Warsh Is in No Rush to Cut Rates — And the Market Reacts
President Trump expressed his unhappiness with former Fed Chair Jerome Powell many times in recent months for failing to cut interest rates. That created the expectation that the new Chair, Kevin Warsh, would be dovish and set the stage for interest rate cuts.
That was not the case.
The Warsh Message
Warsh made it clear that he believes that the Fed has failed in fulfilling its mission on prices. He stated “we’ll fix five years of misses on inflation.”
He indicated that inflation is a choice and it can’t be fixed by aggressively cutting interest rates at this time. None of that is too surprising but it was a bit more harsh than hoped for and it triggered broad selling.
The indexes closed near the lows of the day with breadth sinking to just 35% positive. The Magnificent Seven ($MAGS) lagged badly with a loss of around 3% while small-caps held up better with a loss of around 0.8%.
This action is why I raised my cash levels so aggressively in the last few days. The risk of a negative reaction to the Fed was elevated and now with the Iran deal in place and the SpaceX ($SPCX) IPO over, there aren’t any positive catalysts on the table. While oil is lower that is not enough to fix the inflation problem and the Warsh press conference made that clear.
The good news is that despite the poor action, there is some good stock-picking under the surface. Although very few stocks finished stronger the number of stocks up more than 10% was lengthy. There was some good action in biotechnology ($XBI), storage, and memory. There are speculative traders looking for opportunities.
Strategy
Frankly, I like seeing this selling as it is what is needed to create a new crop of opportunities as we move into the dog days of summer and await second-quarter earnings.
My best advice is to trade tightly, protect capital, and be selective with new buys. This is a market that will favor astute stock-picking, and that is the way I like it.
Have a good evening. I’ll see you Thursday.
At the time of publication, Rev Shark had no positions in any securities mentioned.
