The Fed hints at multiple rate cuts in 2024. Powell suggests that we might be in a recession right now. Historically, every major rate cut led to a 30% S&P 500 drawdown.

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In a surprising move, the Federal Reserve is hinting at multiple rate cuts in 2024, sparking questions about the stability of the financial system. This decision has historical echoes, as every major rate cut since the 1970s has been followed by a substantial 30% drawdown in the S&P 500.

For the first time in recent history, Chair Powell’s alignment with market expectations signals a potential departure from the usual cautious stance. The market has responded positively, with the S&P 500 on track for its 9th green day out of the last 10, reflecting investor confidence in the Federal Reserve’s promises.

Powell’s assurances of a “soft landing” and the indication that rates have peaked have added to the optimism. However, these sentiments hang in the balance, contingent on inflation data continuing to move in the right direction.

Caution is urged, as the Federal Reserve’s optimistic tone may be premature. Historical patterns indicate that commodities and bond yields tend to crash when the U.S. is entering a recession. Powell acknowledges the possibility of a recession, raising concerns about the sustainability of the current market rally.

The paradox deepens as the median price of a new home has notably declined over the last 12 months, yet homebuilder stocks are reaching new highs. This apparent divergence between economic indicators and market behavior introduces an element of unpredictability into the current financial scenario.

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An illustrative example is CNBC’s creation of the Magnificent Seven index, a measure that could forewarn market instability. The fate of this index and its correlation with broader market trends remains uncertain, adding complexity to an already intricate financial landscape.

As the Federal Reserve cautiously navigates the delicate balance between stimulating economic growth and preventing an overheated market, investors are left pondering whether historical patterns of a 30% S&P 500 drawdown post-rate cuts will manifest again. The unexpected dynamics in housing and the potential impact of a dovish Fed statement on commodities and bonds underscore the need for vigilance.

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Powell says there is a possibility we are in a recession now

“There is little basis for thinking the economy is in a recession now,” Federal Reserve Chair Jerome Powell says at a news conference in Washington after Fed officials decided unanimously to leave the target range for the benchmark federal funds rate at 5.25% to 5.5%, the highest since 2001. (Source: Bloomberg)