Here we go again – another near-miss Fed Red Day on Wednesday.

If you are new to Critical Signals Report, we describe Fed Red Days here.

In short, Fed Red Days occur on days that the Fed lowers interest rates (that’s supposed to be good news in a Fed-manipulated Twilight Zone), but markets nevertheless close lower (that’s bad news).

Good news is supposed to take the markets up… not down. Down is red – it means your stock investments probably lost money on a day that the Fed lowered rates – hence “Fed Red Day.”

This is equally “bad news” because it’s signaling that the Fed’s magical powers are losing their “magic,” and given the sad fact that today the Fed is the market, such red days are particularly disturbing signs.

Today, the Fed lowered interest rates by the expected 25 basis points (0.25%), taking interest rates down by a total of 0.75% since the first rate cut back on July 31 of this year. That’s a 30% rate cut since July, but just 0.75% in basis points, raising the question as to whether cutting rates that are this low really matters anymore.

Here’s what happened…

Third Uninspiring Rate Cut

The markets were up and down after the announcement, closing (as on the day of the last rate cut) at uninspiring levels. The Dow Jones Index closed up 0.43%; the S&P 500 Index up 0.28%; and the NASDAQ up 0.33%.

If cutting rates this quickly, this fast, three times in a row now is doing nothing more than supporting stocks (not taking them higher), that says yards about we are… and where we are not. When Fed rate stimulus stops working, the Fed is truly running out of bullets.

So here we are, this is the third time the Fed has lowered interest rates and the market has said, “Boo! Not enough… give me more” – more steroids, more stimulus, more rate cuts, more U.S Treasury buybacks… in short, more candy to keep this sugar-high afloat.

A third uninspiring Fed rate cut heightens the probability that we are in a turning point in this Fed-engineered Twilight Zone and that a recession is imminent or may already have begun – long before the authorities that inform on these matters has a clue.

Let’s review…

Fed Red Day #1: On July 31, 2019, Powell’s Fed lowered rates by 25bps. That’s supposed to be good news. Markets should have gone up… except they didn’t. By the end of that day, the S&P 500 Index fell 1.09%, the Dow Jones Index fell 1.23%, and the Nasdaq Composite Index fell 1.18%.

Close Call – Fed Red Day #2: On September 18, 2019, the Fed lowered rates again, by another 25bps, to a range of 1.75%-2.00%. Stocks markets opened down and fell further on the 2:00 p.m. news to a loss that briefly reached the largest in four weeks, before recovering with the S&P 500 Index ending the session up just 3bps. The Nasdaq closed down 11bps. It was a raucous day in the markets, worthy of your attention.

Fed Red Day #3: On October 30, 2019, the Fed lowered rates again, by another 25 basis points, to a target range of 1.5% to 1.75%, while hinting future rate cuts may now be on hold. We’re not willing to wager on that. As long as growth continues to slow and inflation remains below target, we can expect more of the same come December 11 – the next Fed meeting, just four days before another round of tariffs on China are due to take effect.

Fed rate-cut days like this have forewarned of the past three recessions, namely (1) before the Oil Price Shock Recession in the early 1990s was announced, (2) before the Dot.Com Bubble Recession in the early 2000s was announced, and (3) before the Great Recession of 2008-2009 was announced.

This News is Actionable

Those of you that play or enjoy ice hockey or soccer will recall that a “hat trick” is a remarkable feat, accomplished by a single player scoring three goals in one game. I’ve watched my son pull these off more than once – a true ringer.

Fed Chair Jerome Powell, who is far less of a ringer in my eyes, has pulled off a different kind of hat trick in market terms.

He has lowered rates three times in one market cycle, aiming to woo fans to come to more games, to buy more stocks – to keep the game alive.

It isn’t working. There are no new highs in stocks since these rate cuts started.

Take heed. Be safe. Keep that cash allocation on the sidelines. Markets will need (and likely receive) more magic “juice” in the near-term; but in the longer-term, the risks demand a critical level of prudence.

Sincerely,


Matt Piepenburg


Comments

6 responses to “FED RED DAY – Fed Rate Drop Fails to Inspire”

  1. The concept “Fed Red Day” is not very useful as a signal. It only works when the market does not expect a rate cut. It’s pretty safe to assume that most of the recent rate cuts were expected and already priced into the market well before the day they were announced/went into effect.

    To play Devil’s advocate, the market is close to all-time-highs. So maybe the cuts/steroids are working, for now….

  2. When the the average man realizes just how socialized our Wall Street is and how corrupt our leaders in cahoots with the fed are, in calculating the massive cash injections/QE that are not going to the homeless, the sick and the needy, we shall see protests and the “no more bank bailout people” will shout “no more Wall Street bailouts!

  3. Huh… I don’t quite get it, haven’t we just seen a break out of ATHs? I am not a financial wiz to reflect deeply on why it took 2 days for the markets to react to the Fed’s rate cut, but what I see is that the break out started already heading into the FOMC week and after 2 days of traders pondering over it, – maybe bulls defeating a bear-attack? – the indices just continue up unabated.
    It goes against rational thinking of someone without much insight into the trick-box of today’s manipulated financial markets such as me – , despite reading insight like yours still not getting my head around it how this can be possible -, I’ve just grown up learning that without saving for a rainy day I should not expect to have enough to eat should those rainy days come. And look what we’ve been subjected to now for year after year, I feel so betrayed because my savings have kept constantly shrinking in value as a consequence of all these manipulations, not to mention that being here on the ‘old continent’ our wallets are being more and more squeezed like lemons by our governments and central banks so they can continue tending to the ‘sharks’. Believe me, had I the necessary knowledge and skills I’d rather go along ‘howling with the wolfs’ and make money around these irrational manipulative moves, even if it is against all my ingrained, admittedly very basic, but based on common sense up-bringing in how to handle a household budget. Mainly because I dread where we shall be left the day this all unravels, maybe we’ll get robbed blind and won’t even have enough left to step into the market when prices are low, as you suggest?
    Admittedly it’s my own bias pushing me to look for confirmation of my personal convictions that directs me to blogs like yours, so far not doing me much good, though. It’s not as if I wanted to put any blame on your postings, it just keeps me frustrated feeling one way, looking for the confirmation wherever I find it, and observing quite the opposite happening in the faked ‘real’ world. Unless one is financially well cushioned, how is someone with meager savings (being constantly eroded) and an insignificant pension to survive years and years of such shenanigans?
    Why bring this up here and now?
    Maybe just venting my frustration at the perceived discrepancy, once more, at your hammering the same points over and over again and the markets apparently doing just the opposite, it just doesn’t elicit a cozy feeling going into the weekend,
    regards from Spain,
    Cesar

  4. With the presidential election happening next year, I believe there will be more rate cuts between now and then.

Leave a Reply

Your email address will not be published. Required fields are marked *