If the Fed cuts rates in September, stocks could buck the election-year volatility
Subscribers to Chart of the Week received this commentary on Sunday, June 30.
Earlier this week, Schaeffer’s Senior Quantitative Analyst Rocky White took a deep dive into the subdued performance of the Cboe Volatility Index (VIX) over the past several months, coinciding with the steady uptrend of the S&P 500 Index (SPX). White’s findings showed that looking at data back to 1994, the one-month returns for the SPX (when compared to the level of the VIX at the same time) yielded higher returns when the "fear gauge" was above 25.6. In his conclusion White noted "the persistently low VIX doesn’t tell us much about the direction of stocks, but volatility will most likely be low over the short term."
The SPX has spent the last two weeks below the $5,400 level in a consolidatory pattern following an impressive year-to-date run up the charts. Now pacing for its 14th win in the last 20 sessions, the index nabbed yet another record high of $5523.64 and has a chance to close above the round $5,500 mark for the first time ever. The 100-day moving average stepped up as support during the index’s starker pullback in April, right when quarter two began.
Compared to the other major indexes counterparts, the SPX's year-to-date gain of 15.3% is firmly in the middle, with the tech-heavy Nasdaq Composite Index (IXIC) up 19.9% and the Dow Jones Industrial Average (DJIA) 4.1% higher.
The stock market gains at the six-month mark are notable especially after Friday’s core personal consumption expenditures (PCE) price index matched estimates at 2.6% year-over-year -- its slowest rate since 2021. For the month of May, the core index rose just 0.1%, consumer spending rose 0.2%, and personal incomes increased by 0.5%. The slowing of inflation suggests an improving economy, and if major indexes can nab sizable gains during the first six months amid hot inflation data, its enticing to think of the runway Wall Street could have with lower interest rates.
But the wrinkle for 2024 is the Presidential Election season is starting to heat up, with only two more Federal Reserve meetings until Election Day. Per CME’s FedWatch tool, there’s an 89.7% chance the central bank keeps rates steady for the late-July meeting, and a 59.5% chance of rate cuts in September.
For as much as red-hot inflation gets the headlines, the hard truth is that all year, the Dow, SPX, and Nasdaq have been in an ‘on-again and off-again’ dance between record closes and pullbacks that are quickly filled. Spikes in inflation always weigh on stocks, so when the data unwinds in favor of investors – as it is currently doing -- they are awarded a brief reprieve until the next data point comes along. It’s as much of a green light that a trader can get.