Fed to Cut Two More Times This Year: Strategist DeBusschere

Let's start with monetary policy. Let's start with the Fed and let's start with the expectations or maybe the rethink of expectations as to where rates are going to go. Yeah. So I think it's important to keep in mind that, you know, interest rates going higher, uh, meaning the 10 year yield, uh, because economic growth is better than expected is not a bad thing. The Fed cutting less because economic growth is better than expected is not a bad thing. And let's be very clear about this. What I'm talking about is less upside risk to the unemployment rate, right? The risk, I mean, just last week, remember where we were, there was a service ISM, I'm sorry, a manufacturing ISM that was bringing forward a, you know, at a very weak employment reading. It was a weak manufacturing ISM. People are worried about a recession. Fast forward two days, unemployment rates lower that risk of near-term recession is much lower. So the Fed has to cut less. In aggregate though, financial conditions didn't really change. They are easy. And if financial conditions are easy, growth in the future is going to be better and that's good for earnings. So overall, it's not a bad thing that we're having less cuts now and 10 year yields are drifting higher a little bit. That is not a bad thing at all for the market because financial conditions are still supportive. Absolutely. And I am curious though, as to the price action that we're seeing in the equity space, where a lot of the buying today is once again, back in those big cap names, and obviously they benefit from that growth story, but I would think if they're going to benefit from that, wouldn't some of the mid cap and small caps also benefit from that as well? Why aren't we seeing more buying there? Yeah, it's a good question. I mean, remember that October tends to be, especially in election years, tends to be seasonally unusually weak. And it makes sense, especially going into this election, because, well, there's a lot of uncertainty. If there's a sweep one way or the other, there could be a potential event in treasuries, who knows when we're going to figure out who actually wins. I mean, there's still some risk of that. So I do think there's election risk that's going to hold things back near term. You have geopolitical risk, right? So it's much better or easier to own NVIDIA right now on lower oil prices than it is if they come down a little bit on the day than it is maybe some of these other, I should say higher oil prices, than some of these other riskier names. If we're, you know, we do not know what Israel's response is going to be. So there's a lot of uncertainty right now that's just unusual in short term that I think is holding back the average stock, if you will. How are you thinking about energy stocks, Dennis? I ask because of the move that higher that we've seen in oil, thanks to that geopolitical premium, certainly giving investors a reason to just buy energy stocks as a knee jerk reaction at the same time. Do you see the earnings growth there to support the gains that we have seen over the last couple of days? Yeah, I would say as a general rule, if you need the potential of strikes on oil facilities in Iran to drive oil prices higher, it's not the best reason in the world to own energy stocks. You know, China's stimulus maybe was some was going to be some help as far as global demand is concerned. But you're not going to get the type of stimulus in China that's going to be globally reflating. You know, US demand is OK. So it's very difficult to embrace energy stocks right now based on geopolitical risk going higher because, you know, geopolitical, it's it's come and go. I mean, two days from now, if we have a more benign resolution, more benign outcome on the Israeli-Iranian front, oil price could be down significantly. So it's just very difficult to touch to chase energy stocks in this type of environment. Right. You know, I was taking a look at the S&P 500. It has not been able to string together two straight days of gains or losses in about two weeks. Do you read this lack of positive or negative impetus as this directionlessness as bullish or bearish? I view it as unusual uncertainty ahead of the election. I think ultimately bullish. So if you look at tail risk hedging right now and like, you know, put call spreads on some very large declines, but within people would call tail risk hedging. So like a 10 percent probability event or 25 percent probability event, it's unusually high, meaning bidding up puts relative to calls. So as long as you have that tail risk hedging at usually high levels, you're going to get this kind of internal noise, if you will, day to day until some of the events, particularly the election and geopolitical, clear. Ultimately, that is positive, assuming they clear in a benign way. I think the election, no matter what the outcome, is probably a positive clearing event. It's just we have to get through it. And geopolitical risk obviously can't be a certain, but tail risk hedging at elevated levels like they are now has historically been very positive longer term. Do you feel when you look at this market right now, Dennis, at least what we know publicly, does it feel diversified? Does the sentiment, does the positioning seem diversified to you? No, I mean, I mean, if people keep on piling into the same winners, you know, for I guess for the right reasons, I mean, there's extraordinary profitable companies and they're doing very well. But you had some bounce of the equally weighted index. You had some bounce in small caps. But if you look at values, multiples relative to growth, I mean, it's in like the fourth percentile historically, meaning your next 12 month multiple in value relative to growth. You can say the same basically for small caps. You can say basically the same thing for a lot of the riskier factors. So people are way overweight quality. So it's not balanced relative to what you would expect in a normal economic expansion, which we're in. We're in a normal economic expansion. No one wants to believe it, but that's what we're in. I get the risks around that, but that's what's going on. Based on that, though, Dennis, should people continue to bet on this idea of multiple rate cuts by the Fed over the next 12 months? And when I say multiple, I'm really talking about going four or five, six times over the next 12 months. Yes, I think the direction of travel is clearly easier monetary policy. You know, unless we're shockingly wrong on the inflation outlook, expect the Fed to slowly get to neutral over time. That'll get you two more cuts this year. Again, unless the CPI Thursday is much worse than expected. You're going to get the two cuts. Then you get a few cuts next year, depending on the data, you know, comes in under our forecast, relatively strong data, inflation still benign. You get a few more cuts to get back to neutral. So, yeah, that's the direction of travel. Monetary policy is basically easier financial conditions, which all things equal, you don't want to short, right? I mean, it's very difficult to be short the Fed cutting, even if it's not as fast as some people hope. How are you thinking about the positioning and the likelihood of a violent reaction one way or another with the CPI report due to come out on Thursday? Man, I mean, the whispers here keep on going higher. So I think people are set up for a potential miss when I say miss in CPI terms, it means hawkish. So you're seeing some banks come out at point three on month on month versus point to expect it given the move in rates and oil recently. Yeah, you could get a pretty violent reaction if it comes in a little hotter. The other side of that, though, is given how high rate volatility is, man, you could get a significant internal reversal, almost like we saw on Friday with small small caps, et cetera, if you just get in line. So there's going to be a significant amount of volatility around CPI, given how much the narrative has shifted post payroll.