose significantly afterwards. The 3M, 6M, and 12M returns of S&P 500 in each of those years is as follows (respectively):
- 2019: +6%, +15%, +16%
- 2020: +5%, +11%, +28%
- 2023: +4%, +14%, +28%
- Bottom line: We see equities as having positive risk/reward over the next 10 trading days.
![Mark L. Newton, CMT](https://cdn.fsinsight.com/wp-content/uploads/2022/11/mark.png)
- The recent US equity rally has been constructive enough to think a move back to new highs can happen into September ahead of any seasonal Fall correction. The Equal-weighted SPX has already pushed back to new all-time high territory, coinciding with the breakdown in the US Dollar and Treasury yields.
- Furthermore, market breadth remains constructive and sentiment is not yet bullish enough to mark a larger market peak. Cycles show strength into mid-September in both equities and Treasuries before a selloff takes hold, and sectors like Financials and Consumer Discretionary have been instrumental in serving as a “tailwind” for equity gains at a time when Technology has been a bit wobbly.
- Overall, unless Technology starts to roll over in bigger fashion or the economy starts to weaken at a much faster rate, it looks right to stay bullish past Labor Day.
![Sean Farrell](https://cdn.fsinsight.com/wp-content/uploads/2022/11/sean.png)
- Last week, we noted mid-August to September’s negative seasonality but stressed that macro trends and crypto-specific factors should guide risk assessment.
- Since last week’s CPI, favorable conditions (falling yields/DXY in a risk-on environment) boosted rate-sensitive assets, yet BTC underperformed, lacking expected upside beta.
- We attribute this underperformance to the sale of 10k Silk Road BTC on Coinbase Prime last Wednesday, evident in the US market hour disconnect. Tuesday and Wednesday’s “normal” price action suggests the orderbook imbalance has likely cleared.
- A trend reversal in prediction markets has reintroduced the possibility of a “Trump Premium” being priced back in. The decision of RFK, Jr. to drop out of the race could accelerate this.
- Falling rates and a possible NVDA rally into and post-earnings (8/28) make our AI/HPC miner equities basket an attractive near-term risk/reward.
- Core Strategy – We are optimistic about the outlook for crypto heading into year-end and view a market moving toward a soft landing as constructive for prices. Our focus remains on the majors, with selective exposure to altcoins, while keeping some dry powder on hand to account for geopolitical tail risks and negative seasonality. As a reminder our Core Strategy allocation model is featured at the end of each note along with our crypto equity baskets and trade recommendations.
![L . Thomas Block](https://cdn.fsinsight.com/wp-content/uploads/2023/01/tomblock1.jpg)
- The Democratic National Convention has ended, and the formal nomination of Vice President Kamala Harris and Minnesota Gov. Tim Walz generated similar levels of enthusiasm among party faithful as the formal nominations of President Donald Trump and Senator J.D. Vance did at the GOP Convention.
- It seems clear that since President Biden ended his bid for re-election, the race has become very close ahead of Labor Day, when the final push will begin.
- The Wednesday release of July FOMC minutes, combined with Federal Reserve Chair Jerome Powell’s remarks at Jackson Hole on Friday, send a clear signal to me that support for a rate cut has risen, and cutting could begin at the September 18 FOMC meeting.
Wall Street Debrief — Weekly Roundup
Key Takeaways
- The S&P 500 was up 1.45% this week, closing at 5,634.61. The Nasdaq rose as well, climbing 1.40% to 17,877.79. Bitcoin was at 63,721.70 on Friday afternoon, up about 8.6% from Monday’s levels.
- Fundstrat Head of Research Tom Lee suggests markets could rally and reach all-time highs before Labor Day weekend.
- That is consistent with the work of Head of Technical Strategy Mark Newton, though his outlook for the post-holiday period is less constructive.
“With every year of playing, you want to relax one more muscle. Why? Because the more tense you are, the less you can hear.” ~ Yo-Yo Ma
[Editor's note: Publication of Your Weekly Roadmap was unavoidably delayed due to technical issues. We apologize for any inconvenience.]
Good evening,
“Just get through August.” That’s what Fundstrat Head of Research Tom Lee has been telling clients for the past month, and we are now most of the way there. Since 1928, the most common month for a summer bottom has been August, and the most common week for it has been the first week of August. Evidence continues to suggest that 2024 is following that pattern, with markets having now fully recovered from Tokyo Black Monday (August 5) as we are about to enter the last week of the month.
Head of Data Science Ken Xuan observed that “with the exception of commodities, all sectors are higher since the selloff. Tech is definitely coming back, but to me what's interesting is that if you look at the month-to-date performance, defensive sectors have actually performed better – Healthcare, Staples, and Utilities. The performance of retailers like Target (TGT 0.68% ) and Walmart (WMT 0.13% ) is indicative of the strength in Staples. Both of them really delivered very good quarters, in my view.”
Mark Newton, our Head of Technical Strategy, agreed that “we've managed to snap back in very good fashion. I agree with what Tom wrote this week, when he said markets could push back to new all-time-highs as we approach Labor Day [September 2]. Based on current trends, I expect that we are en route to 5700-5750.”
Newton did sound a cautionary note at our weekly research huddle, however. “The road after that is likely going to get tougher, and I suspect that we are getting closer to a time when stocks will consolidate – though I also think any consolidation will prove to be short-lived. Still, there are some warning signs that are starting to creep up on the horizon that weren’t present before. So, from Labor Day until the election in November, I want to emphasize that I don’t think it's going to be a straight shot. I think it's going to be a lot choppier.”
“It’s admittedly a bit tough for me to conclude definitively that markets have really turned defensive,” he said. “Utilities and REITs have been rallying because yields are dropping, and utilities are also being supported by projections of AI-related power demand. However, I see Ken’s point with regards to recent outperformance in defensive sectors. It’s clear to me that, as an investor, you really need to keep your eye on the ball right now, to be aware when sentiment gets truly defensive, and also bullish.”
For those seeking to get ahead of consensus, excessively bullish sentiment should inspire vigilance. “I don’t think we’re there yet, but there are warning signs,” Newton repeated. “The put-to-call ratio has now dropped to the lowest level since 2021. AAII sentiment has also gotten to the highest levels of bullishness in the last five weeks or so, with the spread between bulls and bears approaching the key level of 30%.” Newton noted that “This is balanced, however, by bearish sentiment coming from uncertainty regarding the election, as well as rising geopolitical tension. And the Fear & Greed Index is back at neutral territory after sinking to fearful levels back in early August. So, to me, overall sentiment isn’t bullish, and it’s not bearish. But it is worth keeping sentiment on top of your radar.”
It was a relatively light week from a macro-data standpoint. We saw the Bureau of Labor Statistics revise its estimate of jobs created in the 12 months ended March 2024 down by 818,000. To Xuan, this was not particularly meaningful for markets, as the cuts came in line with consensus expectations and were thus already priced in. Also, as “Tireless” Ken noted, “These were preliminary revisions. Historically, preliminary revisions have generally been overly aggressive. The final revision tends to end up being more moderate.”
Still, the week’s most significant macro event was Federal Reserve Chair Jerome Powell’s speech at the annual Jackson Hole Economic Symposium. Ahead of his remarks, markets were anticipating the beginning of a vigorous rate-cutting cycle in September. As Newton observed, “When you look further out, what's incredible is that we currently have about 200 basis points forecast to be cut between now and the end of next July. That would be a substantial amount of rate cuts.”
That does not surprise Lee. “‘Real’ interest rates – measured by taking Fed Funds and subtracting Core PCE YoY – are just too high” in his view, and significantly higher than they were ahead of his dovish remarks at the 2023 Jackson Hole symposium. “Real rates have never been this restrictive at a time when inflationary pressures are ebbing and when labor markets are softening,” Lee said.
It was therefore unsurprising to us that Powell’s remarks on Friday at Jackson Hole were dovish – dovish enough for Fed Funds trading to imply improved odds of a 50 bp cut in September, rising from 24% on Thursday to 38.5% after the speech. A larger cut was a possibility that Powell very gently alluded to when he said, “The timing and pace of rate cuts will depend on incoming data, the evolving outlook, and the balance of risks."
“The real key statement for me from Powell came when he said, ‘The time has come for policy to adjust,’” said Newton. “I think that was very dovish, perhaps more dovish than anyone might have expected.”
Looking forward, Lee maintains his constructive outlook on the markets. “Market-based inflation expectations 12 months from now, as measured by OIS inflation forward 1Y-1Y, are currently at 3.2%, their lowest levels in four years. There were three prior similar nadirs in this OIS forward metric – in July 2022, May 2023, and January 2024. Three out of three times, we saw equities rally strongly after the nadir.” We see this in our Chart of the Week:
![](https://cdn.fsinsight.com/wp-content/uploads/2024/08/image-74.png)
“If you’re wondering why this happens, we think it’s because such nadirs mark points at which inflation fears ebbed and investors therefore responded by going ‘risk on.’ This lines up with Powell’s dovish remarks and Mark’s positive technical view,” Lee noted.
Newton on Energy
“I just turned negative on Energy,” he told us this week. “I think Energy is an underweight between now and next year. I think we are starting to see some real evidence of deterioration in crude, and I think that's going to affect the entire Energy sector. In my view, the current administration is going to keep output high. And under a Trump administration, the Energy infrastructure would likely rise substantially, which results in even higher supply. So, regardless of the election outcome, whether Democrats or Republicans gain control after November, Energy likely is not going to be the best place to be.”
Elsewhere
The Bureau of Labor Statistics is again being criticized for its handling of a data release. The BLS had been scheduled to release job-data revisions (referenced above) at 10 a.m. on Wednesday morning, but for reasons that were not immediately clear, failed to do so. It then reportedly released the data to analysts who telephoned the bureau’s offices, before later releasing them online at 10:30 a.m. The snafu echoed previous BLS errors in February and May, in which certain analysts got access to economic data before the rest of the market.
Canadian authorities forced Canadian National Railway and Canadian Pacific Kansas City to resume operations shortly after the two railways locked out approximately 10,000 unionized railroad workers on Thursday. The lockout had briefly halted all freight rail service in the country. A prolonged stoppage would have had serious supply-chain consequences for U.S. companies, many of whom rely on raw materials shipped from Canada by rail. In addition, many U.S. exporters ship to Europe via Montreal ports and to Asia via Vancouver ports.
The central bank of Libya briefly suspended operations after its head of IT was abducted in Tripoli. The perpetrators, unidentified as of this writing, kidnapped Musab Msallem from his home on August 18, roughly a week after armed gunmen laid siege to the bank’s offices. Operations resumed shortly after Msallem was released on Monday.
Carl Icahn and the SEC announced a deal in which the billionaire investor agreed to pay $2 million to settle charges that he failed to disclose his pledge of shares in Icahn Enterprises to secure personal margin loans in February 2022. The settlement includes a $500,000 penalty.
Magazine publisher Condé Nast has agreed to let ChatGPT use content from publications including Vogue, The New Yorker, and GQ. While the terms of the agreement were not disclosed, the deal means that OpenAI can use Condé Nast content to train its generative AI and incorporate the content into ChatGPT’s responses. Time magazine, the Financial Times, and the Associated Press previously signed similar agreements with OpenAI.
Halliburton was hit by a cyberattack that forced it to take certain systems offline. The oil services company did not provide additional details, such as the alleged identity of the perpetrators, or whether a ransom demand was made.
And finally: Maria Branyas Morera has died at age 117. Believed to have been the oldest person in the world, the Spanish woman was born in 1907 in San Francisco. She lived through the Spanish Civil War, survived both the 1918 flu and 2020 COVID pandemics, and attracted 18,700 followers on X as “Super Avia Catalana”. With her passing, the title of the oldest person in the world now passes to 116-year-old Tomiko Itooka of Japan.