There is only 1 thing that matters at this moment for investors. And that is the outcome from the Fed’s 9/18 meeting which is expected to be the start of rate cuts.
This explains why investors flirted with new all time highs for the S&P 500 (SPY) on Tuesday as they await the Fed’s decision on Wednesday.
I see 3 possible outcomes...each with different reactions from investors.
Thus, our time is best spent today reviewing these 3 divergent paths along with a trading plan for each to stay on the right side of the action. That will be the focus of this Reitmeister Total Return commentary.
Market Outlook
All signs point to the first rate cut being served up by the Fed at 2pm ET on Wednesday September 18th. This creates 3 paths of what they could do...each eliciting a different reaction from investors. We will review them all below:
50 Point Cut + Hot to Cut Again
This is the most bullish outcome as it would say that the Fed waves a “Mission Accomplished” banner on the job to bring inflation down to size and thus want to unwind high rates as fast as possible. This would be the best to spark economic growth which is why it would be most beneficial for stock prices.
Unfortunately, this is least likely of the 3 outcomes as the academics at the Fed are naturally cautious and slow to react. However, if they did surprise us with this super-dovish tilt, then we should all be prepared for an extended bull run higher with focus on the Risk On aggressive stocks.
50 Point Cut + But Cautious
This is the most likely outcome as right now investors put 63% odds on a 50 basis point cut being served up. Then combine this with typical Fed speak on how their next move would be based on the data and thus have no prescribed path for future cuts ordained.
Because this is the assumed outcome, then investors might push higher for a session or two in order to make new highs. But really much of this move is already baked into the cake of current stock prices. This would put each next Fed meeting into play as a key catalyst for what happens next.
The more dovish they become to cut rates faster...the more bullish for stocks. And the more cautious they are...the more likely stocks have a hard time moving substantially higher than now.
25 Point Cut + But Cautious
This is the tamer version of the last path. The even milder 25 point cut would signal to investors that they are going at this very slowly and patiently.
I would not be surprised if stocks sold off on this news as it means it will take much longer for truly low rates to be in hand to boost the economy and earnings growth. Like above it makes each successive Fed meeting that much more important for them to increase their resolve to bring down rates faster.
The downside for stock prices on this move is likely only 2-3% at most. But just like the pullbacks to start August and September, it would be short lived as there is not really a need to be bearish. So, this would present another buy the dip opportunity.
Yes, there is a 4th possibility which is getting no rate cut at all. But I think the odds are so low that its barely worth discussing.
To say the least, investors would be VERY DISSAPOINTED with a nastier 3-5% sell off as a near certainty. As the smoke clears investors would try to assess if this is just a 1 or 2 meeting delay...or if they are truly that far away from the first cut. The longer the delay to the first lower of rates...the deeper the stock sell off.
Again, that is probably not in the cards. This brings us back to the 2nd and 3rd options as the most likely. That being a 25 to 50 point cut in conjunction with the Feds typical cautious language about what comes to next.
In the short run this creates a mixed outlook for stock prices. But looking out 2+ months I don’t think greatly alters the path of the stock market. And thus would not cause a great change in our investment approach to line our portfolio with the stocks with the most appealing upside potential.
More specifics on those stocks in the next section...
What To Do Next?
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SPY shares fell $0.08 (-0.01%) in after-hours trading Tuesday. Year-to-date, SPY has gained 19.22%, versus a % rise in the benchmark S&P 500 index during the same period.
About the Author: Steve Reitmeister
Steve is better known to the StockNews audience as “Reity”. Not only is he the CEO of the firm, but he also shares his 40 years of investment experience in the Reitmeister Total Return portfolio. Learn more about Reity’s background, along with links to his most recent articles and stock picks.
3 Paths for Stocks AFTER Fed Meeting StockNews.com
