{"id":22003,"date":"2024-07-23T07:30:50","date_gmt":"2024-07-23T11:30:50","guid":{"rendered":"https:\/\/www.jeffclarktrader.com\/?p=22003"},"modified":"2024-07-23T07:30:50","modified_gmt":"2024-07-23T11:30:50","slug":"be-careful-what-you-wish-for-2","status":"publish","type":"post","link":"https:\/\/jeffclarktrader.com\/market-minute\/be-careful-what-you-wish-for-2\/","title":{"rendered":"Be Careful What You Wish For"},"content":{"rendered":"

Managing Editor’s Note:<\/strong> Today, we’re handing the reins over to colleague Larry Benedict – a market wizard and legendary hedge fund manager.<\/p>\n

With latest inflation reports inching toward the Fed’s target, the market is starting to boom massively… Larry shares why he believes it may be too soon to celebrate…<\/p>\n

Here’s Larry…<\/p>\n

\n

All it took was one inflation report to ignite the stock market.<\/p>\n

Just over a week ago, the Consumer Price Index (CPI) for June came out. The report showed that price levels fell by 0.1% in June compared to May.<\/p>\n

That may not sound like much, but it was the first monthly decline in the CPI since May 2020.<\/p>\n

And it was below the average economist estimate, which called for another increase.<\/p>\n

It also brings inflation a hair closer to the Federal Reserve’s 2% target.<\/p>\n

That set off a firestorm in the stock market. In fact, it led to some of the largest gains in history<\/em>.<\/p>\n

So today, let’s dig into the reason investors cheered the CPI report… and why the optimism may be a mistake…<\/p>\n

Rate Cuts Incoming<\/h2>\n

We saw some noteworthy market action in the wake of the CPI report.<\/p>\n

The Russell 2000 Index of small-cap stocks added 11% in only five days<\/em>. Over that stretch, the Russell outperformed the S&P 500 more than it ever had before.<\/p>\n

And both the Dow Jones and the S&P 500 rallied to new record highs in the days following the CPI’s release.<\/p>\n

The reason comes down to interest rates.<\/p>\n

Due to spiking inflation, the Fed started raising interest rates in March 2022.<\/p>\n

It ultimately increased them to the highest level in 20 years, as you can see below.<\/p>\n

<\/p>\n

The Federal Funds Effective Rate (2000-2024)<\/strong><\/p>\n

\"Image\"<\/p>\n

Source: Board of Governors of the Federal Reserve System; Federal Reserve Bank of St. Louis (FRED)<\/em><\/p>\n

Higher interest rates slow the economy and bring inflation under control.<\/p>\n

But now signs show easing inflation. So investors are betting that interest rate cuts will be on the way soon.<\/p>\n

Lowering interest rates will reduce borrowing costs and help stimulate the economy. That’s why investors responded by pushing stocks higher.<\/p>\n

But before you get too excited, you’d better study your history… and be careful what you wish for.<\/p>\n

<\/p>\n

\n
\n

Free Trading Resources<\/strong><\/p>\n

Have you checked out Jeff’s free trading resources on his website? It contains a selection of special reports, training videos, and a full trading glossary to help kickstart your trading career \u2013 at zero cost to you. Just click here<\/a> to check it out.<\/p>\n<\/p><\/div>\n<\/div>\n

<\/p>\n

Behind the Curve<\/h2>\n

It takes significant time for interest rate changes to impact the economy.<\/p>\n

Most economists will tell you that we need to wait at least<\/em> six months to feel the impact of higher or lower rates.<\/p>\n

That means the Fed is almost always behind the curve.<\/p>\n

By the time the Fed starts cutting interest rates, the damage is often already done to the economy.<\/p>\n

Just look at a couple of prior episodes when the Fed began cutting rates.<\/p>\n

In late 2000, the Fed started reducing interest rates just as the dot-com crash got underway.<\/p>\n

The shaded areas on the chart below are periods of recession. You can see that the economy fell into recession three months after the Fed cut rates.<\/p>\n

<\/p>\n

The Federal Funds Effective Rate (1999-2011)<\/strong><\/p>\n

\"Image\"<\/p>\n

Source: Board of Governors of the Federal Reserve System; Federal Reserve Bank of St. Louis (FRED)<\/em><\/p>\n

And take a look at when the Fed cut interest rates in the middle of 2007, right before the Great Financial Crisis hit.<\/p>\n

Four months later, the economy fell into recession.<\/p>\n

In both instances, the S&P 500 plunged into a deep bear market… even as the Fed was cutting rates.<\/p>\n

Now, there’s no guarantee we’ll see similar results this time.<\/p>\n

Maybe this time<\/em> the Fed will be on the ball and cut rates before it’s too late to avoid a recession. Or maybe this time is simply different.<\/p>\n

But don’t think that rate cuts automatically<\/em> translate to higher stock prices.<\/p>\n

As history shows us, some of the worst bear markets in history have happened as the Fed reduces rates…<\/p>\n

Happy trading,<\/p>\n

Larry Benedict
Editor, Trading With Larry Benedict<\/em><\/p>\n","protected":false},"excerpt":{"rendered":"

Rate cuts could be coming, but it may be too soon to celebrate\u2026<\/p>\n","protected":false},"author":55,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"ep_exclude_from_search":false,"service":"","footnotes":""},"categories":[1],"tags":[],"publication":[10],"person":[58],"newsletter-type":[],"ticker":[],"class_list":["post-22003","post","type-post","status-publish","format-standard","hentry","category-market-minute","publication-market-minute","person-larry-benedict"],"acf":[],"_links":{"self":[{"href":"https:\/\/jeffclarktrader.com\/market-minute\/wp-json\/wp\/v2\/posts\/22003","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/jeffclarktrader.com\/market-minute\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/jeffclarktrader.com\/market-minute\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/jeffclarktrader.com\/market-minute\/wp-json\/wp\/v2\/users\/55"}],"replies":[{"embeddable":true,"href":"https:\/\/jeffclarktrader.com\/market-minute\/wp-json\/wp\/v2\/comments?post=22003"}],"version-history":[{"count":0,"href":"https:\/\/jeffclarktrader.com\/market-minute\/wp-json\/wp\/v2\/posts\/22003\/revisions"}],"wp:attachment":[{"href":"https:\/\/jeffclarktrader.com\/market-minute\/wp-json\/wp\/v2\/media?parent=22003"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/jeffclarktrader.com\/market-minute\/wp-json\/wp\/v2\/categories?post=22003"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/jeffclarktrader.com\/market-minute\/wp-json\/wp\/v2\/tags?post=22003"},{"taxonomy":"publication","embeddable":true,"href":"https:\/\/jeffclarktrader.com\/market-minute\/wp-json\/wp\/v2\/publication?post=22003"},{"taxonomy":"person","embeddable":true,"href":"https:\/\/jeffclarktrader.com\/market-minute\/wp-json\/wp\/v2\/person?post=22003"},{"taxonomy":"newsletter-type","embeddable":true,"href":"https:\/\/jeffclarktrader.com\/market-minute\/wp-json\/wp\/v2\/newsletter-type?post=22003"},{"taxonomy":"ticker","embeddable":true,"href":"https:\/\/jeffclarktrader.com\/market-minute\/wp-json\/wp\/v2\/ticker?post=22003"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}