Walkin Apple Pie (Smith Collection/Gado/Getty Images)

On a high

Rate cuts and record-high stocks are as American as apple pie

Over the past 37 years, more than one quarter of the US central bank’s rate cuts have come when stocks are within spitting distance of all-time highs.

Luke Kawa

9/17/24 9:04AM

The S&P 500 ended less than 1% below its July 16 record closing high on Monday with the Federal Reserve poised to kick off an easing cycle this Wednesday.

Surely, US stock markets near all-time highs mean the central bank doesn’t have much need to be lowering rates, right? Well, history says something different.

From the start of Alan Greenspan’s tenure atop the Fed in August 1987 until the present day, 16 of the central bank’s 58 rate cuts — or more than one quarter — have come when the S&P 500 closed less than 3% below an all-time high the day before.

All but one time (in July 1992), cuts near all-time highs were only of the 25 basis point variety, while markets are currently pricing in a 50 basis point cut as more likely.

Broadly speaking, the central bank either cuts interest rates because a) it’s behind the curve in responding to an ongoing economic deterioration or negative shock, or b) economic conditions are solid and the central bank wants to make sure they stay that way. We probably won’t really know whether we’re in Column A or Column B for a while.

The performance of the stock market as a whole, as well as interest rate sensitive segments of the market like housing-linked companies, seems to imply markets are betting on the latter, more optimistic outcome.

By taking rates down towards a more neutral policy stance, monetary policymakers are saying they want to become more supportive of growth, and improving financial conditions — i.e., stocks going up, credit spreads staying tight, and longer-term interest rates going lower — are a means to that end.

That being said, the Federal Reserve would (probably) want future gains in the equity market to be tied towards a stabilizing to improving earnings outlook rather than even higher valuations.

How to reconcile the current seeming dichotomy of investors pricing in easing that has seldom been delivered outside of a recession with a stock market near records? Well, the benign scenario probably looks something like this: some, but not all, of the easing expectations embedded in markets are realized over the next year, and medium to longer-term yields gently drift higher in the event that employment and earnings growth stabilize and improve as the easing cycle progresses.

Max Knoblauch & David Crowther12h

Nike’s China business declines for seventh straight quarter, stock sinks as soft guidance outweighs Q3 earnings beat

Sportswear kingpin Nike reported results for its third quarter, which ended in February, after the bell Tuesday. At a headline-level, the fiscal Q3 numbers were pretty solid, with Nike reporting:

Earnings of $0.35 per share, comfortably above the Wall Street consensus of $0.29 per share compiled by FactSet.
$11.28 billion in total revenue, roughly in line with the $11.26 billion estimate.

However, weakness in China and a revenue forecast that implies sales will continue to drop are weighing on the shares, which are down more than 9% in early trading on Wednesday.

On the earnings call, management said that revenue is expected to drop 2% to 4% in the coming quarter, and that overall they “expect revenues to be down low-single-digits versus the prior year, with gains in North America offset by declines in Greater China.” That's a disappointment to analysts, who were anticipating 2% growth in the coming quarter, and even more in the latter stages of the year, per Bloomberg.

Nike’s sales in China — where the company earns about 15% of its revenue — fell 7% to $1.62 billion. That’s its seventh straight quarter of sales declines in the market, though this quarter’s was less than feared. The company had issued weak guidance for this quarter considering continued softness in the region.

“This quarter we took meaningful actions to improve the health and quality of our business,” said Nike CEO Elliott Hill. “The pace of progress is different across the portfolio and the areas we prioritized first continue to drive momentum.”

Nike shares are trading near decade lows this month, as tariffs continue to weigh on profits and shipping costs rise amid the war with Iran. As of Tuesday’s close, the stock was down 17% year to date.

Luke Kawa, Tasha Matsumoto

13h

Stocks end worst quarter since 2022 with best day since May

Optimism that the end of the war may be near sent stocks surging.

Max Knoblauch14h

Oil-sensitive travel stocks pop following Iran state media reporting on potential war resolution

Travel stocks are surging on Tuesday as oil prices fall following reports from Iranian state media that President Masoud Pezeshkian said the country has “the necessary will to end this war,” but would only do so with guarantees that “prevent the recurrence of aggression.”

The war has sent oil prices and refining margins surging this month, causing airlines and cruise lines to cut profit forecasts despite reported high demand.

Following Tuesday’s update, shares of the big four US airlines (Delta Air Lines, United Airlines, American Airlines, and Southwest Airlines) all climbed, along with smaller rivals including JetBlue. US airlines have stopped fuel hedging in recent years, increasing their exposure to upward swings in oil prices.

Cruise stocks also rallied, with Carnival and Norwegian up more than 6% and Royal Caribbean up about 5%.

J. Edward Moreno17h

The FDA is expected to lift restrictions on certain peptides, the NYT reports

The Food and Drug Administration is expected to lift restrictions on certain peptides, allowing the experimental, often injectable substances to be sold by compounding pharmacies, The New York Times reported Tuesday.

The potential move was previously reported by The Wall Street Journal, and teased by Health Secretary Robert F. Kennedy Jr. on the “Joe Rogan Experience” podcast in late February.

Peptides have boomed in popularity recently, with search interest for “peptides” surpassing “ozempic” this month. Many of them are currently understudied and not approved for human use, a rule consumers are able to bypass by purchasing them from suppliers that sell them for, ostensibly, research purposes only.

As reports of the FDA changing its stance of peptides mount, consumer health companies like Hims & Hers and Superpower have been getting ready to roll out their peptide offerings as soon as they get the FDA's blessing.

The peptide gold rush: How impending deregulation could supercharge a shadow industry

Matt Phillips18h

Memory stocks bounce as Bernstein analyst calls TurboQuant fears “overdone”

Memory stocks rose Tuesday, after Bernstein analysts called the recent panic over Google’s TurboQuant AI algorithm “overdone.”

Bernstein analyst Mark Newman wrote:

“[Hard disk drive] and Memory stocks have sold off significantly due in part to fears from Google’s TurboQuant report. This however, should have zero impact on HDD demand and negligible impact on NAND demand. Given the stock sell-off we see this as an attractive entry point for Seagate Technology Holdings, Western Digital and Sandisk’s and upgrade WDC to Outperform.”

All three stocks were up early Tuesday, as was memory chip maker Micron.

Today’s rally stands in stark contrast to the pummeling these shares have endured over the last week, after Google Research published a technical paper on March 24 detailing its TurboQuant AI algorithm, which compresses the amount of data associated with AI operations without affecting the accuracy of AI models.

That was seen as a threat to surging AI demand for memory storage, which has supercharged prices for memory chips and memory-related stocks over the last year.