By Morgan Christen
CFA, CFP, CDFA, MBA, CEO and CIO
Summer is slowly coming to an end. Many people took a tropical vacation, while others explored history in Europe. Visitors who went to France most likely dropped by the Louvre to see the Mona Lisa. She has her own room, is encased by bulletproof glass, and boasts over six million visitors per year.
It seems most of the Louvre visitors are in her room, admiring and taking photos of her. I recall talking with a lady who was so enamored by her eyes, she expressed that, they were “following her.” That was it. I couldn’t take it. I had to express my displeasure.
This painting (to me) was such a letdown. I readily admit that I am not an art connoisseur, but the Mona Lisa is not that great. It is a small painting, with massive crowds around it, and fawning over her was starting to make me cringe. There are far better paintings and sculptures that are not getting the selfie-love Lisa is receiving. This love of the Mona Lisa is classic group-think.
Group-think is defined as a practice of thinking or deciding as a group that discourages creativity or individual responsibility. Why not take a selfie with the Winged Bulls of Sargon II, a five-legged Assyrian statue carved from a single block of stone, or one of Da Vinci’s other works, such as St. Anne?
Market participants are showing group-think. The market has completely left the decision making to the Fed. The Fed must drop rates, or the collective market will have a fit. A rate reduction is not a sign of a strong economy. Is a recession coming? Probably not right now, but this rate drop can certainly be seen as “insurance?”
The Fed fund futures (the market) are pricing a greater than 80% chance the Fed will do multiple rate cuts by the end of the year. The decision yesterday showed the Fed wanted insurance on global developments (tariffs) as well as “muted inflationary pressures.” Jerome Powell stated this cut was a “midcycle adjustment,” implying this may be a one-off event. The 25 basis point cut and the language of potentially no future cuts failed to fit in with the group-think, and markets reacted negatively. We have now entered the bizarro world where bad things are good and good things are bad.
Reducing rates is saying that the economy is slowing, which is bad. Conversely, June’s labor report showed a rebound from May’s weaker report and the market sold off. The current trend is showing a negative correlation with the market return and economic events. Investors should be careful for what they hope for. If the Fed needs to reduce rates multiple times, that implies an economic slowdown, which may not bode well for stocks.
While we see slowing in certain parts of the economy, we do not see a slowdown that would warrant multiple rate cuts. We anticipate, baring a major disruption, only one cut for the year. Multiple cuts would be too aggressive. We hope to shift the group-think, as last Friday’s GDP report showed solid economic activity.
I get it… her smile is mysterious, and her eyes are making contact with the viewer, but the Mona Lisa is not Da Vinci’s best. Much like I left the Louvre with a sour taste after seeing the Mona Lisa, I hope the Fed rate-drop group-think will not continue to leave the markets sour.
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The information contained herein is based on internal research derived from various sources and does not purport to be statements of all material facts relating to the securities mentioned. The information contained herein, while not guaranteed as to the accuracy or completeness, has been obtained from sources we believe to be reliable. Opinions expressed herein are subject to change without notice.