A 25 basis point cut, Marks explained, should receive a relatively muted greeting on the markets. It aligns, however, with her broader outlook for a relatively strong US economy that should continue to support equities. The onset of cuts, too, should open up greater opportunities for fixed income investors. Despite the volatility she expects to come from Fed policy and the US election, Marks is relatively confident in the balanced portfolio through to the end of the year.
While Marks expects a pretty standard reaction to the cut on Wednesday, she notes that the commentary we get from Fed Chair Jerome Powell will be crucial to the impact we see. The most recent remarks we’ve heard from Powell were at the Jackson Hole Economic Symposium in late August. Those comments seemed to lay the table for cuts and showed investors that the Fed’s focus has shifted from CPI to employment data. However, while there has been some uptick in US unemployment Marks notes that we haven’t seen a big acceleration in layoffs. There may be more balance in the remarks than some analysts initially expected.
Those relatively strong jobs numbers, Marks explained, are why she believes the Fed won’t cut by 50 basis points on Wednesday. She notes, as well, that other Fed governors have not expressed the level of concern about the economy needed to justify such a significant interest rate cut.
Given the role Fed policy has played in equity markets, there has been an element of a ‘bad news is good news’ dynamic experienced by investors since 2022. When we see signs of weakening in the US economy, many investors greet that as supportive of a cut and equity markets respond to the upside. Marks now says the dynamic has become more nuanced. After a few false starts to the cutting cycle, it now seems more likely. However, Marks expects volatility to increase as investors balance their outlooks between a hard and soft landing because, “every hard landing begins with a soft landing but not every soft landing leads to a hard landing.”
If the economy decelerates more significantly that could be a sign that a hard landing is incoming. From an equities standpoint, Marks expects that would cause greater volatility.