Digging Out After Jackson Hole

Steve Sosnick offers his thoughts on what Fed Chief Powell delivered at the Jackson Hole meeting, and discusses what it means for investors with the stock market near historic highs and AI-giant NVIDIA set to release earnings this week.

Summary – IBKR Podcasts Ep. 185

The following is a summary of a live audio recording and may contain errors in spelling or grammar. Although IBKR has edited for clarity no material changes have been made.

Andrew Wilkinson 

Good morning, welcome to this week’s edition from Interactive Brokers. 

Joining me to discuss the market impact of last week’s comments from Fed Chief Powell at the Jackson Hole Symposium is Steve Sosnick, Interactive Brokers Chief Strategist. Welcome Steve, how are you? 

Steve Sosnick 

Morning, Andrew. I’m doing well, thank you. 

Andrew Wilkinson 

All right, so it’s Monday morning. We’re going to try and turn this podcast around today as quick as we can. Stock markets last week, Steve, they continued their rebound from that heavy selling from earlier in August, and they took a lot of comfort from what Jerome Powell said when he stated on Friday that September would pretty much mark the onset of the interest rate cutting cycle. 

Can you give us your insight into his remarks in Wyoming last week? 

Steve Sosnick 

Yeah, I don’t think he said anything new, actually, quite frankly. He pretty much told us at the last FOMC press conference to expect rate cuts in September.  

He more or less said the same thing on Friday. To me it’s very interesting because rate markets didn’t move very much on this, whether it was the CME FedWatch tool, whether it was our own ForecastX platform.  

Looking at bond market yields, none of it moved very much. Stock market loved it because the stock market is in its own little momentum driven frenzy right now. They could smell all-time highs. 

Who knows? We may be hitting them as we’re taping this, shortly after the open. And so, that’s what they’re all about. Chase the momentum, latch onto the good news.  

The markets have been ahead of the Fed for a while, actually for years, because, you know, in 2022, after Powell spoke and the market sank, it was because he didn’t confirm a Fed pivot, which was hysterical considering the Fed, then, was in the midst of a rate hiking cycle. 

And he basically said, we’re going to continue to do so, but markets have been hoping for this for so long. He confirmed the pivot. I guess that’s good news to have it confirmed.  

But realistically, it didn’t change anything other than if you were inclined to speculate before and chase momentum before, he more or less gave you a green light to do so again on Friday. 

Andrew Wilkinson 

But so the big question to me is whether it’s 25 or 50 basis points, and I’m going to go out on a limb and say that they’ll be eased by an immediate 50 when it comes to the September the 18th meeting. Would you agree or disagree with that? 

Steve Sosnick 

I disagree. We’ll see where the numbers come out. And then again, this is where I think the risk is, that the stock market heard the confirmation and decided that means 50.  

Again, the other markets did not do that. They’re still looking at relatively modest probabilities for 50. 

They haven’t really changed very much. He didn’t tell us anything about the magnitude or the ongoing pace. He really just confirmed that you’ll get something in September and left it blank.  

Here’s why.  

If the Fed is data dependent, we have a lot of data coming down the pipe, right? We’ve got jobs numbers a week from Friday.We’ve got PCE deflator, we’ve got CPI, we’ve got PPI. This is a Fed that has been dragging its feet about cutting rates all along.  

Why are they suddenly going to jump in the pool and say, you know what? We’ve been reticent to do anything for the last year and a half, two years. Sure, let’s go all in and let’s give the market exactly what it wants. 

There’s nothing in his comments or in the comments from other Fed governors that indicate to me that they’re really willing to do much more than 25 basis points until or unless circumstances really dictate.  

So I’m not going to take the possibility off the table. But it’s really not something we should be wishing for because it means that the data would stink. 

Andrew Wilkinson 

Well, let me push back a little bit further.  

The government made one of its infrequent revisions last week to a year’s worth of employment data, and they said that the nonfarm payroll number has been overstated by 818,000 jobs, I think.  

Don’t you think that would have some impact on the overall mix? 

We’re moving away a little bit from the fear of inflation to a cooling economy. Doesn’t the lack of about a million jobs change your view on what they might do with interest rates? 

Steve Sosnick 

Yes, because now it’s brought the dual mandate into play, whereas before it was more or less the focus on the single mandate. But that doesn’t mean that they’re willing to jump right in. First of all, 800,000 jobs in the course of an economy that has over 150 million people employed is actually not that big of a difference, you know, from a data watchers’ point of view.  

Yes. From a giant macro point of view, we’re a country of 330 million people or so. So 800,000 is a rounding error and literally what it is. And so, you know, it’s telling us that the job market is not aflame as it was before. It was on fire and it was very much balanced in the way of workers. I guess, if you’re selling your labor. It was very much of a seller’s market there. 

It’s flipped a bit more into equilibrium, but bear in mind, yes, I mean, we’re way off our lows in unemployment, but 4.3% is a historically, very enviable unemployment rate. That doesn’t tell me what you have to panic in and do anything crazy to keep people employed.  

There’s other statistics that show that layoffs are not really increasing at a big amount.I would say we’re actually somewhat in balance. And in balance does not mean that you have to do anything drastic. It just means you adjust. That’s where I continue to lean on this 25 basis points because I think it’s an adjustment.  

The other thing to keep in mind is the last employment figures, they pooh poohed it, but there was a big temporary increase in joblessness from Hurricane Beryl in Texas. Let’s see if that reverses itself in the next set of numbers. So there’s a lot of moving parts. There’s nothing to me that says we are in such dire straits that the Fed has to really just abandon all the caution that they’ve been putting in for all this time and just say, you know what, we’re all in. 

You know what, you guys want rate cuts, fine, you’re going to get them. What is in there that says that? 

Andrew Wilkinson 

Okay let’s move on to markets. That’s really what I wanted to talk about this morning, Steve.  

Steve Sosnick 

Exactly. 

Andrew Wilkinson 

You’re very close when you say we might be at all-time highs by the time we finish this podcast, pretty much. I’m looking at the chart now. We’re very close to it, but we’re eking up. There are two notable earnings reports coming out that both caught my eye this week. 

We’ve got the big one being NVIDIA on Wednesday, I believe, but we also have Crowdsource, CRWD. That’s the company whose software glitch last month brought Microsoft Windows users to a halt.  

How important are these reports this week? 

Steve Sosnick 

I’ll deal with the second part first. CrowdStrike is interesting. But I mean, it didn’t move the whole market before when it was glitching out. I mean, I think it’s the nightmare scenario. Someone described it as that was the Y2K problem that we waited for in 1999. And it occurred randomly in 2024.  

But realistically, it’ll be interesting to see, if you’re a CrowdStrike investor or someone who’s been trading the stock, it’s crucial because you really want to know if this has damaged the company in a longer-term way. 

But from a market moving point of view, it didn’t really move the market all that much when the whole world was glitching out and took down stocks like Delta and stuff like that. It literally took down other people’s brokerage platforms. So I think it’s interesting. 

NVIDIA on the other hand, I hate to put too much weight on one company’s earnings, but I have to, in this case.  

This market is all in on the AI theme, all right? And NVIDIA is the poster child for the AI theme. It has been a phenomenal company, a phenomenal stock, a phenomenal investment, a treacherous short, however you want to look at it. 

I can’t think of a company that has a better track record. Put together like a better winning streak of beating earnings beating top line, beating bottom line, beating on every other metric, raising guidance, then turning around the next quarter, doing it all again, and then raising the guidance more. 

At some point, you logically think, okay, they might be able to beat because managements are very good at beating 80. If 75 to 80 percent of the managements do it, why wouldn’t NVIDIA? 

But the question then becomes, can they continue to raise the guidance at the pace that they’ve been expecting? 

When the stock was flirting with 100, I would have said that’s not as crucial. When the stock is, you know, 130, 130 plus, I don’t have it. I don’t have my screen in front of me. That’s a lot different.  

It’s been a very big rally. So, to me, there is so much riding on it, because if they give any hint, as Sundar Pichai did for Alphabet, or Mark Zuckerberg did two quarters ago for Meta, that this money is all being spent, but it’s not really getting to anybody’s bottom lines and that the spenders on AI are digesting it, they’re not necessarily giving up on it, but it’s going to take some time. 

We’ve heard if Meta and Google are both telling you that it’s going to take some time for AI to reach their bottom lines, it’s probably going to take a bit longer for it to reach the average company’s bottom line.  

And that’s really what it’s all about.  

There’s some neat things going on, but ultimately for this to be the economic success that’s been driving the stock market, it’s got to hit the bottom lines of the end users. 

Not just the bottom lines of the providers, whether it’s the providers of hardware and software, such as NVIDIA is the ultimate hardware provider, but you’ve got AMD, you’ve got ARM. Or the software providers, which is, Microsoft, Google, Meta, etc.  

And so if NVIDIA gives any whiff that this is slowing down, it affects all of them. If they say it’s great guns and people are going crazy, that’s fabulous too. Then we can continue to rally, although I think a lot of it’s been priced in over the past two weeks.  

And then there’s some other company specific news, which not being an NVIDIA analyst, I won’t get too deep into, but there have been some delays about one of their chipsets, the Blackwater, I believe it’s called. 

And finally, this is not to be ignored. Jensen Wang has sold, what is it? About $300 million, $500 million worth of stock in the last few weeks. I tend to wonder like maybe he knows something a bit more than you and I might. You know? 

Andrew Wilkinson 

I often feel on that front that everybody’s got to put the kids through college though, Steve, at some point. 

Steve Sosnick 

He doesn’t want to have to take out loans for any of that stuff. Actually, he probably does. He probably does take out loans against his stock, which just appreciates like crazy.  

But to me it’s very interesting that you’ve had Warren Buffett basically tell you that he’s cautious on the market and cautious on big tech. 

Not in so many words but through his deeds with selling Apple and keeping as much T bills on hand as the Federal Reserve, pretty much. And Jensen Wang telling you that, you know what, I’ve held this stock forever. And now I’ve decided that this is a good, opportune time to really lighten up on it. 

He still owns bucket loads. So it’s not like he’s giving up on his own company, but these are the little things in the background that make me think, you know what, maybe a little caution is in order, but caution is not the word the market wants to hear right now. 

It’s just not. 

Andrew Wilkinson 

Right. Gotcha. 

Steve, thank you very much for your insights this morning and we’ll come back to you in next week, I hope, and keep well out there. 

Steve Sosnick 

Sounds good. Take care, Andrew. Bye. 

Andrew Wilkinson 

All right, don’t forget, audience, to look for our other recent episodes at IBKR Podcasts under the Interactive Brokers education menu. Thanks for joining us. Bye for now. Thanks, Steve. 

Steve Sosnick 

Thank you.  

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